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Company Spotlight MarketWatch: Global Round-up

© Datamonitor, Apr i l 2007 w w w . d a t a m o n i t o r . c o m

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Company Spotlight: The Body Shop The Body Shop: successful consolidation into L'Oreal Since being bought by L'Oreal in July 2006, The Body Shop has performed well. Like-for-like sales increased by 9.7% in the six months to December 2006, masking even more impressive fourth quarter sales. This, combined with increasing profitability, means the health and beauty spe cialist is en route to becoming a thriving global brand. The partnership seems to be paying off: L'Oreal's takeover of The Body Shop solved various problems for the health and beauty specialist, which was suffering from a lack of funds. The retailer's repositioning as a masstige brand - offering premium product at mid market price points - was failing to generate significant returns due to a limited marketing spend, constraining communications with the retailer's new and larger target customer base. L'Oreal's funds have allowed The Body Shop to raise the profile of its marketing strategy. This has included a global partnership with the music channel MTV to raise awareness of HIV and Aids prevention through the promotion of a limited-edition, co-branded fragrance called Rougeberry Eau de Toilette in 44 countries. This is one attempt to expand the Body Shop's customer base and attract the attention of new shoppers. The Body Shop's multi-channel strategy will also benefit from the investment the French cosmetics company can provide, and the technological expertise that L'Oreal subsidiaries can share. The retailer's first UK transactional website was launched in September 2006, and the company's home shopping business is also growing well. Both of these complementary channels can expect continuing nurture from their parent company. Ultimately, it is The Body Shop's ethical stance and masstige positioning which should, with financial backing, guarantee the retailer's survival in a health and beauty market which will only become more cut-throat regarding the survival of specialists. The retailer has justified its above average price-points with its strong ethics, and will continue to attract affluent customers. The brand has already proved it translates well for international expansion, and L'Oreal's financial backing will allow further international growth opportunities to be exploited - with China, Brazil, Argentina and Chile expected to follow the successful launch in India. Business Background The Body Shop International operates a chain of cosmetics stores specializing in skin and hair care products made from natural ingredients. The company operates in over 50 countries worldwide through a chain of 2,133 stores. The Body Shop International operates company owned stores in the UK, the US, France, Germany and Singapore, with the remaining 45 markets owned and operated by independent franchisees. The company sells over 1,200 health and beauty products. Its traditional emphasis has been on shampoos, bath products, soaps, skin creams and conditioners made from natural ingredients. The company sells beauty related accessories including exfoliating bath gloves, mitts, body buffers and foot files and muscle toning, relaxing and invigorating massagers. In addition, it also sells men's toiletry ranges, perfumes and seasonal products. None of the company's products are tested on animals, and many of the company's stores offer recycling facilities. Body Shop trades with over 35 suppliers from some 25 countries to source raw materials. The company operates through a number of retail formats including stores in railway stations, units in large shopping malls and town center stores. Body Shop is also involved in direct selling through The Body Shop at Home.



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Table 14: Key Facts

Address Watersmead Products and Services

Littlehampton Bath and shower products

West Sussex Body care products

BN17 6LS Skincare

GBR

Website www.thebodyshopinternational.com

Telephone 44 1903 731 500

Fax 44 1903 726 250

Employees 7,050 Financial Year End February

Turnover GBP485.8million

Source: Datamonitor D A T A M O N I T O R

SWOT Analysis The Body Shop International is famous for creating a niche market for naturally inspired skin and hair care products. Though the company's concept was copied by other competitors in the years following its establishment, the company has retained high brand recognition levels and leveraged its first mover advantage. However, the recent acquisition of Body Shop by L'Oreal could present problems due to differences in the corporate images of these two companies.

Table 15: SWOT Analysis

Strengths Weaknesses Niche positioning Declining profitability Low cost sourcing Weak performance in the UK and Republic of Ireland Diversified geographic presence Strong revenue growth Opportunities Threats The Body Shop at Home Clashing ideology Agreement with MH Alshaya Intense competition Male grooming products Counterfeits Entry into new markets Increasing online sales

Source: Datamonitor D A T A M O N I T O R



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Strengths Niche positioning The Body Shop is famous for creating a niche market sector for naturally inspired skin and hair care products. The group has been instrumental in introducing a generation of consumers to the benefits of a wide range of natural products, through its product lines, including Vitamin E Moisture Cream to the Tea Tree Oil range and Banana Shampoo. Body Shop brought the benefits of natural ingredients like aloe vera, jojoba oil, rhassoul mud, cocoa butter and many more to personal care products. The company also revolutionized the ethical stance of the cosmetic industry by not testing cosmetics and other personal care products on animals. Though the company's concept was copied by other competitors in the years to come, the company has retained high brand recognition and the first mover advantage. Low cost sourcing Community Trade is Body Shop's own fair trade program, through which it purchases natural ingredients and accessories from disadvantaged communities around the world. For instance, the company purchases ingredients such as blue corn from the Pueblo Indians in New Mexico and Brazil nut oil from the Kayapo Indians of the Amazon River Basin. In all, Body Shop trades with over 35 suppliers from some 25 countries. It provides the company with access to low cost raw materials for its products. In addition, it reinforces Body Shop's image as an ethical company. Diversified geographic presence The company operates in over 50 countries worldwide through 2,133 stores. The company's operations are classified into four regions: Americas, the UK and Republic of Ireland, Europe, Middle East and Africa and Asia Pacific. Americas accounted for 33.1%; the UK and Republic of Ireland accounted for 29.7%; Europe, Middle East & Africa accounted for 19.4%, and Asia Pacific accounted for 17.7% of the total revenues in fiscal 2006. The company's diversified geographic presence reduces its exposure to market risks in any single geographic region and increases growth opportunities. Strong revenue growth Body Shop recorded strong revenue growth during 2003-2006. Its revenues grew at a CAGR of 8.7% during this period. During fiscal 2006, Body Shop's revenues at £485.8 million grew by 15.9%, above the industry average of 15.7%. Moreover, the growth was realized across key markets. The growth was driven by Europe (26.6%) and Asia Pacific (33.7%). The Americas region also recorded double digit growth of about 13.1%. Strong revenue growth indicates that the company has been able to increase its market share. Weaknesses Declining profitability Body Shop's operating margin declined from 9.4% in fiscal 2005 to 8.5% in fiscal 2006. Moreover, it is lower than the industry average of 16.4%. The company's operating profit from its largest market, the Americas, declined by 20% in fiscal 2006. This was driven in part by lower traffic levels in the shopping malls, compounded by inefficient inventory management that led to some out-of-stock situation. Also, the company's operating margin does not compare well with its competitors, Estee Lauder (11.4%) and Kao Corporation (12.4%) in the



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last reported fiscal year. Lower operating margins might indicate inefficiencies in the company's operating cost structure. Weak performance in the UK and Republic of Ireland Though the company's overall revenue growth strong in fiscal 2006, its performance in the UK and Republic of Ireland was weak. The company's revenues from the UK and Republic of Ireland grew by only 4.8%. Comparable store sales declined by 1% in the Republic of Ireland during the same period. Weak performance in geographically important market undermines may indicate loss of market share. Opportunities The Body Shop at Home The Body Shop at Home (products delivered to customers' homes) continues to show impressive growth in the UK, the US and Australia. The Body Shop at Home grew 14% in fiscal 2006. Strong support systems and efficient networking have also yielded operational efficiencies in this area. As the company's customer base increases, it is able to offer more home parties, hence growing customer base, creating opportunities to offer the brand to a wider audience. The Body Shop at Home in the US has grown significantly and has now been rolled out to 48 states. In the UK, it has been through a period of transition as its infrastructure and systems have been integrated with the UK retail business. In Australia, there has been rapid growth and it has successfully extended the brand to more remote areas. Its success in these markets has prompted Body Shop to launch The Body Shop At Home in Germany in fiscal 2007. Moreover, customers are likely to increase their individual spending when shopping from the comfort of their friends/own home. This represents further opportunities for growth in other countries. Agreement with MH Alshaya Body Shop signed an agreement in February 2006, with MH Alshaya Company, a leading retailer in the Middle East, in a move to expand its franchise operations in this region. The cosmetic and toiletry (C&T) market in the Middle East is currently growing at 12% per annum and is valued at $1.7 billion. The value of C&T market in this region is expected to reach $2.1 billion by the end of 2006. Gulf States in particular has the largest per capita cosmetics expenditure in this region and also one of the highest in the world at approximately $334 per person. As part of the agreement, the company plans to open three new stores in Cyprus in 2006. This agreement would provide a strong base for the company to expand its operations in this region with immense growth potential. Male grooming products There is a high growth potential for male grooming products in the UK, the US and Europe. French men spend the maximum on grooming products followed by the Germans, then by the Dutch and the Americans. Men in the UK spend a total of £920 million a year on personal hygiene products, £278 million a year on hair care products, £88 million on fragrances and £65 million on skincare products. The UK market for male grooming products is likely to grow to £1.5 billion by 2008. A trend toward greater usage of personal care items among young men has also seized the US. Young men between the ages of 8 to 18 are an important and growing sector of the health and beauty care industry, representing a potential market of $2.8 billion by 2008. Body Shop has a line of products for men which includes



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exfoliating and conditioning face scrubs and a range of naturally-inspired fragrances. This high growth potential of male grooming products would boost the sales of the company's range of men's products. Entry into new markets Body Shop has expanded into new markets, with store openings taking place in both Russia and Jordan during fiscal 2006. In Russia, it opened six stores, with another 11 openings planned for fiscal 2007. The company plans to open its first store in India, Pakistan and Poland in 2006. The sales of cosmetics and toiletries rose by 6% in value terms in India in 2005. This growth in Indian cosmetics and toiletries in the future is expected to be driven by rising hygiene and beauty consciousness due to changing demographics and lifestyles, increasing disposable incomes, rising media exposure, and greater product choice. The company's entry into these high growth markets augurs well for its growth. Increasing online sales The company launched its e-commerce site in the US in 2004. Sales on this site more than doubled in fiscal 2006, making a contribution to profit in its first full year of operation. The company expects to launch an e-commerce site in the UK during the fiscal 2007, in time for the key Christmas trading period. Worldwide online consumer spending is forecast to rise from $136.6 billion in 2004 to $228 billion in 2007. Significant growth in online sales is forecast for all categories of consumer goods. The online market is the fastest growing sector of UK retail at present, accounting for almost half the cash growth in retail spending in 2005. The company's increasing online presence in the backdrop of rising online sales should increase its margins by reducing its operating costs. Threats Clashing ideology L'Oreal acquired Body Shop in a deal worth £652 million in March 2006. Though the takeover is expected to be beneficial to both the company's by increasing their growth opportunities, there are few concerns regarding the stark difference in the corporate images of these two companies. Body Shop has built its image as an ethical company which is against all animal testing. Moreover, it is known for the use of natural ingredients in its products. L'Oreal on the other hand has been criticized for testing its products on animals in the past. It has even been boycotted by the animal welfare group, Naturewatch. Consequently, the takeover could have an adverse effect on Body Shop's corporate image. Intense competition The global cosmetics business is intensely competitive, with a few big corporations and a large number of small companies vying for market share. The company competes against global companies such as Revlon, Estee Lauder and Procter & Gamble in addition to a number of smaller companies. Of late, the bigger companies have sharpened focus on beauty and personal care products market in the US as well as emerging markets. Increased competition could result in price reductions, reduced profit margins and loss of market share. Counterfeits The proliferation of counterfeit goods and accessories is adversely affecting the sales of branded cosmetics and accessories. According to Global Congress on Combating Counterfeiting, 9% of all world trade comprises fake goods. In 2005, more than 5,024 incidents of counterfeiting and piracy activities worldwide were recorded by Gieschen Consultancy, an organization that tracks counterfeit activity across the globe.



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Increasing sales of counterfeit products negatively impact the company's sales. Low quality counterfeits also reduce consumer confidence in the products of a company. More importantly, what differentiates the products of companies such as Body Shop from competitors is exclusivity. Widespread counterfeits reduce the exclusiveness of the company's brands. Counterfeits not only deprive the company of revenues, but also dilutes its brand image.

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