SALON-ONLY?

Vicki M. Young / Andrea M. Grossman

Supermarkets and chain drug stores are fighting to maintain their share of hair product sales. One tactic is through sales of exclusive salon-only products.

The now bankrupt Powell, Ohio-based Drug Emporium's court victory against Sebastian International, did more than catapult drug stores' and food retailers' confidence in selling "salon-only" products. It helped them win a battle in their own war, one that pits them against mass outlets such as Wal-Mart, Kmart and Target, which have stolen hair care category sales and market share from drug stores in recent years.

As reported, a California trial court in Los Angeles ruled earlier this year that Drug Emporium could continue to sell Sebastian's salon-only hair care products, based in part on the so-called "first sale" doctrine. The ruling, which William C. Conkle of Conkle & Olesten, an attorney for Sebastian, said was appealed, represented a victory for drug stores, even to those that have never been involved in any legal action with salon-only suppliers.

Angela Aguiar, category manager of Brooks Pharmacy, Warwick, R.I., said while the Drug Emporium ruling "does not affect" her chain since Brooks has never been taken to court or even been asked to remove salon-only products from shelves, the hair care category is one that has become very competitive. "The hair care category overall for drug stores has been losing share to mass [channels of distribution] over the past several years," Aguiar said. "Salon-only brands contribute to higher dollar sale rings and help maintain gross margin. The key is keeping them in stock."

Indeed, sales of hair care products have been funneled to Kmart, Target and Wal-Mart in recent years. More competitive prices and a wider range of categories, some believe, make shopping at mass stores more appealing. According to data from Information Resources Inc., Chicago, drug stores' share of the hair care dollars dipped to 22% for the 52-week period ended February 25, 2001, a four-year low. Food retailers share fell to a 35% share for the period, a four-year low. Mass channels, however, commanded 43% of the dollar share, a four-year high.

Whether procured through diversion or other means, the channels where consumers can buy "salon-only" products continue to widen. Even food chains such as grocery stores and supermarkets have been brought into the fray.

Several retailers on the supermarket and drug store fronts -- such as Randalls Food Markets, Phar-Mor, Rite Aid Corp. and CVS Corp. -- were named as defendants in a Los Angeles federal court lawsuit filed by Sebastian last year, charging the retailers and at least 20 other entities with racketeering, unfair competition, trademark infringement and counterfeiting. The other named defendants include U.S.-based salons and individuals, as well as entities from Italy. The lawsuit concerns the sale and distribution of allegedly counterfeit cans of the Sebastian Shaper hair spray.

According to the lawsuit, "over 750,000 Italian-produced counterfeit cans of Sebastian hair spray have been detected and the scope of the undetected counterfeiting may be enormous."

The California state and federal court actions aren't the hair care manufacturer's only legal battles. Sebastian, as a defendant, is embroiled in a dispute with Albertson's, Boise, Idaho, also over allegedly counterfeit cans of hair spray. Albertson's sued Sebastian in a Phoenix federal court on Feb. 5, 1999, charging Sebastian with unfair competition, unlawful restraint of trade and unlawful resale price maintenance.

A year later, Sebastian filed a countersuit against Albertson's charging the retailer with selling counterfeit goods. For its part, Albertson's issued a recall of the Sebastian product in April 2000 to investigate whether any of the cans of hair spray came from Italy, even though it stood by its claim that it has always sold genuine Sebastian hair care products.

A spokeswoman for Albertson's said, "Many courts, including the U.S. Supreme Court, have concluded that it is legal to buy and resell genuine salon products. Sebastian's attempt to restrict sales to salons only reduces competition so that the consumer pays a higher price."

To be sure, public demand for the products appears to be insatiable, according to the increasing sales at drug stores and supermarkets.

Drug and food retailers, in fact, depend on salon-only products to make up for sales that are lost to mass stores.

Jon Rudden, vice president of merchandising, Happy Harry's said his salon-only business is "reasonably significant," about 5% of the Newark, Del.-based company's overall hair care business. Greg Heller, senior health and beauty aids buyer for Tulsa, Okla.-based May's Drug Stores, is also pleased that salon products are on May's shelves.

May's distributor, which Heller declined to name, offered the retailer indemnity as an incentive to get the products onto its shelves. "If something happens, they'll pay the legal penalties, but it also eliminates us buying from another source. This is a big business for them, too," Heller explained.

According to Heller, many salon-only suppliers buy back their products from May's -- at the chain's retail price -- just to get their brands off the drug store's shelves. Sebastian, however, "never bought their product back," he said.

Of course, keeping salon-only product in stores could become more difficult, Heller acknowledged, if Sebastian prevails on its appeal or other manufacturers start taking legal action against drug stores.

Michael Malkin, assistant general counsel for Phar-Mor, Youngstown, Ohio, believes that Sebastian's legal maneuvers don't pack much punch.

"Phar-Mor does carry Sebastian products, but we buy them from legitimate, normal channels of commerce," Malkin said. He added that Phar-Mor "never received any counterfeit goods" and that Phar-Mor conducted store-by-store searches to uncover any Sebastian products carrying certain lot numbers that had been tied to counterfeit Sebastian units, specifically their Shaper and Shaper Plus hair sprays.

"The whole point of bringing in retailers is because if [Sebastian] is menacing enough, the boatloads of money this costs to defend" may not be worth spending, Malkin said. "They are bullying us not to go through with all of these motions." Salon retailers, on the other hand, have quite a different story.

"It's fairly clear there is a thin line between the ownership of product and to what point the retailer has the responsibility of contractual relationship with manufacturers and distributors, who have specific territories," said Robert Hobe, vice president of product services for Ratner company, parent of the Hair Cuttery chain of salons, based in Falls Church, Va.