Toning Up The Body Shop
After Falling Behind Its Imitators, Improved Efficiencies And A Spruced-Up Image Are Helping The Global Chain Bounce Back
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The 26-year-old analyst at a consulting firm recently picked up a lip gloss, her first purchase from the store in several years. "It's definitely good value for money," said Thorsteind, who also likes the retailer's reputation for socially progressive business practices. "Who doesn't?"
MARKET PIONEER. Shoppers like Thorsteinsd are helping lift the fortunes of the Sussex, England-based chain, which is as famous for its ecological and social advocacy as it is for "naturally inspired" products like Passion Fruit Body Butter and Brazil Nut Soap.
After pioneering the market for natural cosmetics, Body Shop fell behind a slew of imitators in the 1990s, from the pricier Origins line by Estee Lauder (EL) to discount drugstore brands. Sales suffered as a result.
In 2002, Body Shop founders Anita and Gordon Roddick gave up their roles as co-chairmen after months of unsuccessful talks with potential acquirers. Almost a year later, the outfit's stock, which trades on the London Stock Exchange, fell to the equivalent of about 90 cents, its lowest point since 1987.
UPBEAT SIGNS. Lately, however, the financial situation at the chain -- which has 2,045 stores, including 1,312 franchises, in 52 countries -- has been looking more robust. For the fiscal year ended Feb. 26, 2005, Body Shop reported operating profit growth of 19% to $67 million -- on top of a 25% gain in 2004 -- on sales of $1.3 billion. Earnings per share were up 22% in 2005, to about 24 cents, on top of a 57% increase the previous year.
The company also issued guidance for an operating profit increase of 15% to 20% for this year.
Another upbeat sign: In Britain, where weak sales have weighed on the outfit's overall performance, revenues rose 9% in the first two months of the current fiscal year, at a time when many retailers there have been posting losses.
MASS MARKET + PRESTIGE. Richard Ratner, analyst with London-based investment bank Seymour Pierce, attributes the progress to the management of Executive Chairman Adrian Bellamy and CEO Peter Saunders, who took over when the Roddicks departed. "It seems like they are firmly in control."
Much of the Body Shop's improved financial state can be attributed to increased efficiencies with the introduction of behind-the-scenes systems to reduce inventory, streamline the supply chain, and make better use of sales data, says Bill Eyres, the company's global communications director.
More visibly, the retailer has been trying to shift its image slightly upmarket, with the goal of creating a so-called "masstige" brand, offering a premium-quality product at prices just slightly above mass-market.
SPA-INSPIRED. This strategy and the new products are hitting the mark, analysts say. Alexandra Richmond, cosmetics and toiletries analyst with research firm Euromonitor, cites as an example the Body Shop's new "Invent Your Scent" perfume, which capitalizes on consumers' interest in customization.
Another winner is spa-inspired products, or at-home versions of pampering treatments such as mud masks and salt scrubs. "They're doing all the right things," Richmond said.
The Body Shop's multichannel approach to selling also has contributed to its rebound. The retailer has a growing direct-sales operation in the U.S., Britain, and Australia called Body Shop at Home. Revenues from this program, which uses a network of independent agents who host sales parties in their homes, soared 31% worldwide last year to $86.9 million.
EXPANSION PLANS. Revenues from this direct-sales initiative in the U.S. surged 57%, to $40.9 million, accounting for the bulk of overall top-line growth there. Also last year, Body Shop rolled out a new Web site for the U.S. market, which it expects to turn a small profit in the coming year.
In the meantime, the chain is expanding in traditional ways. As part of a $185.2 million investment plan announced last year, the company will open 120 new stores in the coming year. Another 130 locations will be refurbished according to the new design implemented in London's Covent Garden store -- one of eight worldwide that were revamped last year to test the new look.
Joe Spooner, an analyst with Dutch bank ABN Amro, wrote in a May 3 research note that "recovery momentum is gathering" at the retailer. Most of the outfit's initiatives -- including store refurbishments following the pilot program and the planned expansion of Body Shop at Home into Germany -- "represent the roll-out of tested strategies," Spooner said. The analyst rates the issue a buy.
TOUGH CONDITIONS. Buoyed by this brightening outlook, Body Shop's stock has shot up 24% this year, to the equivalent of $3.67, nearly quadrupling in value since its low in early 2003. Yet although most analysts say there's room for more growth, the retailer still faces challenges.
While total sales climbed 5% and same-store sales were up 2% worldwide last year, performance has varied by region. In both the Americas and Britain, which together account for about 46% of the outfit's business, comparable-store sales were flat.
Further, in the coming year, retailers in many markets will face tougher trading conditions, and the weak U.S. dollar -- which cut Body Shop's pretax profit by 8% in fiscal 2005 -- is expected to continue to take a toll.
"FINE BALANCE." Meanwhile, competition in the sector keeps intensifying. Body Shop may be benefiting from consumers' willingness to pay more for natural ingredients, but the chain still faces rivals.
Besides traditional competitors, Body Shop is also up against new organic producers, notes Euromonitor's Richmond. The company does source certain ingredients, such as organic honey from Zambia and nut oil from Brazil, through its community trade program, but it also uses synthetic ingredients.
Moreover, trying to establish a "masstige" brand can be risky, said Nirmalya Kumar, director of the Centre for Marketing at London Business School. "You have to be careful, because there's no market for mass-market products at prestige prices; there's only a market for prestige products at mass-market prices," he said. "The balance here is very, very fine."
"DELICATE AND GRADUAL." Still, the program appears to be working so far. Paul Smiddy, an analyst with the investment bank RW Baird in London, says Body Shop should be able to make even more efficiency gains.
The chain is also managing to maintain its identity as an ethical company, despite the departure of its best spokesperson, Anita Roddick.
"They've had to cling to the campaigning roots of the business and at the same time leverage that in a commercial way," Smiddy said. "It's a delicate and gradual process." But one that seems to be well under way.
Copyright 2005
, by The McGraw-Hill Companies Inc. All rights reserved.
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