Redken Combs Hair-Care Market at Lucrative Clip : Canoga Park Firm Looks to Well-Groomed Baby Boomers for Growth in Salon Sales

Not long ago, the beauty salon business was virtually moribund. But, in the last few years, business has been as hot as a hair dryer, thanks in part to dress-for-success baby boomers who want more controlled-looking hair.

That suits Redken Laboratories just fine. Based in Canoga Park, Redken is the biggest seller of hair-care products marketed exclusively to (and through) beauty salons. With stylists both using and selling the products, the company has captured about 14% of that lucrative $650-million wholesale market.

The market is profitable in part because the styling business is growing at an impressive clip. Total salon revenue has almost doubled since 1979, to nearly $20 billion, according to Mary Atherton, editor of the trade journal Modern Salon. Sales of women’s hair-care products rose 43% to $3 billion from 1980 to 1984, according to Product Marketing magazine.

Higher Profit Margin

But the market is also lucrative because products used and sold in stylists’ shops cost more and have a higher profit margin than store brands. As a result, Redken’s gross profit margin is 60%. Its business throws off so much cash that Redken had to borrow only half of the $17 million it spent on facilities and equipment during the last 20 months.

Redken still has $10 million left and now is seeking acquisitions. It is also aiming to expand overseas, where it already generates 18% of sales but as yet almost no profits. It particularly has hopes for Japan, the world’s largest hair-care market after the United States.

Toward that end, Redken named its international vice president, Solomon R. Mester, president of the entire company in July.

Mester’s background would seem to qualify him to lead the new push. His grandparents were Russian Jews who emigrated after the revolution to Manchuria, where the family was trapped during the Japanese invasion in 1931. Solomon was born during the occupation, learned Japanese and later immigrated to Canada. Before joining Redken, he was president of the Japanese unit of Max Factor, which remains one of the largest cosmetics companies in Japan.

Nearly 1,000 Employees

Mester heads a company with nearly 1,000 employees worldwide, about half in Canoga Park, including 11 scientists with doctorates in the company’s new research laboratories across the street from its Variel Avenue headquarters. Redken spent $2.4 million on research during the fiscal year ended July 31. Earnings were $8.4 million on revenue of $108.5 million, for a record $3.05 a share.

‘A Bad Business’

“It’s a good company in a bad business,” said Brenda Lee Landry, a cosmetics industry analyst with Morgan Stanley in New York. The problem with the business, she said, is that hair stylists are generally unsophisticated.

“They’re not educated,” Landry said. “Redken has taught hairdressers how to run their salons, keep track of income and how to increase their income.”

The company has come a long way since Paula Kent mixed up her first batch of shampoo with a wooden paddle in a tub in her Van Nuys home 25 years ago. Now married to company Chairman John E. Meehan, Paula Kent Meehan and her husband hold 44.5% of the company’s stock.

With another 6.2% in an employee stock plan, outsiders are left in a minority position no matter how much they buy. And, although Redken is a classic target for a takeover--lots of cash, little debt and a firm foothold in its profitable market--the Meehans aren’t selling.

But not everything smells shampoo-sweet at Redken. Earnings plummeted 45% during the first quarter ended Oct. 31, contrasted with the same quarter a year ago. That was an especially good quarter in 1984, but the most recent quarterly earnings of 50 cents a share were lackluster, both historically for Redken and contrasted with results of competitors.

“There’s been a little bit of drop this year all across the board, but not as much as Redken,” Atherton said.

Factors in Recent Problems

Lee Quaintance, the company’s senior vice president for administration, said excess inventory in the hands of distributors and a staff expansion of about 4% worldwide were partly to blame for the recent problems. But he also said that the hair-care business is a fickle one and that it is difficult to say what makes people go to the hairdresser more in one quarter and less in another.

Fickle or not, the hair-styling business is booming, and so are sales of hair-care products. Atherton said the industry is growing by 15% a year and that total revenue of U.S. beauty salons is now about $20 billion.

“The baby boom has passed 30,” according to a research report written by Alice Longley, who follows Redken for Donaldson, Lufkin & Jenrette, a New York securities firm. “Advertisers are responding by popularizing the more controlled, more polished looks that most flatter women of all ages over 30 and that are most acceptable in workplaces.”

For years, older customers provided a valued, regular clientele for the salons by coming in like clockwork for their weekly wash and set. But now, younger customers appear to be visiting salons more often and buying more products, such as mousse and gel, to keep their hair in place.

Redken has exploited that trend. Earnings per share have risen 74% during the last five years and per-share dividends have more than doubled to 64 cents, while the company’s per-share net worth rose 67% to $19.49. Return on equity (profits divided by the difference between assets and liabilities) ranged from 15% to 18% and was 16% in the most recent year.

Profitable Down the Line

One reason Redken has been so successful is that its products are profitable for everyone involved. Sixty percent of Redken’s sales are derived from sales by salons to consumers for at-home use. Those consumers pay $5 for an eight-ounce bottle of Redken shampoo or a four-ounce bottle of conditioner.

Redken sells through a network of distributors who travel to salons selling everything from combs to conditioner. These distributors tack on a 40% markup when they sell to salons, and the salons add another 40% when they sell the products to consumers, Quaintance said.

Apparently, markups are not unusual. “It’s not highway robbery, compared to everybody else,” Atherton said.

To tell stylists about its products and persuade them to recommend the products to customers, Redken produces videotapes, has an educational division and runs 700 annual presentations, each for up to 1,000 stylists. About half of the estimated 150,000 salons nationwide use and sell Redken products, the company said.

Other Offices

Redken also has sales offices and warehouses in Australia, Canada, Japan, the United Kingdom, West Germany and New Zealand. It has not been very profitable abroad, Mester said, because Redken is still spending money to build up the overseas business, particularly in Japan. Because the Meehans control the company, it is able to defer profits and invest, he said.

Company officials said the Japanese business grew 20% last year, and knowledgeable sources say Redken does about $5 million in business there annually. A strengthening yen and the large Japanese appetite for beauty products, particularly skin care products, are in Redken’s favor, Mester said. The company has about 50 employees in Japan.

Mester has stepped up Redken’s advertising, spending $1 million in the last six months experimenting with television commercials in two test markets--Indianapolis and Buffalo, N.Y. That’s a departure for the company, which directs most of its marketing at salon operators, but Mester is convinced that, in the cosmetics business, “you live and die by promotion.”

Redken was among the first to market its wares to the public through salons. But Quaintance said that Redken considers its competition to be the whole range of upper-end hair products and cosmetics available to consumers.

Companies in that boat include Estee Lauder and its popular Clinique brand, Max Factor and Helena Rubinstein. Also competing--mainly in stores--are Sassoon, Wella, L’Oreal, Jhirmack and Nexxus. The last two companies were started by Jheri Redding, who helped found Redken with Paula Kent and whose last name counts for half of Redken to this day.

Off Limits for Retailers

As hard as Redken tries to keep its products in beauty salons, it strives just as hard to keep them out of retail stores. A former agent for the Internal Revenue Service is in charge of policing distributors, and three or four lawyers are kept busy with it.

Redken even requires its nationwide sales force to buy Redken products where they aren’t supposed to be sold. Using distributor codes, the company then tries to find out who sold to a retail outlet. Redken has cut off distributors who sell to retail outlets.

Sale of the products in stores, the company said, would detract from its premise that the products must be prescribed by hair-care professionals. Also, the carefully cultivated loyalty of stylists might be undermined if competition from retail outlets were allowed.