Why MiniLuxe thinks franchising is the key to growth and a better nail industry

0:06Hello, everyone, and welcome to the Modern Retail Podcast. I'm your host, Cale Guthrie-Weissman, the editor-in-chief here at Modern Retail. This week, I'm really excited. We have Tony Chan. He's the CEO and co-founder of Minilux, which, for those that don't know, it is in the world of manicures and nail care. It both has its own suite of nail salons around the country in many select cities, as well as sells its own products. It's a really interesting model. It's a really interesting story. Minilux has been around for quite a while now. I think, correct me if I'm wrong, Tony, but 2008 is when you launched.

0:40Is that right? Yeah, just over 15 years. Wow. And so it's been an interesting, you know, decade and a half, I'm sure, as a company. I have a bunch of questions just about the overall nail care scene. I also know that Manilux has been working and doing some franchising, which I think is a really interesting step for a company to take. And I want to ask all about that. But Tony, how are you doing? I'm doing great. And it's great to be here, Cale. Thanks for having me. Absolutely. I'm happy that you're here. So let's start with you and Manylux. So it's about a little over 15 years now. Why did you get into nail salons?

1:15And what was the idea? Because you were an investor before, and I think you still are an investor, if I'm not mistaken, right? Yeah, I actually started as an entrepreneur doing two other businesses, including starting my own investment firm, which if you count that, that would be a third company. But I actually got my entrepreneurial start, kale growing up in Canada, in the furthest point, East in Canada, Newfoundland, and then moving to Toronto and started by selling skincare door to door when I was 15. And it was the first time I got a sense of how beauty and beauty products can empower people's independence and sense of freedom.

1:58It was an exhilarating feeling and it always stuck with me. And when I combined that with having a family that is in some ways a classic immigrant story, my parents had come over as overseas Chinese, Indonesian during a time the Chinese were being persecuted and almost a million Chinese were being killed in Indonesia, that so many of my family members grew up in retail service that that always stuck with me. If I fast forward to Minilux, what happened in between, I actually started different tech businesses. I built one of the largest privately held web application development firms in the height of the internet boom.

2:37And then I went on with my business partner, helped transform a company that eventually became Thomson Reuters. I joked that the logical thing to do after that was open up a nail salon. But, you know, it was really getting pretty excited with a group of co-founders and colleagues where we put out a challenge, a simple challenge of saying, what's out there in the world that can still be starbucked? We said, what's out there that's starbuckable? So archaic industries that might lack an elevation of experience might lack technology. And it quickly became evident that nail care was one of those areas that lived in the dark ages, both in terms of hygiene, professionalization, technology, and several other factors.

3:23And we thought we can bring our experiences to bear to try to radically transform this industry. What made it so that you were radically transforming it? Was it all about aesthetics? I've read a bunch of interviews in the preparation for this that a lot of this was about the general ethics of hiring and paying people. Was that the idea from the get-go? Yeah, I'll talk about the differentiation in terms of a why and a how. Our why and raison d 'etre for starting this business is to use self-care and self-expression to empower and enrich lives everywhere. And a deep-rooted belief that you can actually empower and enrich lives through self-care and self-expression.

4:10What's incredible when you look at the potential of that impact, there is no other industry that employs as many hourly trade workers and trade women workers as nail care outside of cleaning, domestic cleaning. And there are nearly 500 ,000 hourly workers that are part of this industry. Unfortunately, part of our why was a response to what we learned. And we can talk later in this podcast interview around some of the atrocities we saw from lack of hygiene, poor working conditions, violations of what we would think to be very, very basic ethical labor practices and in extreme cases, human trafficking and horrific chronic illnesses that come from working in nail care.

5:06That's the why. The how is along three C's. We need to be clean, we need to celebrate craft, and we need to be creative. The clean part was that we were going to be hyper clean. We were going to just be ultra, ultra hygienic. We actually worked with Columbia Presbyterian early on the hospital and tried to think of how we can make surgical grade clean labs. The craft is how do you offer the highest quality artisanal ship in this one centimeter by one centimeter nail bed so that it's just something that people could just get an incredible feeling after coming to us. And the creativity that's really seeing its day right now in nail care is to allow people to have inclusive and a diverse range of self-expression.

5:53And that includes that what you see today in nail care, you cannot believe what people can paint and design on this one centimeter by one centimeter canvas. Got it. And so I guess my question is, so this all started 15 years ago. Do you think the nail salon industry has transformed a lot over the 15 years that Minilux has been around? Or like, what would you say? How would you say the expectations from customers as well as beyond your business, but every other places? Has it become a better or more bespoke type of experience? I think we still have a long ways to go. I think we are still a relatively small drop in the ocean of nail care.

6:43When you think that there are 65 ,000 places to get your nails done and we're 23 and beginning franchising where we can see ourselves having thousands over the next several years of Minilux, that's still a relatively small percent. That said, the bright light, and by shining a light on the issues, there's certainly been greater awareness. We were very proud to have been profiled during probably the first time there was a height of awareness put on this issue was their seminal article that was one of the largest pieces of investigative journalism I've seen the New York Times do in 2015 by a woman, Sarah Maslin-Neer.

7:24over two days, front page, nearly 20 pages, I think, written on the ugly side of nails, the ugly price of nails. And we have been prominently featured since our start as being ethical, better for you, clean. And I hope that has helped pioneer new practices in the industry. And we certainly see more better for you nail care than we have before. But there's still a long ways to go, not just in the services, but the products which we have started really pushing on. And it's one of the reasons why we're taking on franchising that you mentioned earlier, Cale, so that we can actually expand our vision and our promise faster and a larger scale.

8:05Got it. So can you just talk about the overall business model, how it works? Because there are two, at least for me, going to your website, my understanding is there are two sort of facets to it where you have the salons themselves. I imagine that works the way any salon works. You hire people. People pay probably for a service based on what those services are. But you also sell products. And I can buy your products online and have them shipped to my house. So how has that grown? How has that changed? How is that? When did they launch over the years? Yeah, so it started on the service side or what we call our talent revenue side of our business model where we have studios.

8:45And like other multi-unit retailers within our studios, we sell our services. And we also sell our products, but they're studio revenue. The other side of our business is the product side, where fairly early on when we launched this business, there's a component in nail care. Some of your listeners will be very familiar. Others might not be called acrylics. We decided not to take on any acrylics from day one. And that is 20 to 30 percent of nail business. We also made a decision probably year five in not to use any of the incumbent brands of nail polish and nail related treatment services. And I, alongside my partner, we finally put to some use, I think, our biology and biochem degrees and work with some of the top people all around.

9:38And including now, we're privileged to work with some of the top people at the MIT labs to try to create and push forward formulations that are better and safer for you in the world of nail care. So those are two lines. We you're right. We have a service revenue line. And the other side of it is a product where we sell online. We sell in studio and we started selling wholesale our Minilux brand of products. We also have a sister brand called Paintbox where we're selling nail art offerings and also offering higher end nail art in New York City. The third part of the business model, of course, that's coming into bear is franchising, where we are now taking on this third leg and looking for partners who want to be in business for themselves, but not by themselves.

10:31And that's really the beauty of franchising and who believe in our purpose to empower and enrich lives everywhere through the power of self-care and self-expression. And that's where we are today. So I wanted to talk about franchising because I think franchising, you know, A, it's It's not anything but new. It's been around for a very long time. But also, I feel like we're seeing more businesses talk about it now after it sort of had a bad rap for a few years. for a brand, a company like Minilux, which is very focused on the experience. And it's very focused on curating, having all parts of it be curated and sort of be controlled, I imagine.

11:10How are you thinking about the franchising model so that it will still have your name and it will still be known that it is Minilux, but you yourself will not be controlling it. And there is the fear that it could lose some of the elements that were part of the original promise, Do you understand what I'm saying? How are you hoping to make? So what are your thoughts on that?

11:35Well, it's worthwhile stepping back and talking about why do people franchise? One is it's a capital efficient source so that people can be more capital light in rolling out franchising. And that's usually what people default to as, oh, they want to grow fast. They want to scale fast. And that's part of it. But two other dimensions that have been really, really important to us and it ties to your question of can you maintain consistent quality, is that we have always believed that our brand has been a platform for empowerment. And our own nail designers have a system where they can continue to gain economic empowerment and creative empowerment, but we are encouraging our own team members over time.

12:20Our hope is that some of our best franchisees come from our internal system. We have already half of our nail designers, what people more commonly might refer to as technicians, but we don't love that term, who own equity in the company. And we have had our first set of nail designers and our first set of studio manager leaders for us at Minilux come forward saying they're interested in a franchise. That would be a real dream because that helps us accelerate our dream of franchising as a vehicle for true empowerment and our vision to create the first set of many millionaires, as we internally call.

13:03The second reason, though, that franchising is really important to us is to really build a neural network of learning and innovation. Think of it as crowdsourcing. Usually, again, when franchising is talked about, it gets a lot of focus towards the capital side and the rapid expansion of a model. But what people have not emphasized as much is what the greatest franchises in the world have done. Our business partner helped to lead McDonald's franchise, one of my board members, and was executive chair of Chipotle, as well as an owner of 150-odd McDonald's. And if you look at the power of franchising McDonald's, almost every innovation on its menu, on its new design aspects, things like the Egg McMuffin, would not have occurred without the idea coming from a franchisee.

14:08And we have seen the power already in our distributed empowerment from nail designers and studio leaders, ideas coming from the fringes. So if you can decentralize entrepreneurship as a way to not just scale economics and scale the replication of a model, but the scale, the speed with which you can get innovation and learning, that's what's super, super, super exciting to us. one question i wanted to ask and i don't you know i i don't know how the contracts of franchises work but like with minilux you launched very much with a focus on correct payment correct workers conditions some workers as you mentioned earlier get equity in the company is that part of what's required for the franchisees to also sort of buy into that in terms of how they're paying their workers?

15:05Yeah. Well, you can't, to your point, there's certain things you can dictate and certain things you cannot dictate in franchising. And that's probably at the root of your question. So what really matters is in our franchise screening, we're very, very fortunate to have on board a gentleman, Sean Bach, who formerly led franchising for all of Drybar and heyday and is just a seasoned executive. And it's really helped us get really, really sharp on how we screen our franchise partners. And that's the same with our board member, the gentleman formerly of McDonald's I mentioned, Max Liederhausen. How you pick people on your team, on your board and in franchising is of equal importance.

15:59You are, you know, I often joke because I, you mentioned earlier, I'm a, I've been an investor having invested in back some 45 earlier stage companies. And these are often cases where whether it's a venture deal or you're coming in on franchising, you're getting married, but you're not allowed to get divorced or it's really, really tough to. So, you know, it really comes to how do you structure that engagement process? How do you talk about principles that really, really matter? And a lot of that comes through the process for how you interact in pre-screening and how you design what's called your discovery day to see if you have common chemistry.

16:45And ultimately, I would say, do you You have common values and common standards. Got it. And so correct me if I'm wrong. You announced the franchise plan in, I think, November. Yeah, you launched in March. Yeah, launched in March. For 2024, do you have a target for how many franchisees you want to sign on? Or in terms of rollout, what are your thoughts and how it's going to scale? Yeah, I think what we've said internally, we actually are looking for our first handful of single digit franchisee partners because we subscribe to a philosophy to think big, start small, and then scale fast. The criticality of success to franchising, because as you've alluded, the graveyard is full of franchise concepts that did it too quickly, too fast, and there wasn't something really to replicate or there weren't enough systems, infrastructure or cultural compatibility, we really, really need to ensure that the first set of franchise partners that we bring on really do share those common values, common standards, and that we are supporting them, trying to win the best supporting actor award as much as possible.

18:01So our initial target is very small, Cale. We've been fortunate every day to have a number of new leads come in, to be clear. But we're trying to be as selective as a top selective college these days and get the best partners. It doesn't mean we'll get it completely right. But if we can get the first set going, I think the rest will fall in place. And how are you thinking about in terms of owned business openings? Like, are you putting that on pause? Will you focus on franchise? One thing I noticed in my research, correct me if I'm wrong, but there's no mini-lucks in New York. And so would you want that to be a franchise or would you want to have that yourself?

18:40Or is New York just off the table? New York's not off the table. We have a paint box, which is our sister brand, which we acquired in New York. But we do not have a Minilux in New York. I think we're keeping an open mind. I think, again, it comes less about being so prescriptive with a plan. And what's the saying, you know, how to make God laugh is to show him a plan that you believe you're going to execute perfectly. Like, you know, I think what we're going to do is look region by region. And it comes down to people with shared purpose and good people. You know, I wrote a book once on this called Good People.

19:19And I've just learned in all these years of business, I think we overcomplicate so much of it when it really just comes down to can you find the best people? And so if we have a great person from our team or we have a great opportunity that one of our team members want to take over and it could be company owned, that's great. But we believe that the future really will come from a philosophical standpoint through decentralized entrepreneurship. And whether that's internal or external with franchising, we'll look case by case. Right now, we've been fortunate to have both options. But no, of course, places like New York are absolutely not off the table.

20:01I'd love to find one of your listeners out there who is interested in New York. Call me. All right. You heard that. There's a call out on here. I want to switch gears a little bit and ask about, you mentioned this earlier, but the product side of things. So like, how, A, are you able to share just sort of the mix of revenue based on what is from the service side, what is from the product side? And is that a major focus in terms of ramping up the business that you want to be selling more products and that type of thing, as opposed to having it be mostly stores. How have you approached that over the last few years and what are your plans with it?

20:33Yeah, the first rationale for developing our own products was actually not for wide consumer distribution. It was the need in our industry vernacular to develop our own back bar products because we did not see or we were not satisfied with what's out there. So meaning not just a formulation of a polish, but of a clipper, of a type of file, you know, of a cuticle oil. We sell a number of those products now to the consumer. But what is not completely captured in the size and scale, to answer your question, is all of our internal consumption of that, which is quite a large number across 23 studios.

21:19We have just started over the last few years to emphasize more and learn what the consumer really wants. And, you know, our best selling offerings are sometimes you can't predict this. We designed some time ago what I call chapstick or lip balm for the nails, a little cuticle oil. And it's blown away by and far other product lines, you know, that we have out there for sale. I think where products will go in the longer run, the other two channels that will really drive its growth will be the franchise partners themselves. But we will offer very fair and favorable pricing so that, again, doesn't capture the full revenue potential.

22:02But we have for the first time start really seeing larger wholesale interest. So we have a partner on Amazon that we just put forward and started selling some of our products on Amazon. We were in places like Bloomingdale, Anthropologie, and other retailers. So I suspect that over the next few years, you'll continue to see products grow. If you had to put a gun to my head and said, like, you know, in, you know, next several years, how big can it get? It's probably something that can grow to be, you know, in the tens of percent of our revenue line. Got it. And so do you have, you mentioned Amazon.

22:42I noticed you guys on Amazon, although I always find it interesting with brands where, especially when they just start, it's always unclear if it is actually you or someone else selling your product. But this is Mini Lux that's on there right now. It is. We've worked with a partner there to design our experience. It goes back to us wanting to have a very controlled experience. And it's only been in more recent years that you can have a degree of agency and control. And Amazon has learned to get more premium, more experiential, more elevated brands. It has to allow people to create their own stores and their own way of presenting their narratives.

23:18So when you see a Minilux presented, the contextual background, the quote unquote digital merchandising of it hopefully feels a little bit more elevated. Absolutely. And so, but with that elevation, that goes to my question, which is how, you mentioned Bloomingdale's, there's Amazon. Would you want to see Minilux in, for example, a Walmart? Or are you looking for sort of a step above in terms of who you think the ideal wholesale partner would be? Yeah, when we started Minilux, we had this thesis that my partner, John Hamill, used. And this is a very Bostonian analogy, but the general thesis is go from class to mass.

23:58So in Boston, we have, you know, a high street equivalent called Newberry Street. And we said what we want to do is bring Newberry Street to a main street. So before this podcast, Cale, you and I were talking about like a town center like Newton. Yeah. You know, and how do you take these main streets in these towns and get them excited? You want to do a little bit of, you know, class to mass or class to aspirational strategy. And this is no different than how every great lifestyle brand has evolved, in my view. When you look at, I don't know, pick something like major athletic brands, a Nike or a Puma, oftentimes they started in a pro category.

24:41They were the waffle shoes for running or they were a soccer cleat. And they established themselves in an area and that helped the broader population sets aspire to be part of that ethos. And so to answer your question, it's a matter of sequencing. For me, it's very important for Minilux to be accessible and for Minilux to be a catalyst towards changing the narrative of what it means to be a nail designer, the stereotyping, the stigma, the racial profiling of what it means to be a nail designer. We're only going to do that if we can make this a product and a service that is accepted by the masses and excites the masses and also educates people in terms of how they should vote with their conscience and their wallet.

25:40Got it. Got it. We're just about running out of time. We have a few more minutes, but I guess while we're to the latter minutes of the podcast, I want to just see sort of the year ahead and what you're focused on. We've talked a lot about the franchising. Is that sort of the big focus at Minilux right now? Is there anything else that you've been thinking about or any new launches on the horizon that we should expect to see? Yeah, I think there's probably two or three other things. I mean, I'm trying to think what are the top things that come to mind. If Cale were a board member coming to my next board meeting.

26:13Yeah, please let me know. You're welcome. You could be a guest observer. But the first one that comes to mind is continue to improve the unit economics. I think this is why some concepts haven't worked in multi-unit. they actually haven't established the strength of the unit, the four wall, meaning how strong is the average unit volume? We've been fortunate on our top boxes at 1 ,400, 1 ,500 square feet to cross over$2 million on some of those boxes. How strong is the flow through, the contribution, it making money, four wall contribution? And what is the capex in terms of what it costs to build in Minilux.

26:57Those are the elements and the inputs that we constantly focus on. And there's a whole set of sub-inputs to continue to improve the unit economics. That's what we day in, day out, try to focus on. That's number one, improving unit economics. Second, an evergreen priority for us is how we become the brand of choice for talent out there. The underwriting for winning in nail care and nail care services. It's actually not about winning demand. When you have an industry that has nearly 500 ,000 designers, 65 ,000 places to get your nails done, and a$45 billion industry, people get their nails done.

27:38We went from hundreds of people, tens of millions to zero during COVID. Not sure if we would survive. And when we came back, we were hitting record numbers every single quarter, every single month in our business. What that demonstrated to me is that there is great resiliency of demand in this industry, but what people have failed to focus on is the talent supply. So that is an evergreen priority. How do we engage our talent? How do we elevate them? How do we empower them with psychological safety, with economic empowerment, with continuous learning with continuous learning and with creative expression.

28:20So that's a second evergreen component for us. And the third one is what you said, our most exciting new launch that we've done in nail care has been with our sister brand Paintbox, where we've launched what are called press-on nails. And press-on nails have had a bad rap in the past, but these aren't your mother's or grandmother's press-ons in a drugstore. They're very elevated custom fit. And we actually believe that there is a tipping point right now happening in nail care, just like going from print photos to digital photos, where more and more people will do on and off instant manicures with intricate designs with press-ons.

29:01So we believe we've created one of the most advanced, elevated, best-fitting, high-quality press-ons, and we're proud to win Cosmos Award for it this year. and that's been a big push to try to put out in the industry. Would you put that, would you have any collab between that and Minilux or are they just Already doing it. Already doing it, really. All right, that's great. Already doing it and we actually see the relationship and synergy in that press-ons used to be a do-it-yourself. Yeah. You mentioned places like Walmart and drugstores, but imagine if it was do-it-for-you. You come in, you have an event, you got to get ready quick.