Lawsuit: Regis clips franchisees by ditching ProCuts
In 2011, Regis Corp. was heavily promoting its newest brand, ProCuts Sports, “where men can be men, and look good doing it,” as the slogan went. ProCuts would hit 30 salons in Minneapolis-St. Paul, its headquarters market, by 2013, and 900 salons in the United States and Canada within 10 years, execs predicted at the time, according to a lawsuit filed in August.
Today, Regis, also the franchisor of 2,400 Supercuts and more than 740 Cost Cutters, appears to have abandoned the brand. The website lists one store in Iowa, six in Minnesota and one in New Jersey—total—and many of those stores are said to be closed. No franchises are being offered in any state in the country, the website says.
The handful of remaining franchisees—seven people who owned nine stores and invested more than $3 million into them—say they’re owner/operators in a dead system. Their lawsuit, Ansari vs. Regis, claims fraud.
“Many of them have lost all the money they have and all they can borrow. It’s a sin,” says J. Michael Dady, Dady & Gardner in Minneapolis, about the franchisees he represents in the lawsuit filed in state court.
Eric Bakken, chief administrative officer and general counsel at Regis, and James Susag, Regis’s outside attorney at Larkin Hoffman, did not return calls seeking comment. Susan Evans of Evans Larson, Regis’s outside PR firm, sent this statement: “Regis Corp. does not comment on pending disputes.” In other words, their side of the story will remain unknown at this time.
In the lawsuit, franchisees Jason Ansari and others allege they were given financial performance representations, also called Item 19s, from another brand entirely—Supercuts—and told their brand-new ProCuts stores would achieve similar results to that 35-year-old national chain. They allege they were told ProCuts was the No. 1 priority for Regis, at the same time execs were saying the same about Supercuts in separate public meetings.
“These people have been screwed royally by people who know better. I’m really angry about this,” Dady says, calling it “preposterous” that a sophisticated, multi-brand franchisor like Regis would supply an Item 19 for another brand to prospects, as the lawsuit alleges.
How much you can make in a franchise opportunity is “the most heavily regulated question” in franchising, Dady says. “The law says you can’t talk about it at all unless you spell it out in your Item 19.”
Keith Marnholtz, also with Dady & Gardner and representing Ansari et al., said they’re disputing the arbitration clause in the franchise agreements, which Regis is invoking.
While arbitration provisions are “very enforceable” typically, he says, “sometimes a franchisor will over-step to the point that it’s unenforceable.” He maintains because the claims are based on fraud, “they’re outside of the power of the arbitrator.” That point is set to be litigated October 2 at a hearing in Hennepin County District Court in Minneapolis.
Not so silly
Regis Corp. has a lot more on its mind than what to do with ProCuts franchisees. In late August Regis reported a net loss of $2.6 million for its fiscal fourth quarter. Revenue was down 4.3 percent from 2014, to $462.9 million. It has been trying to restructure middle management and store operations for more than a year, and has closed about 250 of about 9,500 locations in that time.
In a statement after its fourth quarter report, CEO Dan Hanrahan said, “It takes time for cultural shifts to occur and is difficult to predict the pace at which our organization can change. We have significant work ahead of us, but I am proud of the foundational work already in place to help us drive long-term growth and shareholder value.”
Gordon Logan, founder and CEO of Sport Clips, chuckles when I reach him on the phone and say I’d like to talk about ProCuts and the men’s haircut business. Regis wanted to buy his franchise five or so years ago, Logan says, but Logan declined so Regis started its own.
But launching brands is not Regis’s strength, Logan says. “Regis hasn’t developed a new concept since Mastercuts in the 1980s. That’s just not their skill set.”
A concept called Raze, for example, was developed. “They were going to have 800 or 900 of those, too, and they opened two,” he says, which were later converted to Roosters. (Roosters lists 70 locations on the Regis website.)
Sport Clips started franchising in 1995, targeting men’s haircare, and at the time Logan says he was often dismissed for his idea. “People used to say, you can’t make money on men’s hair. I was on a panel discussion with a couple of guys.
"They were almost laughing at me how silly I was trying to do men’s haircuts.”
Today, Sport Clips has 1,425 units and this year will grow sales by 10 percent. “Our average sale is 20 percent higher than Great Clips or Supercuts,” Logan claims, the giants in general haircare franchises. Meanwhile, many copycats in the space have sprung up, from Grooming Lounge to Hair Saloon to The Barbershop. “I don’t think any of them has broken 100” units, he says.
But don’t blame the niche itself. “It’s a great market,” he says, referring to men’s haircuts, which consists of trims and cowlicks and receding hairlines and not much else. “We try to keep it simple. Too many people try to complicate things,” he says.
For ProCuts franchisees, however, the road ahead looks plenty complicated.
Beth Ewen is managing editor of Franchise Times. Send interesting legal and public policy cases to firstname.lastname@example.org.