Blitz Magazine, July 2000
In the late ‘80s, a friend of John and Lotte Davis’s came to them with an idea. He planned on starting a line of hair care products, which he would market in California. He figured that, since California has the same population as Canada, but in a much smaller space, he would make a killing. John, a former hair stylist who was then in the antiques business and Lotte, a graphic designer, dropped everything and became immersed in their friend’s venture. Which promptly flopped. There they were, unemployed and broke, with a little momentum and a bit of knowledge of the hair care products industry. They decided to continue and, in April 1989, founded AG (Advance Group) Professional Hair Care Products.
Their first step was to contract a local company to make a shampoo and a conditioner. They said they wanted the products to be rich and creamy, be pink in colour and smell of strawberries. Other than that, they were unable to dictate product specifications. They bought a used peanut butter-making machine and spent their evenings filling and labeling bottles. Then they started knocking on salon doors. With great results.
“Our advantage then was that we knew what not to do,” recalls Lotte. “From our previous experience, we knew that we shouldn’t dream too big, that we had to start small, and do it in our own back yard. The California venture failed because we didn’t live there and we didn’t understand the market. Here, we went to one salon at a time and we didn’t rely on someone else to sell our products. No one has the conviction to sell a product like the people who make it.”
John and Lotte started visiting salons, developing relationships and persuading stylists to try, then recommend, their products. Although they initially hoped only to be able to make enough money to cover the mortgage, first-year sales topped $127,000.
“There was a well-established industry standard on how you did business,” remembers Lotte. “We came along and said ‘We don’t know how everyone else does it but here’s how we have to do it because we don’t have any money’. We had to get attention on a very short budget. So we offered salons a 10% discount if they paid us upon delivery. Our competition all had 90-day receivables. We allowed the salons to make a huge margin, and it got word of mouth going.”
Demand was increasing, but John and Lotte couldn’t rely on their private-label supplier for consistent quality. They knew they had to manufacture their own product. So they sold their home and used the proceeds to open a manufacturing facility.
Most professional brands, it turns out, use private-label manufacturers. They can make specific requests for formulations, but they have little control and don’t know if their recipes are being sold elsewhere.
“We needed the kind of product we could succeed with, not the kind of product our supplier was making for us,” says Lotte. “And we realized that it’s like cooking. You start with the basic formula, you get creative, you devise your own recipes. If you add the finest ingredients, you’ll have much better products. And John turned out to be an excellent chef. Making your own product is a lot more work, it’s more time-consuming and it’s more expensive, but it’s also cost-effective because that control over the finished product pays off.”
To Lotte’s knowledge, the only other salon product made by the marketer (the name on the bottle) is Joico, which is AG’s main competitor. In the BC market, AG and Joico are usually neck-and-neck, or AG is slightly ahead. Continent-wide, AG competes with Paul Mitchell, Aveda, Sebastian, Matrix, Nexus. It’s a rich business, with Mitchell reporting annual retail sales of $200 million, Matrix $300 million.
AG remains the only Canadian company in the field. Its sales aren’t leading the market yet but the company is doing well, with 100 employees and 1999 wholesale sales of $11 million (translating to retail sales of $18 million). In 1994, the company won the Canada Award for Business Excellence from the National Quality Institute; in 1996, Profit Magazine named it Canada’s fifth fastest-growing company, with five-year sales growth of 5,426%.
In addition to AG’s Vancouver headquarters, there are offices in Calgary and Toronto. This year, distributors opened up two Washington State markets—Tacoma and Seattle/Bellevue and, in California, San Diego and northern Los Angeles. There’s one distributor in New Zealand; in Canada, there are 35 AG sales reps, plus five independent distributors.
The AG line is now sold in 4,500 salons. The line currently consists of 30 shampoos, conditioners, styling products, finishing products and perms, priced at $9-$14. There are plans to expand into colouring products, and the idea of opening AG salons is under discussion.
Lotte attributes much of AG’s success to timing. “In today’s market, if we said ‘We’re going to try and take some serious market share from Joico’, people would think we were crazy. The field is just so competitive now, we probably wouldn’t succeed. But we stayed focused on how to make this work. We also had a knack for marketing.”
When AG was founded, salons carried one or two lines; now they may carry 15. A salon is a busy, noisy environment. If you want to sell product, you’re going to have to get people’s attention. John and Lotte did this with bold, aggressive point-of-purchase (p.o.p.) materials. This sounds elemental now but, at that time, Lotte says that no one used p.o.p. materials to sell professional hair care products in salons.
“Back then, p.o.p. materials were a drug store thing. We invested in high-quality racks, we introduced specially-priced Christmas and travel bundles, and we introduced price-driven promotions on litres. We used easily-remembered names and colour-coded our products so they’d be quickly recognized. Our p.o.p. materials are very bold and they quickly deliver the message to consumers, talking about the products’ benefits and uses and providing instructions. Everything’s high-quality, very colourful, and there’s lots of it. We provide salons with posters, header cards, mirror talkers, shelf talkers, masks. The competition doesn’t do that.
“Also, with Joico being around so long, our real advantage, because Joico’s an American company, was that we could offer salons a higher margin. That, along with our p.o.p. materials helping with sell-through, in addition to getting our products noticed and increasing sales, allows salon owners to focus on what they do best and still achieve an extraordinary retail business.”
John’s knowledge of the stylist mentality, and catering to that mentality, is another key to AG’s success.
“Stylists traditionally think of themselves as artists,” continues Lotte. “They’re not comfortable selling. They’re in the business of cutting hair. It has taken a lot of education—from the whole industry—to convince them that if clients can’t maintain their styles after leaving the salon, the clients are going to be upset. And you need hair products to maintain those styles. You have to know what products to use and how to use them, or your hair will go back to being limp. We had to convince stylists that, although they don’t have to do the hard sell on clients, they can at least tell clients what they used for their styles.
“That’s the basis of our business. The average woman sees her stylist every six weeks and buys at least two products each time. About 2% of consumers buy professional hair products because they’ve seen ads in magazines, 75% buy because stylists recommended it. At the beginning, we knew stylists weren’t actively recommending our products, so the p.o.p. materials had to do the job.”
This also led to another innovation—a salon education program, consisting of product introduction seminars, and styling, cutting and perming classes. AG sends top stylists into salons to introduce new cutting techniques, styling techniques, perming techniques. And, of course, to teach stylists how their clients can use AG products to keep their hair looking healthy and beautiful between salon visits.
AG also does 10 trade shows each year, with an enormous ‘booth’ that Lotte likens to the Steel Wheels Tour facility. At trade shows, AG stages hair shows complete with professional costumes, choreography and sound effects. “We spend about 3% of our sales on hair shows,’ she says. “It pays off because we have to educate stylists and that’s what keeps them interested in us.”
Stylists have always been impressed by AG’s innovative marketing approach. For example, no one else used customized delivery vans. AG’s reps used vans stocked with product and emblazoned with the AG logo. When a salon agreed to carry AG products, the rep only had to go out to the parking lot, return with the stands and products and set up the sales area then and there. As the company became more successful, it had to switch to couriers—reps had to constantly return to fill the vans—but they are still used in rural areas, small towns and when opening new markets, where they serve as excellent advertising vehicles.
Also, no one else offered a refill program. AG customers receive a 25% discount if they bring empty bottles back to salons and refill them from larger dispensers. AG is still the only company in its industry that does this. AG is also the only company to offer samples in half-ounce bottles, while the competition persists with foil samplers. ‘Try-me’ bottles, in fact, have a higher perceived value and a greater capture rate.
Another innovation—this was the early ’90s—was the promise that no AG products were tested on animals, and that AG products contained herbal extracts, natural oils, vitamins, natural proteins and aromatherapy elements. They use things like silk protein, wheat, oat and human hair protein, and non-PABA based sunscreen. They offered alcohol-, wax- and oil-free formulations, and pH-balanced products made from photo-degradable and biodegradable ingredients. Products are blended in an herbal extract base and, perhaps most importantly, AG uses no sodium chloride.
Salt, it turns out, is what most other manufacturers use as a thickening agent. Salt dries out the hair and scalp. AG uses natural thickening agents, which are more expensive but make your hair feel better. It was important for AG to let people know about this, so much so that AG reps go into salons and make a drug store shampoo on the spot, using beakers and test tubes, fragrances and colours—and a box of Sifto.
AG uses very little water in its products, which means that they’re highly concentrated. So a $9 bottle of AG shampoo will last much longer than two $4 bottles of drug store shampoo. Advertising this had the effect of making professional products more affordable for, and accessible to, average consumers. AG was also able to promise consumers instant results.
Many people believe that it doesn’t matter what you put on your hair—that it’s what you put in your body that determines what your hair looks like. But we know that some products make hair look better. And we know that the wrong products can ruin hair. (You want alcohol on your hair, in a spray, but you don’t want it in setting lotions because it saps moisture. You don’t want oils because they stick to hair and can go rancid. Lanolin is not good for hair, silicone is.)
Educating consumers and stylists about all of this has been crucial to AG’s success. But the key is in the final use.
“The first thing people do is take the cap off a product and smell it,” explains Lotte. “So it has to smell great. Next is its appearance as it’s being poured—it has to be creamy and rich-looking. Ultimately though, when someone gets in the shower, does she feel good about it? Is she going to buy it again? Having spent that money, is it giving her a good experience? We can say ‘yes’. Our products work. If we say that a product will make your hair look thicker, it will. Because our products do what we say they’ll do, we have a very high repeat performance. Which pays off for us, and for salons.”
Over the years, AG has worked hard to anticipate what consumers want. “We have an R&D team with two full-time chemists and we’re always changing ingredients, always looking for something of a higher quality,” notes Lotte. “We look at trends in fashion and hair styles, get stylist feedback and sales rep feedback about what people need and want. We don’t copy our competition because, if you do that, you’re always one step behind. We try to come up with innovative products before anyone else does.”
Packaging is also a big issue. In the early days, Lotte did all of the company’s design work. Two years ago, AG retained Vancouver’s M5 Design, which has just redesigned AG’s packaging.
“Packaging has to be something that people can relate to and find attractive,” explains Lotte. “But lately, people are into interesting packaging. As soon as new packaging comes out, consumers gravitate toward it. They’ll spend $30 on a bottle of bubble bath because they like the bottle. And now you’ll find salons with one chair and racks of product. So packaging has to make the product easy to spot. We went eight years with the same packaging, we’ve just changed it and we’re already looking at changing it two years from now. Joico recently changed its packaging and has to do it again because it wasn’t successful. We refresh our image, but we’re careful not to lose our brand image.”
The majority of AG’s marketing budget is spent on marketing directly to salons and stylists. Ads are placed in trade magazines; a PR firm, Vancouver’s Turtle & Hare, makes sure that AG’s products are regularly mentioned in fashion magazines. A web site went up last year. It’s lightly-visited and has not been a big part of the company’s marketing plans, although it will be in the future and it is about to be revamped. Its main purpose has been to attract new distributors.
AG is very deliberate in its choice of markets and distributors. One of the reasons for its success is single-line distribution, meaning that AG products go directly from the manufacturing facility in Vancouver, to contracted distributors, to salons.
One benefit of this is that the practice of ‘diversion’ is avoided. Diversion takes place when people buy products from salons for 10% more than the salons paid. Then they sell it to drug stores for a higher percentage. This is why you’ll see pieces of professional product lines in drug stores, but never the full line. In the US, diversion is harder to control because there are so many levels of distribution, but AG has been successful at controlling it.
And why would it matter if their products popped up on drug stores shelves?
“Drug stores sales are the death knell of a professional product line,” explains Lotte. “Once you start selling to drug stores and putting your product into a mass-market venue, you’re taking business from the salons and forcing salons into competition with drug stores. The salons will drop you. Drug store sales also degrade the image and professionalism of a product, because it’s instantly associated with the cheaper, lower-quality products. So drug stores sales are absolutely contrary to our distribution plans.”
Lotte says that AG’s distribution methods are another area in which it is unique. “Most distributors carry multiple lines. So a sales rep will go into a salon and say ‘I have these lines, which one do you want to buy today?’ Our distributors can only sell AG. They can carry brushes or nail products from other companies, but AG is the only wet line they can carry. But we provide our distributors with a turnkey operation. All the p.o.p. materials, the education programs—everything that has made AG successful is passed on.”
So what’s next? New York?
“No way,” says Lotte. “We look for opportunities where there’s still opportunity, not where it’s over-crowded. Now that we know what works, we want to expand into markets that are about to take off.”