QB House, Haircut Excellence in Operations
This past Sunday morning, I went to get my haircut at QB House at Columbus Circle here in New York. QB House is a Japanese haircut chain with over 640 stores mostly in East Asia. They recently began expansion into the US market and currently operate three locations in Manhattan. Their core value proposition is delivering quality haircuts in a clean environment at an affordable price of $20 in <15 minutes.
I really enjoy getting my haircuts at QB House and this last visit was no different, except for one to be covered aspect. Let’s take a deeper look into the four aspects of the QB House value proposition.
1.Quality. A unique aspect of the QB House model in the US vs. other non-Japan locations is that almost all of the stylists are Japanese!!! The stereotype is that Japan=Quality and in this case, I would say it is quite true, I find my haircuts from here to be of comparable quality to places I paid twice as much for.
2. Clean. There’s a huge emphasis on cleanliness in both the marketing, tools used, and the experience. It’s executed very well, the shop feels sparkling clean despite that a high volume of haircuts is the perfect grounds for dirty.
3. Affordable. $20 is incredibly affordable for a haircut in New York. Probably too affordable if you ask me.
4. Fast. It used to be that I could zip in and out of this place without much of a wait, but it seems like the word has gotten out and the last two times I’ve been here, there were 10–15 people ahead of me and I had to wait ~45 minutes to get my haircut. So fast is no longer a value proposition if the wait is too long.
Operations and Financials
To understand the business model of QB House, I created a Pro-forma financial model for one hypothetical location in NYC. Note that there are quite a few assumptions in the model and I focused on speed as opposed to accuracy in creating some of these assumptions. Think back-of-the-envelope calculation to get an idea of how the business works as opposed to precise estimates.
To start, I used the published operating hours and segmented each day by peak and non-peak hours. I assumed that weekend days were all peak and then from 3PM-8PM would be the peak hours for weekdays.
Then we take a look at the operating data. Key assumptions here are that it takes 17 minutes for one haircut (14 minutes cutting, 3 minutes payment) and that it’s 100% utilized during peak hours and 50% during non-peak.
Next, real estate costs. The space looks to be about 350 square feet from my naked eye and retail spaces average about $700/sqft in Manhattan.
Finally, we estimate labor costs. In my model, the stylists are making close to $85k per year including tips. Somehow I snuck in operating costs here too on accident, I assumed those were 5% of haircut revenue and includes things like cleaning supplies, hair gel, etc.
Now we have both the revenue and cost side of the equation, we can create the Pro Forma P&L.
At an operating margin of ~27% and ~$300k year per location, this looks like a very attractive opportunity. One crucial driver of the profitability is the speed of haircuts, the sensitivity analysis below highlights the importance of speed. Going beyond 23 minutes kills all profit. Increasing speed by 1 minute to 16 minutes could increase profits by $60k!
Recommendations
Now that we have a better understanding of the business model, operations, and profitability, what can QB House do better?
- Increase Price. My thought is that there would be little price elasticity if moving to $25 given the crushing lines now (it’s been discovered) and that most of the customers seem to be fairly well-off young professionals. A comparable cut elsewhere is far more expensive.
- More Locations. A lot of demand is likely not being captured as the “fast” value proposition is no more with 45-minute waits due to high demand. I myself turned down getting a haircut here twice because the line was simply too long.
Next time you get a haircut, give QB House a shot! I highly recommend them :)
