Vanity Hair

Hudson is 44 and his boy-wonder years are behind him. His long look in the mirror recently allowed him "to go back and look at what went right and what went wrong in Newcourt. What my strengths and weaknesses are." He seems to be enjoying himself. He hands out business cards like a carny-to a balding lunch waiter, for instance, urging him to come in for an assessment on the house.

The Globe and Mail
April 25, 2003

Vanity Hair
Shadowed by his tumble at Newcourt Capital, the gone-South Steve Hudson is reinventing himself as [don't snicker] head of Hair Club. Hey, it's a boom market in injured egos.
Patricia Best

“Touch it," Chase says.

"Go ahead," requests his boss, Steve Hudson, standing to the side. "He's used to it. Everybody does it."

Chase Brown is a young 20-something. He is pretty, well composed and has a lovely head of stylish blond hair.

"Run your fingers over it," instructs Hudson.

I can't, I think. That's too familiar, too intimate. However, I've heard so much about it, and the two men are so sure I'll be amazed, that I find I can't resist.

I touch it and it feels like the real thing. I look closely and it's very impressive.

For most of the day, I've been on the receiving end of a sales pitch from Hudson & Co. I have tried to maintain proper reporterly skepticism. It has been a struggle. First, there is the immense charm and enthusiasm of Hudson. Then, there are the mountains of testimonials from happy customers. There is also the cast of science on the whole business, lending it credibility and the veil of humanitarianism. Finally, there is that last moment of authenticity: Chase's hair and scalp, even from inches away, seem his very own. But it is, in fact, a "hair replacement system" from Hair Club for Men, the fake-hair outfit first made famous by Sy Sperling 27 years ago.

Hair Club For Men-recently renamed simply Hair Club with the start of an all-out drive for women clients-is Hudson's next big thing. Hair Club sells human hair weaves-"hair replacement systems" in company argot-that are attached to the scalp (that's what Chase was showing off). Hair Club also sells an array of hair-grooming products and hair-transplant surgery. Hudson bought the company late last year and installed himself as CEO with a grand plan to smarten up operations, expand the business big-time and eventually spin it into a lucrative merger or IPO or some such whereby he would cash in.

Should this plan transpire, it will be a triumphant third act for a man who first was one of the most celebrated prodigies in Canadian business, and then took one of its most spectacular falls from grace. Hudson, an auto mechanic's son from the Toronto suburb of Scarborough, parlayed his knowledge of tax accounting and his early job at Toronto General Hospital into a brilliant new scheme for structuring leases on equipment and capital projects and repackaging them to financial institutions. That financial premise became Newcourt Credit Group Inc., which he founded in 1984 with partners and ran as CEO. Eventually Newcourt boasted a market cap of $10 billion and was the second-largest non-bank finance company in the world. But Newcourt's explosive growth and a switch to a controversial accounting methodology aroused the suspicions of short sellers after a credit crunch hit in 1998, hurting Newcourt's earnings. It was sold into the arms of CIT Group in the nick of time in 1999.

The ignominious ending for Newcourt had unfortunate consequences for Hudson's reputation-he made an abrupt exit as CEO, for one thing-and for the company's shareholders, who saw $2.2 billion wiped away from the CIT deal. They continue to carry a deep grudge against him.

Following Newcourt, Hudson was plagued by a very bad horoscope for a few years. In 2000 he launched Dorset Partners as a merchant banker, featuring Peter Munk as a major backer. But Munk backed out to concentrate on his own business. The following year Hudson partnered with two institutional heavies-the Canada Pension Plan Investment Board and the Borealis infrastructure-fund arm of Ontario Municipal Employees Retirement System. His relationship with the new entity-Borealis Capital-soured by the spring of 2002. Meanwhile, Hudson's predilection for backroom high rolling and friendships with the like of former Ontario premier Mike Harris led to his backing of Brian Tobin's abortive bid for the federal Liberal leadership. And then there was his own leadership role in bidding for the 2008 Olympics for Toronto, which failed.

All of which is to say, Hudson has acquired a previously underdeveloped taste for both the underdog and the dogged. When his old friend Eleanor Clitheroe endured a public crucifixion (his words) last summer at Hydro One, Hudson made a point of sticking by her. He also turned his back on mighty Bay Street, the source of his still-considerable personal wealth.

Last year, too, his second marriage fell apart, sending him into the dispiriting land of periodic access to his young children and the very public process of trying to sell the $15-million matrimonial home in Rosedale. A friend's synopsis: "He had the biggest midlife crisis of anybody I ever knew." Hudson's line is that it was a "personal journey."

"The last two years of Newcourt, a lot of it my doing, were very, very challenging. Having had some disappointments there," he says, "the chance to remove myself from that process for the short term has been very helpful." In the last years of Newcourt, he was a workaholic overseeing an operation with 6,000 employees in 26 countries, always on a plane checking his PalmPilot to know where he was.

Hudson led an exotic life. He drove a $300,000 Ferrari, he jetted to his $10-million apartment in New York's Trump Tower, and he and his wife hosted glamorous cocktail parties at their enormous Joe Brennan-designed residence in Rosedale.

All of that, he says, is behind him now. He's living in the former family vacation home, an understated oceanfront affair in Palm Beach, Fla. He's lost weight-40 pounds-and hits the treadmill every day. "He's changing his life, he's in a pretty great mood, he's got his own company again," says the friend. With the humility of a post-midlife-crisis man, Hudson embraces the challenge of Hair Club and seems unashamed by the humbleness of it.

Hair Club's head office sits on the third floor of a squat glass-clad office building in Boca Raton, Fla. On the other side of the atrium are some former offices of WorldCom, which went spectacularly belly up last year.

In Boca, the avenues are wide, palm-lined, sedate. In wintertime, the sun is bright, the sky blue, the air clear. Before Hudson arrived on the scene, the mood at Hair Club headquarters was decidedly laid-back, befitting the outside environment. When he became CEO last fall, Hudson began piloting his mammoth Toyota Sequoia SUV 40 minutes down the I-95 from Palm Beach to Boca to chair an 8 o'clock Monday-morning meeting during which such things as the previous week's telemarketing efforts were measured. Top management didn't survive Hudson's early days any better than the take-it-easy atmosphere.

"This company needs," Hudson says, sitting in front of his black coffee in the absolutely nondescript boardroom, "10 hours a day. There wasn't an analytical culture at the company. It was very much a marketing, fly-by-the-seat-of-your-pants culture."

That would be thanks to the personality of Hair Club founder Sy Sperling, whose TV commercials reminded viewers that he wasn't just the president of the company, he was also a client.

Sperling retains a nominal stake in the firm, but he spent a period in the wilderness during the previous management regime. Hudson flattered him, and brought him back as an adviser and confidant, coming to appreciate both his knowledge of the hair business and his idiosyncrasies. "Sy will always own this company. He calls people, he walks into my office with the latest brochures marked up in red pen." Recently, Hudson made the mistake of trying to accurately report the highly preserved Sperling's age in a corporate document-only to receive a stern lecture that he was not 76, but 72.

Today, Sperling is into a new venture: green-tea concentrated power drops, which promise long life and good health. He's shooting an infomercial at the Chesterfield Hotel in Palm Beach when Hudson pulls him away for an interview. In the hotel's legendary Leopard Lounge, a room swathed in animal spots and red drapery, Sperling is looking hip and smooth. "Thanks," he says when I compliment him. "Would you believe I'm 61?"

Thirty years ago, the balding Sperling got into the hair replacement business when he found himself newly divorced and dateless. After he married for the second time, he and his new wife, Amy, built Hair Club together-she was the company's first stylist; he was the sales and marketing whiz.

"Hair Club was our child. But we also grew apart after 18 years of marriage. We were unable to resolve our differences at home and at work," Sperling says, amid commentary on the mercenary qualities of women. Hair Club wasn't formally on the market, but in May, 2000, an intermediary-Bill Farlinger, chairman of Ontario Power Generation-put Les Martin, a Hair Club supplier located in Toronto, in touch with Hudson and his partner Gil Palter of EdgeStone Capital Partners. Martin needed financial backing to acquire Hair Club.

At that point, Hudson put in $3.5 million of the initial $15-million investment (all U.S. dollars here and following) to buy out most of Sy's control block, well over three-quarters of the company. Hudson took a seat on the board, where he observed Hair Club's strengths and weaknesses.

The following year, Martin decided to reduce his stake in the business. In the subsequent buyout, Hudson took 22% of the company, EdgeStone 50% (on behalf of its investors, including National Bank and the Canada Pension Plan Investment Board). These are big players, but the stakes are rather small here. In the last round of financing, the investors earmarked $15 million to fund expansion.

Hudson is at the flip chart in the boardroom, marker in hand, pie charts and swirling arrows covering the paper. "Capital's not going to be the problem. Our challenge is to execute"-he authoritatively flips pages-"from being the industry leader in this slice"-hair systems-"to having a dominant position in these two"-hair transplants and drug therapies, such as Propecia and Rogaine. Those two categories are growing at 20% and 15% a year, respectively, far more than the 4% to 8% rate for hair systems.

The hair-loss solutions market is, in theory, huge. There are 40 million balding men walking around the United States and another 30 million women with thinning hair. Only 7% of men do anything about it. "One of the main drivers here," says Hudson, "is that men are becoming more image-aware. They're starting to spend a little more money on their image."

"What [younger men] ask for is this," Hudson says, pointing to the transplant and medical-treatments portions of his pie chart. "The older gentlemen with more significant hair loss will look at that"-hair replacement systems. Hair Club is happy to supply any one of the three.

"Our real product is our brand. When you see that 1-800 number, you may say it's a bit tacky, but it actually works. When that gentleman or lady calls, that's the product we've created. We should be able to address your hair loss."

Surgery is the most promising direction for Hair Club, and the most costly-a surgical suite can cost $1 million and the liability is much higher than with hairpieces. The company hooked up with an established transplant surgeon, Matt Leavitt, and has opened three transplant centres, including its showcase in San Francisco. Other locations are in the works.

"I'm thinking of surgery for the recession," Hudson confides, pointing to a photo on the boardroom wall, "that I have just like that fellow up there."

I can't really see the hairline recession he's talking about. You mean the corners? I ask, thinking Stockholm syndrome. "Yeah. Up there," he says seriously, pointing to his temples. "Where it starts to creep back."

Transplants are essentially a re-landscaping of the scalp on a micro scale. A centimetre-wide band of hair is "harvested" from the back of the head, where the hair grows thickest. Those follicles are then transplanted to the thinning scalp on top. The surgeon cuts a hole, plants a follicle (each with between one and four hairs) and moves on to the next one. This individual follicle planting is the chief difference from older transplant jobs, where the hairs were planted in clumps, like shrubbery.

As appealing as the transplant business is, it's also highly competitive and requires investment. Plus, Hair Club must be careful not to cannibalize its hair-system clients, because hair systems are the gift that keeps on giving.

Hairpiece technology is also advanced today. A "bio-matrix strand by strand" system is not discernible on a guy's head and doesn't fall off, although some men have found them too itchy to tolerate. The pieces are based on a matrix of transparent fibre webbing that holds the new hair. The light-as-air hairpiece is attached to the scalp with copolymer adhesive, which is transparent and pliant. Most of the hair comes from India; the systems are made in China.

Dear Hair Club,

Some thoughts on Christmas Eve:

Why did I not venture forth into your world of hair-replacement sooner? When Diana first placed the hair upon my head, I thought I was going to cry. For the first time in over 25 years, I had a full pate.

The stock market may have sucked in 2002. America was (and still is) in turmoil. The economy headed south. This will still be a banner year for me. I have hair. I look 20 years younger. If possible, I am more confident than ever. Life is great! I think I will have to remember the San Antonio Hair Club Staff in my will.

Sincerely,

William N. Mayo

This has been the strength of Hair Club: Counting just corporate "stores," not franchised ones, some 22,000 "members" like the ecstatic Mayo return each month to have their hair system maintained. To Hudson, Mayo represents cash flow-the strong, secure kind.

A hair weave costs $1,500 to $2,500, but it must be cleaned and maintained and styled regularly to look good. This is known as the PCP inside the company-preferred client program-and it represents 85% of Hair Club's corporate-store revenue, or $4.5 million a month (the figure, depending on who you talk to in the company, is as low as $3.5 million or as high as $5.5 million). This explains Hair Club's generous offer of 0% financing on the hair systems. Depending on the level of maintenance-from bronze to platinum-a guy spends between $199 and $499 a month for as long as he has the hair. "And that," says Hudson, tapping his flip chart twice, "is the heart and soul of our business."

Secrecy is an important ingredient in this relationship. Hudson was working late one night when a call came in from a Bank of America vice-president. The executive had an important early-morning meeting and his hair system was separating from his scalp-Hudson suspects the guy had been fooling around with it. He was in a panic and needed a fix immediately because no one at work knew about it. He was also a platinum member-$499 a month. He got his fix.

Hair Club outlets are deliberately anonymous, identified by the initials HC on the door, located in office buildings that anyone might have business being in. Inside, the waiting rooms for new clients are pretty sparse, except for Hair Club sales material. There's a separate entrance and waiting room for established clients, so no one is embarrassed. Here the reading material improves considerably, as do the refreshments.

A new client first has his situation assessed by a consultant; a microscopic video surveys the sparse landscape of his scalp. House-brand hair-care products-shampoos, conditioners-are pressed on him. For some clients, drug therapies are suggested; others are steered to surgery or replacement systems. A happy man like Mayo is the successful conclusion of a long sales process that starts with an infomercial and a 1-800 number.

The operating part of head office is a cramped space where young men and middle-aged women with headsets speak to unhappy men who watch a little more of their hair line wash down the drain each morning in the shower. The Hair Club customer has seen the infomercial on late-night TV. Being a man, he does not act quickly. In fact, he has seen the ad a few times, slowly adjusting to the idea that something might be done about the terrifying reality of losing hair and, thus, sex appeal.

"The average fellow will wait three years from decision to follow-up," says Hudson. The [telephone] consultant has 15 minutes to figure out what's happened in the last 24 hours. They [the prospective clients] usually call two or three times before they come in."

Hair Club's phone-centre people get paid for making appointments, and are rewarded with an extra commission for the "show"-which half of the prospects don't. The sales team earns a percentage on the retail price of whatever the client ends up with-5% on a $1,500-to-$2,500 system, 3% on a $7,000 transplant. And upselling an incoming client nets them an extra point. "It's very similar to the way a car dealer works," says Hudson. "A very good sales person can make $100,000. The average is $50,000 to $60,000."
Hair Club lays claim to being the No. 1 brand in the estimated $1.5-billion "hair loss solutions" market. It's a highly fragmented scene, populated largely by small owner-operators and franchisees with an average of 300 to 400 clients. Many of these owners are former Hair Club technicians who struck out on their own and now, as they near retirement, find no way to exit their businesses. Hudson wants to acquire them and then consolidate, region by region.

His other strategy for growth is pure expansion, putting new stores into Canada, Mexico and Europe. Canada is a no-brainer-with about 1,000 clients, the existing Toronto location does the second-largest volume in all of Hair Club, in part because of cross-border shopping: A $199 procedure in the U.S. is also $199 in Canada. For other territories, he wants joint ventures with local partners.

The Plan, designed to more than double the $100-million business in the next two years, then double it again to approach top-line revenue of $500 million by year five, is to eventually attract a sweetheart offer for Hair Club, perhaps from a global hair giant like Paul Mitchell. It's the building stage of a company's life that appeals to Hudson. "One of the things I walked away with," he says, "was that the early days of Newcourt-the first 12 years when it was manageable, when it was 500 to 1,000 employees and I could actually be a bit hands-on-that was the best time."

Hair Club sales brochures feature a parade of depressingly realistic "before" pictures and astonishingly attractive "after" pictures. The "after" photos are said to be untouched, as far as the hairline goes, at least, though some of the subjects are boosted by big-breasted beauties hanging onto their manly arms. The message is clear enough-as if men need a reminder that their hairline is connected to their mainline. It is an appeal to vanity and an offer of salvation.

My new friend Chase was entirely bald on top at a tender age and he wanted a full head of hair so badly he found the money for a Hair Club system while still putting himself through college. "For guys like Chase," says Hudson, "it's more important than the rent."

Hudson is 44 and his boy-wonder years are behind him. His long look in the mirror recently allowed him "to go back and look at what went right and what went wrong in Newcourt. What my strengths and weaknesses are."

He seems to be enjoying himself. He hands out business cards like a carny-to a balding lunch waiter, for instance, urging him to come in for an assessment on the house. "I can come down here and commit to eight to 12 hours a day on Hair Club. I can travel to see our centres."

And there's this advantage too: Being "down here" also means being away from "there," he says. "In Toronto, it's such a small community and a very powerful community. It's also powerful when you make mistakes."

Does Hair Club offer him a clean slate? "Yeah. But I consider Newcourt a success." By the time he is 50, "I hopefully will have created real value. And part of me wants to show the people in Toronto I could do this a second time," he says, as unable as his Hair Club clients to eschew the vanities of man.

Hairline Timeline

1500 BC
Bald Egyptians rub crocodile fat on their scalps and eat hedgehog prickles

400 BC
Hippocrates, father of modern medicine, rubs sheep urine on his scalp and eats opium

ca 45 BC
Julius Caesar combines a wig and laurel

1624
The prematurely bald Louis XIII dons a wig, setting off a vogue that lasts nearly 200 years. Wig-making prospers in France and England

1870s
P.T. Barnum's East Indian Snake Oil inspires scores of other medicine-show and mail-order potions in the United States

1940-1950
Heyday of vacuum helmets and electro scalp stimulation

1950s
American dermatologist Norman Orentreich develops a hair-transplanting technique

1971
Upjohn researchers notice that patients testing minoxidil, a blood pressure medicine, are getting hairier. Upjohn takes the drug to market in 1988 as Rogaine (Regaine in Europe)

1976
Sy Sperling founds Hair Club for Men, selling customized weaves

1994
The Federal Trade Commission makes a $27-million (U.S.) claim on the bankrupt promoters of Helsinki Formula shampoo, a bogus hair restorer that had been shilled by Robert Vaughan in infomercials

2001
Tokyo-based Aderans, the world's largest wig company, continues global expansion by buying Bosley Medical Group, the largest hair-transplant company in the U.S.

As of 2003
Of a $1.5-billion (U.S.) hair-solutions industry, the largest share is taken by surgery, followed by wigs and then drugs. Other solutions range from radiation to massagers to spray can "New Hair"

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