The Good, the Bad and the Unguent

June 9, 2006

L’Oreal buys The Body Shop, but reactions are mixed…

The Good, the Bad and the Unguent

L’Oréal buys The Body Shop, but reactions are mixed…

By Ava Caridad

In March of this year, The Body Shop International PLC, British retailer of natural-based cosmetics, agreed to be taken over by L’Oréal SA of France. L’Oréal, makers of Maybelline, Lancôme and Armani and Ralph Lauren fragrances, in a cash deal worth $1.14 billion. According to the companies, The Body Shop will retain its separate identity and current management, while L’Oréal doesn’t plan to close any stores or make job cuts.

The Body Shop was founded 30 years ago in Brighton, England by Anita and Gordon Roddick, and there are now more than 2,000 stores globally. The Roddicks stepped down from managing the company in 2002, but have remained as non-executive directors and stand to earn approximately $204 million from their 18% stake.

Reactions have been mixed. A large part of criticism of the deal is over the collaboration between The Body Shop, known for products that aren’t tested on animals, and L’Oréal, which has yet to ban animal testing.

“It’s ironic that a company well known for its anti-animal testing stance should sell out to one that tests on animals and which has yet to show its commitment to any ethical issues at all,” said Ruth Rosselson of Ethical Consumer Magazine.

Anita Roddick, founder of The Body Shop
Anita Roddick, who will retain her current role as a consultant, said the company’s values would not change.

“I don’t see it as selling out," she said. “L’Oréal has displayed visionary leadership in wanting to be an authentic advocate and supporter of our values.”

She maintained that The Body Shop is about more than just animal testing and that a benefit to joining with L’Oréal is that The Body Shop will be able to teach L’Oréal about issues such as “community trade, which is the best poverty eradicator in the world.”  Former L’Oréal chairman and chief executive officer Lindsay Owen-Jones said L’Oréal wouldn’t be able to stop animal testing overnight, but it does have the long-term plan of “joining The Body Shop on the issue.”

The two brands seem to have other contradictory values, as well. The Body Shop promotes self-esteem among women and has a strong stance on ethical issues, including fair trade. The Body Shop does not use celebrities to promote its products, and Ms. Roddick has directly criticized L’Oréal to the press in the past for its treatment of women.

L’Oréal’s former chairman and CEO, Sir Lindsay Owen-Jones
According to Chicago-based research firm Euromonitor International, L’Oréal produces high performance products promoted by celebrities that enable women to disguise imperfections, directly contrasting The Body Shop’s approach of using real people.

There remains the question of the impact, of what is seen by many as a misalliance, on the sales of the ethically-minded cosmetics retailer, explains Euromonitor. From the very beginning, The Body Shop strove to offer natural products, produced and distributed with minimum negative impact on the environment and producer communities around the world. Much of The Body Shop customer loyalty lies in the values supported by the brand. It will be in L’Oréal’s interest to preserve the brand’s integrity by intervening as little as possible with all business aspects that may impact The Body Shop’s public image. L’Oréal’s pledge to let the company operate as an independent business and the decision to keep the current management team are steps in the right direction.

If L’Oréal keeps enough distance to convince consumers that the change in ownership of the brand does not impact its ethical integrity, Euromonitor International expects the great majority of customers to resume their purchasing habits. In developing markets such as Eastern Europe and Asia-Pacific, the alliance with L’Oréal should not be as damaging as it might be in countries such as the UK and Ireland. Ms. Roddick’s repeated assurances that the takeover will not change The Body Shop’s values and her decision to remain as a consultant should also convince more cynical customers.

What’s in it for The Body Shop?

In recent years, The Body Shop has moved toward the luxury end of the cosmetics market to avoid direct competition with supermarket and drugstore mass merchandisers such as Tesco in the UK and Wal-Mart in the U.S. Euromonitor insists The Body Shop could benefit from L’Oréal’s experience in managing prestige and masstige brands around the world and that L’Oréal’s huge budgets could be used to accelerate The Body Shop’s growth.

The Body Shop’s current management team has also focused its efforts on the geographical development of the business into the fast growing markets of Asia and Eastern Europe, into countries such as China and Russia. L’Oréal’s established position in these markets, its financial capacity and existing infrastructure would be an invaluable advantage.

Ms. Roddick further stated that The Body Shop will now be able to expand into new markets and grow all of its channels—retail stores, The Body Shop At Home and e-commerce—around the world.

What’s in it for L’Oréal?

Plenty. According to Euromonitor International’s Briony Davies, L’Oréal, which lost its number one position in the global cosmetics and toiletries market to P&G in 2005, has a lot to gain from the buy-out. The acquisition of The Body Shop is a first for the French cosmetics group in several ways. The company has so far distributed its brands through independent retailers, and the distribution of a brand through its own stand-alone store will be its first major foray into this type of retailing. The takeover also makes a move away from conventional cosmetics into more natural products, a growing sector in the cosmetics industry as consumers extend notions of health and wellness from food into their personal care routines. Although L’Oréal has herbal-based product lines, consumers are increasingly perceiving these products as not ‘natural.’

The Body Shop could provide L’Oréal with the perfect platform to cash in on several fronts, e.g. the rise of the masstige segment, the potential to further exploit the BRIC countries (Brazil, Russia, India and China), the demand for natural and ethical beauty care and the opportunity to get closer to the end consumer through standalone stores and direct sales.

Will it Work?

In spite of strategic fit from L’Oréal’s perspective, there are still hurdles to be overcome, says Euromonitor. One of The Body Shop’s strengths is its loyal consumer base, which may be threatened by association with L’Oréal. In addition, acquisition of The Body Shop will not instantaneously enable L’Oréal to recover its number one position. It will need to focus on overseas expansion of The Body Shop to emerging markets to realize full potential.

And in spite of The Body Shop’s strengths, considerable investment will be necessary to counter its performance in weaker U.S. and Germany markets. Even in the UK, 2005 performance was below par. L’Oréal’s management has limited experience with franchise operations, and the direct sales arena (outside of France where they have Le Club Createurs de Beauté) is unfamiliar.

However, both L’Oréal and The Body Shop have high hopes for the merger.

Sir Owen-Jones exclaimed, ‘‘We have always had great respect for the success of The Body Shop and for its strong identity and values created by its outstanding founder, Dame Anita Roddick. A partnership between our companies makes perfect sense. Combining L’Oréal’s expertise and knowledge of international markets with the distinct culture and values of The Body Shop will benefit both companies.”

Ms. Roddick added, ‘‘For both Gordon and I, this is without doubt the best 30th anniversary gift The Body Shop could have received. L’Oréal has displayed visionary leadership in wanting to be an authentic advocate and supporter of our values. They understand what a maverick The Body Shop was in the business world and how we helped change the language of business, incorporating the action of social change, especially in human rights, animal welfare, the environment and community trade.”