Greener Shades for Nail Salons

Artificial-nail services make up the bulk of the sector's profits, but the natural-lifestyle wave is forcing big changes

by Kerry Miller

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It may sound harmless, but the so-called "organic revolution," or the shift in consumer spending habits to support a "natural" lifestyle, is the biggest thing to happen to the $6.4 billion U.S. nail-services industry since the Vietnam War.

It was nothing more than coincidence that artificial nails first emerged as a status symbol in the mid-1970s, just as the U.S. saw its first influx of Vietnamese immigrants. Coincidence, too, that a second wave of Vietnamese immigrants crested in the early 1980s, just as TV shows such as Dallas and Dynasty, which glamorized long nails as a reflection of wealth, were propelling acrylics into the mainstream.

For many Vietnamese—a good number of them educated, experienced entrepreneurs—it was the perfect opportunity to build a new life: The nail-services business had low startup costs, and it didn't require extensive education or English fluency. The number of nail salons started to multiply, and new nail technologies helped drive profits, even as competition forced prices down. Cheaper prices helped bring in even more customers, and the idea of the quickie manicure as an "affordable luxury" was born. Nationwide, there are now more than 57,800 nail salons in operation, most of them independently owned and operated, and their workforce is still about 38% Vietnamese.

Price Wars

Quy "Charlie" Ton was one of the thousands of Vietnamese immigrants who sought refuge in the U.S. in the 1980s. Now, as the owner of Regal Nails, Ton has built the country's largest chain of nail salons, with 913 franchises so far, most of them inside Wal-Mart (WMT) stores. His other businesses—Alfalfa Nail Supply and T4 Spa—manufacture nearly everything nails salons use, from emery boards to pedicure thrones. And about 99% of his franchises, Ton says, are owned by fellow Vietnamese immigrants.

Ton says that for decades, Regal Nails—and the entire nail-services industry—saw nothing but growth. But recently, there have been signs that the tide may be turning. Analysts projected a 6% decline for the nail-services industry in 2006, due to rising interest rates, gas prices, and other economic influencers. And in oversaturated areas like New York or Los Angeles (where a manicure can be had for as little as $7), price wars may have pushed profit margins as low as they can go. "It's a terrible market right now," Ton says. "Very competitive."

The nail-services industry has come under attack repeatedly in the past few years, after outbreaks of skin infections were traced to contaminated footbaths at nail salons. A much-publicized study linking a chemical used in nail polish to birth defects added fuel to the fire. By late 2006, several major nail salon suppliers, including Essie and OPI, announced plans to reformulate their products in response to public pressure, but that didn't slow the drive for a regulatory crackdown.

Natural Revolution

This January, an influential new law went into effect in California forcing cosmetics makers to reveal harmful ingredients in their products. Another new law gives a California state board the power to immediately shut down nail salons cited for sanitation violations. Similar laws are under consideration in other states, such as Oregon and Washington.

Regal Nails already spends $500,000 annually to inspect each of its salons once a quarter, Ton says. And new rules for franchisees went into effect this year requiring the use of special apparatuses to sterilize equipment and prohibiting the use of blades to remove calloused skin.

Ton says the California law is unfair because it doesn't give salons time to correct problems before punishing them. But it's the overall movement at work—the organic revolution—that Ton says is having far more worrisome effects on his bottom line (see BusinessWeek.com 4/7/06, "Organics Are No Longer a Niche").