Sally Beauty Supply 2011 Annual Report Download - page 14

Open-Line
This channel serves retail consumers and salon professionals through retail stores and the internet. This
channel is served by a large number of localized retailers and distributors, with only a few having a regional
presence and significant channel share. We believe that Sally Beauty Supply is the only open-line
distributor in the U.S. with a national network of retail stores. In addition, the Company’s website
(www.sallybeauty.com) and e-commerce platform provides access to product offerings and information
beyond our retail stores.
Direct
This channel focuses on direct sales to salons and salon professionals by large manufacturers. This is the
dominant form of distribution in Europe, but represents a smaller channel in the U.S. due to the highly
fragmented nature of the U.S. salon industry, which makes direct distribution cost prohibitive for many
manufacturers. In addition, we recently began to offer our BSG products for sale to salons and salon
professionals through the Company’s websites (www.cosmoprofbeauty.com and www.ebobdirect.com) and
e-commerce platforms.
Mega-Salon Stores
In this channel, large-format salons are supplied directly by manufacturers due to their large scale.
Key Industry and Business Trends
We operate primarily within the large and growing U.S. professional beauty supply industry. Potential
growth in the industry is expected to be driven by increases in consumer demand for hair color, hair loss
prevention and hair styling products. We believe the following key industry and business trends and
characteristics will influence our business and our financial results going forward:
•High level of marketplace fragmentation. The U.S. salon channel is highly fragmented with nearly
250,000 salons and barbershops. Given the fragmented and small-scale nature of the salon industry,
we believe that salon operators will continue to depend on full-service/exclusive distributors and
open-line channels for a majority of their beauty supply purchases.
•Growth in booth renting and frequent stocking needs. Salon professionals primarily rely on
just-in-time inventory due to capital constraints and a lack of warehouse and shelf space at salons.
In addition, booth renters, who comprise a significant percentage of total U.S. salon professionals,
are often responsible for purchasing their own supplies. Historically, booth renters have
significantly increased as a percentage of total salon professionals, and we expect this trend to
continue. Given their smaller individual purchases and relative lack of financial resources, booth
renters are likely to be dependent on frequent trips to professional beauty supply stores, like BSG
and Sally Beauty Supply. We expect that these factors will continue to drive demand for
conveniently located professional beauty supply stores.
•Increasing use of exclusive-label products. We offer a broad range of exclusive-label products. As our
lines of exclusive-label products have matured and become better known in our retail stores, we
have seen an increase in sales of these products. Generally, our exclusive-label products have higher
gross margins for us than the leading third-party branded products and, accordingly, we believe that
the growth in sales of these products will likely enhance our overall gross margins. Please see ‘‘Risk
Factors—We depend upon manufacturers who may be unable to provide products of adequate
quality or who may be unwilling to continue to supply products to us.’’
•Favorable demographic and consumer trends. We expect the aging baby-boomer population to drive
future growth in professional beauty supply sales through an increase in the usage of hair color and
hair loss products. Additionally, continuously changing fashion-related trends that drive new hair
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