Anasazi Exclusive Salon Products

1. Anasazi Exclusive Salon Products Distribution Channel Strategy Selective Distribution March 2000

2. The Selective Model • Salon owners object to professional products being sold outside of the salon channel • Salon margins were being squeezed by distributors and would welcome a product sold with a higher GM • Existing intensive distribution provides no services or training to salon operators • Salon operators have little loyalty to existing brands and would readily shift

3. The Product Proposition • Create a new profit center for salons • Special product prescription to match hair type • Special massage and treatment that permits an additional price to be assessed by the salon • Permit sales at retail to be made to enhance the treatment process at home • Train all hair stylists in the product • Allow discounts, cooperative advertising, training in providing the prescription

4. Sales Expectations • By 1994 • Capture 2,421 salons by 1994 • Achieve net sales of 10,884,000 or $4,500/salon • Achieve close to break even • By 1997 • Rapid expansion to 7,400 salons • Comparable sales increases by 1997 • Highly profitable

5. Distribution Realization • In 1994 • Achieve average sales run rate of over $3 MM • Gain only 1,337 salon customers • Average sales per salon at 2,500-3000 • Encountering sales resistance • Sales force closing only 6 accounts per month • Growing distribution by about 1,000 salons per year • Sales force retrenchment to focus on major markets

6. Distribution Costs • Sales and marketing costs running high • Sales force costs alone are almost 75% of sales • Show and education costs are half of sales costs • Marketing costs, discounts, etc. to salons are running almost 50% of sales costs • High costs reflect inability to place product in stores at expected rate and expected rate of repeat sales

7. Break Even • Current overhead and selling costs are running at $3.5 M per year • At the current 56% GM, breakeven will not occur until sales reach over $6 M, assuming overhead costs are fixed • If sales increase at $600K per year, there is 4 years to breakeven

8. Implications • With a four year time to breakeven, minimum, the company is likely to require another two to three million dollars of capital • Profits will be slow to grow after this point • Profit potential from the project has diminished enormously

9. Selective Conclusions • Why did Anasazi’s selectivity program fail? • Poor Implementation? • Sales force may not have had adequate product skills • Initial contacts with salons not maintained; weak brand • No pre-testing of the selectivity model • Weak selectivity benefits to salon owners? • Minimal congruence between salon/shampoo supplier • Shampoo not a key element in salon’s differential advantage • Stronger loyalty by hair dressers to prior brands • Would intensive distribution have been a superior alternative?