HAIR CARE Salon-only products in stores irk makers

Diversion of products can involve several steps and multiple wholesalers.
WASHINGTON POST
Why do drugstores, supermarkets and discounters sell high-end hair-care products that say "For Sale in Professional Salons Only"?
It sounds like a simple question, but it turns out to have a complicated answer.
"You've put your finger on the most controversial and contentious issue in the industry," said Mary Atherton, editor of Modern Salon magazine.
Products by manufacturers such as Paul Mitchell, Redken, Sebastian, Tigi and many others are not supposed to be sold anywhere but in salons. If they are, then somewhere along the line, a distributor or salon has broken an agreement with the maker.
But selling these products through alternative channels is not illegal. So it's up to the manufacturer to catch the wholesalers, distributors and salons that are selling products on the side, and that's not always easy. The result is rampant "diversion" of hair-care products into what the industry calls the "gray market."
Impact of sales
The practice costs manufacturers and salons millions of dollars per year in lost sales, diminished brand value and legal fees. Company executives estimate that 15 percent of all salon-style hair-care products end up being sold through unapproved retail channels.
"We have done a good job of creating a product, creating a brand name and creating satisfied customers," said Luke Jacobellis, chief operating officer for John Paul Mitchell Systems of Beverly Hills, Calif. "But if the drugstores of the world and others know that, and there's demand for that product, then if they can get the product, they'll put it on their shelves."
In a typical gray-market situation, a wholesaler receives products from a manufacturer and sells them, on the sly, to retailers or other distributors. There could be several steps between that wholesaler and the end consumer because profit margins on hair-care products can be quite high.
"They can buy it at wholesale, turn it over to a wholesaler to sell to another wholesaler, and everybody can get something," Jacobellis said.
That's one reason Jacobellis can't just call Wal-Mart and ask where its Paul Mitchell Hair Thickening Spray came from. Wal-Mart may not know.
Pressure on distributors
Some industry insiders say manufacturers aren't free from blame -- in part because they put so much pressure on distributors to sell, and in part because they turn a blind eye when diversion yields big revenue gains.
"The manufacturer will set quotas for the distributor, and the quotas are totally unrealistic. They'll say, 'If you don't buy a million dollars this quarter, I'm going to go to another distributor,'" said Paul D. Finkelstein, president of Regis Corp., which owns 10,000 salons, including Supercuts, Vidal Sassoon and Trade Secret. "So [the distributor] buys a million dollars and sells a third of it to Rite Aid."
Some manufacturers become addicted to the added sales and look the other way, Finkelstein said. "They could stop it tomorrow if they really wanted to."
There's another method of diversion: A salon deliberately orders more than it needs and resells the extra to a "collector," who amasses products from salons and then sells them to retailers or distributors. A small minority of salons participate in this kind of activity, but it still amounts to millions of dollars a year.
Counterfeit products
Indeed, counterfeiting is another concern. Industry officials warn that diverted bottles may contain fake products that might not be clean or safe.
"The problem is, the retailer doesn't always know where their product came from. If it's in a salon, at least it came through our distribution channel," Jacobellis said.
Some manufacturers, like John Paul Mitchell, campaign against diversion with court fights, investigations, ad campaigns and communication with salons. But salons have the most to lose, because when someone buys a product in a drugstore, the manufacturer still made the sale, but a salon lost one. And much of a salon's profit comes from selling hair-care products.