How Beauty Products Are Sold: Part One

Customers don’t know very much about how beauty retailers sell them products. The process by which a lipstick goes from factory to store to you is pretty opaque. Sure, we know conceptually that beauty has high margins and a big markup. But while newer brands like The Ordinary and Beauty Pie have started to offer a bit of transparency into pricing and how brands are ultimately made available to consumers, there is still a lot of mystery baked into the process.

The recent apparent shuttering of an indie beauty brand and its lawsuit against Sephora helps shed some light on how truly complex it is to sell beauty products — and the costs that get passed on to shoppers.

A few weeks ago, the beloved indie makeup brand Obsessive Compulsive Cosmetics (OCC) abruptly shuttered its website, its New York City store, and all its social media accounts. While the brand has not made any official statement and none of its third-party retailers like Nordstrom and Urban Outfitters have confirmed anything, it’s widely assumed that the brand has gone out of business. Founder David Klasfeld seems to have started a new Instagram account under the handle @dkwmakeup, and notes in the bio: “I founded and ran the world’s first 100% Vegan & Cruelty-Free Cosmetics line from 2004-2018.” (Racked has reached out again to OCC and will update if we hear back.)

If this is the case, what happened? The only person who knows for sure at this point is the founder of OCC, but a lawsuit with Sephora dating back to 2015, may provide some clues. It also sheds some light on things like who actually is responsible for building and filling the product testing fixtures you find in stores, what large markdowns mean for a brand, and how store exclusivity works.

There are two legal documents publicly accessible, one from 2015, first published by blogger Zadidoll, and one from 2016. These provide an incomplete record of the full proceedings, and it’s unclear if Sephora and OCC settled this case or what the final outcome was. But what is clear is that retailers hold a lot of the cards and OCC probably lost a lot of money. A representative for Sephora sent the following statement to Racked: “Per company policy, we do not comment on pending litigation.

The terms of a Sephora contract

According to the 2016 order, OCC and Sephora signed a contract in 2012 stating that the retailer would sell the brand’s products and that OCC would be 100 percent responsible for the costs of the fixtures, which is the system of shelving and pigeonholes where testers and products for sale are displayed in the store. They can vary in size from a small box on a shelf to an aisle-long behemoth. Per industry sources, this is a pretty common arrangement. (More on what those fixtures cost in a bit. Hint: a lot.)  OCC then alleged in the suit that it entered into a verbal agreement with Sephora to alter the original contract in two ways: first, that Sephora would become OCC’s exclusive brick-and-mortar retailer with the understanding that it would place enough orders to make up for the ones OCC would have to decline from other retailers. Second, Sephora was supposedly going to help defray the costs of the fixtures by contributing 50 percent, since it supposedly wanted to increase the number of stores selling OCC, which would then necessitate building more fixtures. OCC alleged in the suit that Sephora reneged on these oral agreements by not placing more orders and not helping to pay for fixtures. Sephora argued that it was a moot point because the original contract stipulated that the contract could only be modified in writing and therefore the suit should be thrown out.

However, the judge ruled that OCC could continue pursuing it, because he determined that OCC had acted in such a way (turning down orders from other retailers, for example) that made it seem clear that OCC relied on Sephora’s verbal statements. (He threw out a fraud allegation that OCC made about Sephora, however.) Sephora was given 20 days to serve an answer, but the conclusion or settlement does not appear to have been made public.

But that’s not the full story. An earlier 2015 order details exactly how much money OCC stood to lose in the Sephora deal. Sephora wrote a letter to OCC to terminate the deal in 2015, stating it would sell the products it had until a certain date, while also requesting OCC to fulfill two outstanding purchase orders that OCC hadn’t shipped yet. After the date in the termination letter, Sephora expected OCC to take back leftover product (this is called a return-to-vendor, or RTV, clause) and reimburse Sephora for the unsold product. The bottom line? Sephora said it expected to be reimbursed $832,700 for the unsold products. Otherwise, it allegedly said it would liquidate its remaining stock at fire-sale prices. OCC asked for a preliminary injunction, arguing that “if provisional relief is not granted it will suffer irreparable harm because an immediate mark down of the outstanding inventory would have financially devastating effects and moot any award of damages.” According to the lawsuit, OCC never reimbursed Sephora for remaining stock, and Sephora did end up marking down the remaining products and selling them off quickly, according to Revelist. Ultimately, OCC claimed damages of $521,647.20. This is where the paper trail ends.

PART TWO COMING NEXT WEEK

How To Wrestle With Non-Compete Contracts in the Beauty/Cosmetic Industry

The Real Hair Truth Documentary Blog!

 

You’d expect a fat non-compete clause in a top-tier investment banker’s employment contract. Yet more companies of all stripes are foisting non-compete contracts on lower-level lieutenants–and even line workers.

Some employers also use non-disclosure or confidentiality agreements. A non-disclosure agreement helps an organization safeguard its trade secrets and other proprietary information. Under the agreement, employees are prohibited from disclosing this information. Confidentiality agreements are similar, except that the agreement requires that one or both parties must keep information confidential.

“Even though hair stylists aren’t six-figure earners, they are frequently being asked to sign [non-competes],” says David Conforto , an attorney at Conforto Law Group in Boston. Conforto recently won an injunction for a stylist client so she could continue to work; the judge deemed her non-compete contract un-enforceable because of the high demand for qualified stylists.

Employers wield non-competes to stanch turnover and keep a firm grip on proprietary client lists and critical research. And with global competition more fierce than ever, the paranoia is at a fever pitch. Being a member of this so-called professional industry a few words of wisdom from me to you may help you from being deceived from business owners who rent chairs. After your interview make sure you take a copy of the contract to a lawyer, NOT YOUR FRIEND TO READ. But a Lawyer. Sign nothing, and if the owner will not let you take it out of the salon to give to an attorney, they are probably 100% not honest with you. SCAMMERS are abundant in the beauty industry my friends. Do not get your advice on Non-Compete contracts from a beauty industry magazine, beauty industry website, a hair idol, or so-called Icon, but from an attorney licensed in your state. Read On My Friends.

In Pictures: Five Tips For Negotiating Non-Compete Contracts

While you probably can’t avoid having to sign these contracts, you should make every effort to negotiate as much wiggle room as possible. It is your business and you must conduct yourself as a business owner.

First step: Hire an attorney to vet your contract before you sign it. Yes, you might pay $200 to $500 an hour for the privilege, but that’s probably a good bet. The cost of going to trial over a breach of a non-compete typically runs in the tens of thousands of dollars. Even if you do win the case, you don’t recoup those legal fees, as defendants typically do in other cases. If you lose, you’re out of work to boot.

If you’re presented with a non-compete clause, send your potential employer a letter confirming that you are consulting an attorney to make sure you understand all the terms. Declaring that step in writing is important because it prevents the employer from retaliating by swiping the job offer later on. (Judges don’t look too kindly on a move like that.)

In lieu of a traditional non-compete contract, try to angle for a “non-disclosure” or a “non-solicitation” agreement. Non-disclosure agreements stipulate that departing employees can’t make off with valuable research, while non-solicitation agreements prohibit them from going after important clients–except those they cultivated prior to joining the company. If that doesn’t work, focus on winnowing the scope of the non-compete. “The employer is going to push it to be as broad as possible, but you want to make it as restricted as possible without jeopardizing the job offer. Two key elements here: geography and time. Try to limit both. Reasonable restrictions will vary by industry, of course.

For example, temporarily barring a hairstylist from working in an entire county might not be plausible, but shackling a pharmaceutical rep in the same area might. Contracts stating that you can’t work in the industry throughout the U.S. probably won’t hold up in court, although some tech companies may be able to enforce them, because of the global nature of the Internet. The same strategy goes for the time span of the non-compete. The standard window for these contracts is six months to a year. Anything more than two years is downright draconian, and probably won’t hold up in court. Then again, don’t count on a judge to bail you out. “You still have to pay for litigation, or hope that your new employer will pay for it. In a tough economy, that’s a chance you probably don’t want to take. Take my advice my fellow professionals go see a lawyer.

Legal matters

While there are no federal laws directly governing non-compete agreements, some states do address the legality of such agreements. Under Wisconsin law, for example, the agreements must:

  • Be necessary for the protection of the employer;
  • Provide a reasonable time period;
  • Cover a reasonable territory;
  • Not be unreasonable to the employee; and
  • Not be unreasonable to the general public.

Although most states will enforce non-compete agreements if they are “reasonable” in terms of breadth and length of the restriction, the definition of what is “reasonable” varies. When crafting a non-compete agreement, an organization must pay careful attention to the agreement’s scope. An overly limiting agreement may be deemed un-enforceable by state courts.

 


 

Valid Or Not Valid: The Truth about Contracts

So many professionals have invested in our beauty industry in becoming a Paul Mitchel salon. And have been let down by the huge conglomerate by not policing their end of the contract that they make you sign when purchasing the hair care line in your salon. That is why there is a huge class action lawsuit brought on to them by no one but themselves.  Contracts in this profession do not hold up in court.  This false advertising lawsuit was filed in New York Federal Court on July 1, 2010, against the following: L’Oreal USA, Inc., the owners of Matrix, Redken, Pureology, Kerastase and others; The Procter and Gamble Company, the owners of Wella, Sebastian, Nioxin, and Graham Webb; Conair Corporation, the owners of Rusk; Farouk Systems, Inc., the owners of Chi and Biosilk; Sexy Hair Concepts, LLC; Tigi Linea, LP; and John Paul Mitchell Systems. This is what corporate greed gets you. 
The purpose of a contract is to ensure the completion of actions based on specific guidelines or stipulations for the parties involved. Incidentally, most people think that in order for a contract to be valid it has to be written, but that isn’t always the case.

 

A valid contract does however need to contain certain elements. First of all, it needs to identify all the parties involved. Secondly, it needs a mutual consent between the parties. Typically, there is an offer and acceptance that takes place between the parties that is communicated in the contract.

 

Thirdly, a valid contract needs to have an object, which is the portion of the contract that is actually being agreed upon. For this part, it is best to be specific on dates, deadlines, payments, breach of contract requirements, and termination conditions.

 

The fourth element is the consideration factor. The consideration shows what each party will gain as a result of the agreement. Paul Mitchel Systems offers “A EXCLUSIVE” to the product in your salon. Do you see the product anywhere else? I see it all over the commercial sector of the beauty industry.  Is that what you signed for.

 

The next time you see a contract, make sure it includes all the above elements. If it doesn’t, or if there is a portion that you question, you should probably contact a lawyer before you take any action. When considering buying Paul Mitchell products be assured that there end of the bargain will be in the commercial sector of retailing and not your salon. When considering of having a retail line in your salon, go with independent manufacturers within the beauty industry. AND DONT SIGN A CONTRACT. It is a waste of ink.


BOOTH RENTAL CONTRACTS!!

THEREALHAIRTRUTH.COM

Booth rental is very important, and having a contract is the utmost of importance. If your problem is with walk-ins, many salons do not allow renters to take any salon walk-ins at all. You are responsible for your own advertizing and furnishing your own clients. If you are being treated as an employee, where you are required to answer phones, required to be in the salon specific hours, then you have a problem. First, you should never rent a chair in a salon without having a rental agreement which spells out everything in detail. Get the salons rental agreement BEFORE starting work and sit down with the owner and make sure you understand everything. The major things that should be in any rental agreement are, how much is the rent, when its due and when it can be changed and what exactly is furnished in your rent, how are walk-ins handled, when is the salon available for your use, do you get a key, can you sell your own retail, what services are you allowed to perform, what are your specific cleaning duties. As a booth renter you have certain basic rights. You have the right to schedule your own appointments, determine your own work hours, within the guidelines you agreed upon in your lease and very important, the ability to come and go as you please. You have the right to set your own prices and determine what products you use to perform your services. You also have the right to sell your own product lines. Cleaning of the shop is not your responsibility. Clean your work area, take out your own trash. And it would be good to start your own corporation, have tax ID, and occupational Licenses.