The question is on everyone's mind that either owns a spa or salon or is thinking of moving their clientele to another salon: will the economy freefall in 2011? More importantly: which salons and spas will survive the continued Mother of All Meltdowns?

It is a foregone conclusion that the recession will continue at least another year with all the belt-tightening and the reduced discretionary income available to our clients. We all are acutely aware of the challenges of the past two to four years and really do not need another primer about how we got in this mess. Whether its deficit spending gone wrong, or the cost of labor exceeding the marginal value of goods produced or the destruction to domestic jobs by cheap foreign manufacturing, this economy has been diving south.

Many hair salons and spas are reporting a 20% or greater decline in revenue in the past two years, with an alarming number of salons suffering up to a 20% decline for each of those years. High end salons and spas have reported a 9% drop in revenues in each of the last 2 years, for a total of 18%. The more than 400,000 salons in the US are expected to shrink in number as the economy begins to sputter towards a recovery.

This is one of the paradoxes of an economy recovering from a deep recession trench: when things start looking up for the economy, many businesses have run out of options to stay alive and either go on sale at bargain prices or simply walk away from their leases. Anyone with cash and good credit can, however, use this situation to garner another salon or aquire their first when those salons that are clueless are handed over to those with vision.

The salon and spa business used to be the best industries in the decades of growth. From 2000 to 2009 we enjoyed record growth with sales over $37 billion annually. Add another $8 billion in annual retail sale of professional beauty products, and you are talking about a vibrant industry.

Conventional wisdom dictates that salon and spa businesses are recession proof. In previous recessions, higher end salons and spas have shown growth - a possible attribute of women's desire to keep their personal luxuries in the face of budgetary tightening. Geno Stampora said it best when he remarked that women will give up a lot in hard times but will hold tight to things that define their concepts of beauty. They are still going to get their hair done and will tend to do so in more luxurious enviroments.

Let's look at some current economic indicators and try to predict what stylists and owners can expect in 2011:

Under any predictive modeling, 2011 may prove to be a wild ride. Some economists are hoping for an up tick in economic growth in 2011 from 3% to 4.5%, an improvement over the 2 % growth in 2010. Others say we are either going to see this growth - a repeat of the Great Depression period from 1933 to 1935 - or we are already at the freefall tipping point - as was 1937, when the jobless rate went over 24%. This is the great question: are our leaders as clueless about the economy as they were in the Great Depression or have they collectively gained common sense in the ensuing 73 years?

According to the findings of an AP survey, economic growth for the beginning of 2011 will not exceed 3%. Unemployment levels are not expected to fall below the current 9.5%, after a January jump to 10% to reflect seasonal end-of-holiday layoffs. Many of the economists believe that normal 5% level of unemployment is at least four years down the road. Economist Arthur Laffer, one of Wall Street's biggest bears, predicts a double-dip recession in 2011. His words are stark: we will see an economic freefall by the end of the year. Despite an excellent record of predictions, we all hope he has lost his mind. Personally, we believe that business investors are weary of the situation and are willing to invest again - if the Congress and White House give them signs that taxes will not be raised.

One strong indicator of economic stability is in the data for home sales. Over 25% of all current sales are with homes in foreclosure. In states across the nation, foreclosure rates are up anywhere from 17 to 35 %, and loans at least 90 days behind on payments rose dramatically. Many homes on the market never sold and went off the market in 2010.

Meanwhile, people struggle to pay their bills by patching together multiple jobs. Garage sales are more like estate sales, with homeowners selling items they would never consider parting with before. CraigsList is full of lightly used high-end home furnishings and appliances for pennies on the dollar. The very clients that were a staple of our success seem to be under too much stress to worry about their hair color or pedicure. We can keep them with the old standbys: value added services such as two for one deals, bundled services such as a free cut with full foils, and mini services such as part line foils. We know many bargain shoppers will be higher ringup clients when the economy improves, but, exactly when can we expect a recovery?

Not today, my friend. Don't order the party favors yet. The key to recovery is the creation of millions of jobs, and that's not going to happen this year. Unemployment should remain near 10%. The economy may have to reinvent itself in order to employ all who want employment.

Finally, while the economy will continue to grow, it will do so at a rate slower than the flow of maple sugar in December. Crippled by continued high unemployment and non-existent consumer confidence, any growth will be obscured by uncertainty and a series of painful fallbacks. It is almost like watching Charlie Sheen stumble towards rehabilitation.

We are sorry that this analysis is grumpy and bleak, but we can expect prolonged uncertainty in an industry whose lifeblood is consumer confidence and spending. Of course it is possible that some unforeseen action could inexplicably restore the healthy bottom lines of spas and salons tomorrow morning - look for an invasion of super helpful aliens or a buyout by the Chinese. We will survive and, when the economy comes back, our lost clients will break our doors down to shake off the stink of this horrid recession. For the next year - or two - hold tight to services that sell, cut out unnesessary salon expenditures, and batten the hatches. The economy is what it is.

Like my uncle Francis always said: "things could be worse: you could be Mel Gibson".

Article by: Edward Paul - Capelli d'Oro ©2011