Understanding The Hair Color Revolution With Madison Reed

In this episode of TD Cowen’s Retail Visionaries Podcast Series, Amy Errett, CEO & Founder of Madison Reed, joins Cowen’s Retail, New Platforms, & Luxury Analyst Oliver Chen for a podcast focusing on trends in the haircare industry. Amy offers her perspective on bringing transparency and convenience to consumers across different channels while providing insights into Madison Reed’s core competencies, business structure, and growth prospects.

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Transcript

Speaker 1:

Welcome to Cowen Insights, a space that brings leading thinkers together to share insights and ideas shaping the world around us. Join us as we converse with the top minds who are influencing our global sectors.

Oliver Chen:

Disrupting the hair color industry, Madison Reed is transforming at-home and in-salon hair color with ammonia free hair dye. Madison Reed offers unique convenience, ingredients, technology, and bricks plus clicks. This is a visionary podcast series about visionary ideas and people. My name is Oliver Chen, I’m Cowen’s new platforms, retail and luxury analyst.

                In this episode of our retail and luxury visionary podcast series, we’re excited to spend time with Amy Errett, the founder and CEO of Madison Reed. Which is disrupting the hair color industry by providing professional hair coloring at home, and then through other venues as well. A brief introduction on Amy. Amy founded Madison Reed with over 30 years of business and operating expertise as a four time entrepreneur, venture capitalist and social mission visionary. Amy’s a venture partner at True Ventures, focusing on investments in consumer and eCommerce. And she holds an MBA from the Wharton School at the University of Pennsylvania. Amy, it’s great to be here with you.

Amy Errett:

Thank you, Oliver. I’m excited to be here, as well.

Oliver Chen:

Amy, we’ve been following Madison Reed and what you’ve been doing for many years. But for those who are less familiar, what is Madison Reed? What led you to start it?

Amy Errett:

Yeah. I saw a massive void in this category where 95 million women in the US color their hair every six weeks. So I saw a void and the void was on one side, the box offered on the shelf had limited shade ranges, terrible ingredients, horrible componentry, no technology enablement. And it just seemed to me that $10 box wasn’t doing the job for the 52% of women in the US who color at home.

                On the other side of the equation, 48% of women color in the salon. And I saw an opportunity to both use technology and the same exact product with consistency to disrupt that side of the industry. I didn’t see yet in the beginning that we would be on other people’s shelves. And so that part of our business is also growing. We have a great partnership with Ulta and Ulta [inaudible 00:02:34] Target in their mini stores. And we’ve seen that to be incredibly additive to our business in terms of not just sales, but brand awareness.

                This is a category that has a high friction point. And what I mean by that is, intuitively the woman is scared to make a change about whether, what is her hair going to look like in terms of outcome? This isn’t like you do it, it screws up, you put it back in a box and send it to somebody. This is an appearance changing. So we’ve learned that all these touchpoints are absolutely critical for the customer to know the brand that has integrity and purpose.

Oliver Chen:

Amy, what are Madison Reed’s core competencies? How are you different from existing brands? You do have a really high net promoter score.

Amy Errett:

Yeah. So the first place we start, Oliver, is our ingredients. So we have a 8-free formula that has taken out the harsh ingredients in hair color. It’s proven to work close to 60 shades. So shade range and the ingredients. And we use technology in an innovative way to give the customer support about finding their perfect color. And then helping them apply it in terms of content and access to certified license colors. Either on video or on chat or on email and text.

                And so we really felt like we were disrupting all sides of that equation. Once we did that, we understood with the net promoter score, that this product was salon quality. And if it was salon quality, then we could open our own version of a salon. Which is we call Hair Color Bars. We have 65 of them today in 18 different hub locations in the US. Moving to 80 soon by the end of the year, and then over a hundred next year. And then as I mentioned earlier, we’ve also made the product accessible at Ulta, Ulta Target. And most recently, we’ve put our toe in the Amazon footprint and that’s going incredibly well.

Oliver Chen:

Amy, what about pricing? Your prices are very compelling in its prestige. How do you compete? What’s your hero product priced at versus other options?

Amy Errett:

Yeah. On the at home side, we’re 52% of women in the US color at home. We have a much more expensive price point. We are a $30 price point in retail, $25 in the subscription online directly with us at madisonreed.com versus a $10 box. So that part of the equation is the three X pricing premium based on better ingredients, more shade ranges, color matching this 18 question algorithm that’s quite good. You don’t get between a 60 and 70 NPS if the algorithm isn’t working, which it is.

                On the salon side or our Hair Color Bar side, where we actually do the services. We actually are priced at less than half of what somebody would pay in a salon. So, depending on where you live, but if you live in New York or San Francisco and LA, the average salon visit is $200 plus. And our average Hair Color Bar visit is $75.

Oliver Chen:

Wow. Very compelling. Amy, I think technology’s also interesting slash personalization. Could you speak to what you see happening there and in your business?

Amy Errett:

Absolutely. So, technology for Madison Reed is not just a feature set. I talk about this all the time. Our technology stack is absolutely critical to the value of what we’re giving a customer. So this 18 question quiz algorithm is effectively doing, Oliver, what somebody would do if they were looking at your hair in person. It’s asking you the 18 questions to predict what color is perfect for the outcome you want. We have over 15 million hair profiles and they’re very sophisticated. It has helped us develop new products because if we know that 70% of our customers say that their hair is dry, it becomes very clear that you need to offer shampoo or color conditioning or masks. And we’ve been able to do that and then serve the customer that from personalization standpoint.

                We’ve also made that technology available to our retail partners. So for instance, Ulta has an open API to that 18 question quiz. And that gives Ulta customers the same advantage that a Madison Reed customer has. We don’t believe in not opening that technology. We have built all of the salon technology. So the scheduling of appointments, the prediction of how many people we need from the labor force. The stylist gets an app and that app actually keeps track of what the customer’s data is, but it does things like a timer. You can’t leave hair color on indefinitely. And so it helps us with SLAs in moving people through the chairs effectively with great results.

                So all of that data stack exists in our value proposition. And it also allows us to have consistency to the customer. For instance, customer comes into multiple Hair Color Bars in different locations. We need to have the consistency to know exactly what we put on their hair, regardless of where the location is. We have customers that have been in 10, 11, 12 Hair Color Bars already, and that same consistency exists if they go online to madisonreed.com. We know what we put on their hair and so they can purchase that box seamlessly. So these are all things that other competitors don’t have, that are important to know. AR tools, virtual try-on tools, chat bot. Those are all things that are not just feature sets, they are consistently embedded in how the company operates.

Oliver Chen:

Very helpful and complex yet, very customer centric. Amy, a general question, what do you think’s most underappreciated about your business from those who may be less familiar with hair care and hair color?

Amy Errett:

Yeah. The number one question that I have gotten asked over the years and all the years that there have been investors that have been interested is, “Oh, wow. The size of the prize may not be big.” And my response to that is, 90 plus million women in the US color their hair every six weeks. They color starting at 35 years old and color to at least 70. I want you to run the numbers about how big that market is and how deep those numbers go.

                And in addition, once you get that customer, the retention that’s already built into the business model. So for instance, we have over 250,000 subscribers online. We offer today a subscription model in our Hair Color Bars. So in our salons, we offer what we call an unlimited roots membership. And that is one price on basically a monthly service fee that just keeps on piling up. And you can come as many times as you want in a 30 day period. We already have 15,000 people that have subscribed to that and it’s 50% of the run rate of the Hair Color Bars already.

                So what you’re going to see is a business that isn’t predicated on typical 4-wall unit economics or typical D2C economics. It’s predicated on the fact that we will have millions of members who effectively are bought into the premium nature of the brand, that have guaranteed a unit economic LTV to cap return that is automatic. And so we’re not interested in being analyzed as a service business in 4-wall economics versus the fact that we’re really a membership business that has consumer behavior that is based on consumption and retention. You get a box, you use it. You can’t use it a second time. You come into the Hair Color Bar, we do a service, you have to come back.

                So these are things that are very different about this business model. And if you looked at Ulta’s numbers of Madison Reed or you looked at Amazon, these people are coming back and automatically buying again. Because the size of the price is massive. And what we’re doing is only in the US. Women everywhere color their hair globally. So this is a global business that’s going to expand dramatically. And already the growth has been something that I think will surprise people. Having said that, we’re turning the corner on profitability. We understand that the investments one makes needs to pay off by making money. And so the company is also spent a lot of time in making sure that the unit economics worked before we just hit a gas pedal. And I think people will be surprised in a couple of years about how big we got and what the company looks like from a bottom line perspective and growth perspective.

Oliver Chen:

Amy, on the Hair Color Bars, you have 65, you could have many more. What are your thoughts about that physical aspect? And what might happen with the customer or customer who shops at Ulta or Amazon? Do they typically come see you in the Hair Color Bar or not? How do you see their journey working through?

Amy Errett:

Yeah, so we want our product to be accessible to everyone. Meaning if you want to do it at home, you could buy it in multiple places. We are agnostic to that. If you want to come into our Hair Color Bars and have us put it on, we are agnostic. We see about 20% of our customers that do all those things. So we have 20% of our customers that are coming into the brand in various ways. And then using the brand on a multiple channel basis.

                Now that we can’t track Ulta, that’s just what we know about our direct customers. So we don’t have the names of all the customers. We obviously don’t have the names of Amazon customers. But what we know from some of the data that we can infer is the return rate of those customers is quite attractive regardless of the channel that they came in. And they weave their way through the journey in very, very different ways. Industry average would tell you that only 10% of women will enter into a brand in hair color and do those things. In our case, it’s 20 and growing. So we’re very happy with this omnichannel approach. What we also know is the customer that enters into our store first is incredibly valuable on a multiple basis versus the customer that just enters in on an online basis. And I think it’s because the immersive experience of the store locks in and guarantees that the brand really knows what it’s doing in a highly considered purchase.

Oliver Chen:

Yeah. A trusted partner.

Amy Errett:

Exactly.

Oliver Chen:

The lifestyle branding as well-

Amy Errett:

Exactly.

Oliver Chen:

Kind of speak to the customer very quickly. So last question, Amy, what would you say are your toughest problems ahead? And which parts of the business are the most fun for you?

Amy Errett:

Toughest problem ahead is staffing. I can share with you that the amount of unfulfilled demand that sits even in the first half of this year, while there’s still COVID to come into our 65 Hair Color Bars, is a number that people laugh that I will be laying on the floor in the fetal position crying. Because we have a staffing problem about the number of colorists and the timing it takes to hire them and the quality.

                So this is, what we have customers want. We now need to figure out a way to hire the best people, train them and accelerate that. Because 80 stores at the end of the year, you can run the numbers about. We have an unlimited demand if we can service a chair where there’s typically 10 chairs in our hair color bars, we can fill those chairs. We can start at seven o’clock in the morning and we can go to 10 o’clock at night, we can go seven days a week. It is an unlimited demand and where our biggest problems are today is just recruiting and hiring fast enough.

                The great resignation is real. It is difficult for service industries like us. But we are finding a way through that to build a really world class team and also train people on hospitality skills. This business is not just, can I apply color on your hair? It’s how do you feel when you’re there? And are you immersed in the lifestyle nature of the brand?

                The most fun of my job, I am by nature a people person. I love our team, I love proving good economics can work because we pay our team members and our Hair Color Bars two to three X what they make anywhere else. This is personal to me. I love the fact that people are seeing the brand and understand the integrity and the purpose of the mission. 57% of the people of Madison Reed are people of color. The diversity is real. The inclusion is real and 83% are women. So I am incredibly excited about the possibilities of building a diverse workforce whose lives are really better because they work here and they’re happy, and our customers love what we’re doing. I am convinced, Oliver, convinced in my core that this company is turning this whole industry upside down. And we will continue to do that, but you can’t do it without loving your team and investing in people. And so that’s the most fun of my job is getting to see that aspiration be your realization in our business.

Oliver Chen:

Yeah. And the beauty industry as well, the minority customer has been under-

Amy Errett:

Absolutely.

Oliver Chen:

[inaudible 00:16:08]. So it’s a big opportunity.

Amy Errett:

Absolutely. And we’re dedicated to that.

Oliver Chen:

Amy, thanks a lot. Madison Reed clearly offers unique convenience, really special ingredients, technology and digital meets physical. So it’s great to learn more about what you’re doing. Thanks.

Amy Errett:

Thank you for having me, Oliver. I appreciate it.

Oliver Chen:

My pleasure.

Speaker 1:

Thanks for joining us. Stay tuned for the next episode of Cowen Insights.

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