SINGAPORE (Feb 28): Many years ago, my career coach argued that barber salons were recession-proof. People would need a haircut, whatever the gyrations of the economy. I ignored this advice and became an equity analyst.
Barber salons are not only recession-proof, they are defying the death of traditional retail. Singapore’s shrinking footfall in the malls has been accelerated by the coronavirus. But, barber salons are thriving in Singapore and elsewhere.
In the US, barbershops are licensed businesses. This allows us to track its progress. The number of barbershops fell by 23% from 1992 to 2012. Since 2013, there has been a boom. In the last two years, barbershops have risen at about 10% per annum, according to Barber Boards Association of America.
This stands in complete contrast to the crumbling performance of traditional retail. Vanishing footfall is common not just in Singapore. In the US, over 15,000 store locations have closed since 2017. Sales are moving online.
Even businesses that were said to be immuned to e-commerce such as cosmetics have fallen victim to it. Cosmetics buyers, it was said, prefer to touch and feel the merchandise. However, more than a quarter of the cosmetics sales in the US in 2019 were online.
What is the secret sauce that gives barbershops its Teflon-like status? A robot cannot provide a reliable and affordable haircut — yet.
We have computer programs that assess the contours of a person’s hair. But, everyone’s hair is sufficiently distinct that only a human can truly assess it. People do not have enough confidence in a machine to allow robotic scissors to cut hair. There is also the fear of injury.
Barber salons, particularly those that cater to males, enjoy regular revenue. Most males have a haircut every month. The same barber has been chopping my thinning locks for the last 22 years. A haircut is a regular function like brushing teeth or shaving.
The male haircut is also a uniform service with high volumes. The ingredients are just a pair of scissors, clippers, a brush, a sink and a chair. In Singapore, there is a service that provides a 10-minute haircut for $10. This is the fast food equivalent of a haircut.
Women’s hairdressing is not as uniform and requires higher upfront costs. The women’s hair salon carries a vast stock of dyes and cosmetics. Blow-drying adds to the overheads. The efficiency is less, as a hair appointment can take three hours. The frequency is also lower than a male barber shop.
A barbershop is cash flow positive, unlike many other service businesses. The customer pays on delivery of the service. The wages, rent and utility bills are paid at the end of the month.
Landlords love barber shops. Barbershops want a space format that many other tenants avoid. Barber shops want “bowling alley” space — minimal storefront with great depth.
Though most barbershops are standalone, there are stock market proxies. QB Net Holdings, listed in Japan, is an operator of budget haircuts in Asia. It has a network of 660 stores in Japan, Taiwan and Singapore. The typical haircut in Japan takes an hour and costs about US$60 ($84).
QB Net provides haircuts in 10 minutes that cost below US$20. Reservations are not required. It targets the 20- to 45-year-old demographic that are looking for quick service. It takes up an average space of around 33sqm.
At just 12 times EV/Ebitda, QB Net is undervalued for its growth. It generated 19% earnings growth in FY2019 and could exceed that in FY2020. Its projected same store sales growth (a vital metric in retail) is twice that of the average in Japan. It is much higher than the moribund norm in Singapore.
Some barber salons may have to take a haircut on the level of service. Supercuts, the UK business of US-listed barber shop operator Regis Corp, filed for bankruptcy last year. Supercuts has 220 salons, but struggled due to its extravagant rents and workforce.
The QB Net low-cost and efficient model seems to be the one that will last. It may be too late for me to follow my career coach’s advice, but investors should not ignore this business.
Nirgunan Tiruchelvam is head of consumer sector equity research at Tellimer (Exotix Capital)
