Anasazi Exclusive Salon Products Distribution Channel Strategy Selective Distribution March 2000

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

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

Sales Expectations By 1994 By 1997 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

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

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

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

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

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?