TANOLOGY - The Science of Tanning

STATE OF THE INDUSTRY. Most indoor tanning salons recognize the fact that many of the tanning units they carry and products they sell are also sold by competing salons as well as other businesses that offer tanning services. Local Yellow Page display ads promote commonalities while salon websites possess almost interchangeable messages. The lack of exclusivity in product mix has led to “salon homogeneity”, sameness from one salon to the next.

Indoor tanning salons, similar to many retail businesses have generally engaged in strategies that place them into one of three categories in the market spectrum:

Discounter
Middle/Market Average
High End/Luxury

The effect of decreased differentiation has resulted in severe market pressures and a thinning of the Middle segment, creating a polarization to either end of the market spectrum. Value conscious customers who have difficultly perceiving the difference between salons in the Discounter and Middle segments will most often opt for the lower priced salon. The trend of severe price competition, deflationary retail prices and eroding profit margins will continue as more and more salons find themselves having to compete on price.

For those wanting to position themselves in the High End/Luxury segment, there is a clear need to create salon differentiation. Salons that are seen as destinations and viewed as brands themselves will be able to build the equity necessary to attract and retain customers and to profitably compete.

This dynamic is affecting the entire industry supply chain. Currently, every company that operates as a general supply house to salons is suffering severe profit margin erosion due to the continued need to compete solely on discounting. Pressured by their own eroding margins, salon operators negotiate with numerous distributors of the same identical goods, pitting each against the next in a contest to match discounts.

With little operating margin left, distributors are in poor position to provide any value-added services to the salons. In an effort to maintain profit margins through increased sales volume, many distributors have begun to seek out alternate points of sale for products including retail outlets unrelated to the tanning industry as well as direct sales to tanning customers. This is evident by the fact that every leading brand-name tanning lotion is readily available for purchase through online catalogs and electronic marketplaces. While these sales aid in sustaining the distributors, the dollars lost by tanning salons when their customers purchase diverted products severely impacts their profitability.

Distributors have also started to use their leverage in negotiating pricing structures with the tanning industry’s product manufacturers, in particular indoor tanning lotion companies. With a warehouse full of lotions from competing manufactures and an abundance of new brands emerging each year, distributors understand that they are in a position to demand increased margins from lotion manufacturers. These pricing pressures have forced manufacturers to reevaluate their operating costs in an effort to recoup the additional margins that they are forced to provide to distributors.

In an effort to keep their situation transparent to salons and tanning customers, leading lotion manufactures have chosen to maintain their costs related to marketing, promotion and packaging. Instead, all have opted to reduce cost related to the ingredients that are used to manufacture their products. A review of the ingredient list on the product label of any name brand tanning lotion reveals the fact that manufacturers are reaching into the product’s bottle, pulling out the expensive performance ingredients and replacing them with cheaper alternatives such as water, synthetic moisturizers and artificial sunless tanners.

This decrease in product quality is directly contributing to the eroding profitability of the entire industry. Value-driven customers that overpay for underperforming products that fail to deliver on promises will adjust purchasing habits accordingly. This often will include not only changing the product they purchase, but also the retailer/service-provider from whom they purchase as well. Customers that are repeatedly disappointed may opt to discontinue consuming products and services all together.

These trends are the direct result of an industry that has experienced a period of hyper-growth over the last decade. Now entering late adolescence, the tanning industry will begin to develop a different complexion that will reflect the competitive marketplace that it has become. These dynamics create a significant opportunity for new industry leadership. Forward-thinking companies with emerging strategies have the potential to reshape the market and significantly benefit those that are first to adopt.