French cosmetics giant L’Oréal has revealed that it is considering a sale of The Body Shop, as the ethical beauty retailer grapples with sliding profits.
L’Oréal, which owns high-profile brands including Garnier and Maybelline, acquired the retailer – founded by Dame Anita Roddick in 2006 for £652.3m – as a means of response to the growing demand for natural cosmetics.
However, while the remainder of L’Oréal’s business portfolio has gone from strength to strength, The Body Shop has struggled.
Last week the London-headquartered business reported a 38% slump in full-year operating profits. Sales slid nearly 5% to €920.8m.
With news that L’Oréal has “decided to explore all strategic options” for the retailer, what challenges would a new owner face to get The Body Shop back on track?
Cool kid no more
While teenage girls around the world used to stock up on the beauty retailer’s body butters and White Musk fragrance, the emergence of retail rival Lush has put The Body Shop on the back foot in terms of in-store experience.
“Shoppers have become much more knowledgeable and brand savvy when it comes to health and beauty”
Charlotte Pearce, GlobalData Retail
Lush has doubled its market share over the last five years while The Body Shop’s has declined from 10.4% in 2015 to 9% last year, according to GlobalData Retail.
This, combined with the growth of fashion-forward beauty retailers such as Urban Decay and NYX have increased competition for The Body Shop to produce cutting edge products.
“Shoppers have become much more knowledgeable and brand savvy when it comes to health and beauty and while The Body Shop is known for its cult products, it has failed to innovate enough and offer on-trend products, especially in terms of its make-up,” says GlobalData Retail analyst Charlotte Pearce.
“Contour sticks, kits and palettes were a strong trend in 2016, and these are nowhere to be seen in The Body Shop’s range.”
Ethical is everywhere
When Roddick founded The Body Shop in 1976, the idea of using natural ingredients in mainstream beauty products was pioneering.
“The Body Shop has lost its position in the market as an ethical pioneer”
Since then, however, the use of ethically sourced and sustainable products has become more mainstream in the beauty sector.
“While natural skincare and beauty was once scarce, making L’Oréal’s acquisition of The Body Shop attractive 11 years ago, ethical products are no longer specialist and are widely available at discounted costs through the likes of Superdrug,” says Retail Week Prospect analyst Rebecca Marks.
“L’Oréal’s acquisition of brands such as AcneFree may prove more beneficial for the group now in terms of being able to target more specialised and niche markets, fuelling additional revenue.”
The Body Shop has lost its position in the market as an ethical pioneer and has failed to up its credentials in its on-trend beauty offering to offset this shift.
The squeezed middle
The beauty market has become increasingly crowded in recent years.
“Superdrug and Boots offer shoppers on a budget low-price beauty products and department stores provide a wealth of high-end, luxury items”
While The Body Shop would once have only had to ward off competition from fellow specialist retailers, businesses of all different sizes and sectors are now getting in on the beauty market to boost sales.
“Clothing retailers such as Topshop, New Look and Primark have invested in their beauty ranges, and department stores have also been focusing on revamping their beauty halls and bringing on board new exclusive brands, and The Body Shop hasn’t been able to keep up,” says Pearce.
Superdrug and Boots offer shoppers on a budget low-price beauty products and department stores provide a wealth of high-end, luxury items, while The Body Shop sits in the middle, which may be part of the reason it is losing market share.
The costs of keeping shop
The Body Shop has 3,000 stores across 66 countries, 277 of which are in the UK.
“L’Oréal’s strengths lie in developing and nurturing brands, not as a retailer operating a sprawling store estate”
Harsha Wickremasinghe, Livingstone
The cost of running an estate of that size is significant, and prospective new owners will need to weigh up whether the scale of the retailer’s bricks-and-mortar presence is justifiable.
“It is surprising that an owner of the magnitude of L’Oréal has failed to capitalise on the potential The Body Shop had,” says Harsha Wickremasinghe, an associate at mergers and acquisitions and debt advisory firm Livingstone.
“However, L’Oréal’s strengths lie in developing and nurturing brands, not as a retailer operating a sprawling store estate.
“Maintaining such a cumbersome store estate in a sector where consumers are rapidly shifting online is difficult to justify in the long term.”
In an interview with Retail Week last year former UK boss Simon Coble said the retailer planned on opening between 10 and 15 new stores per year over the next three years, but whether this plan will come to fruition, now a sale is being mooted, is unclear.
The beauty retailer has put its shoulder behind its online proposition recently, redesigning its mobile app with an integrated loyalty scheme and overhauling its ecommerce website last year.
“New owners will need to be willing to invest in brand awareness to grow its credentials in the market again”
Rebecca Marks, Retail Week Prospect
However, has investment in launching click-and-collect and third-party delivery offers been behind the curve?
At a time when much of the growth of beauty newcomers is being driven by social media, The Body Shop will need to develop its online presence and proposition to recapture the imagination of millennial shoppers.
“New owners will need to be willing to invest in brand awareness to grow its credentials in the market again,” says Marks.
Likewise, Wickremasinghe believes that, should a new owner take on the beauty retailer, online will need to be a key area of investment.
“We expect a new owner could look to slim its UK store portfolio and divert a significant share of marketing spend to reinvigorating sales online,” he says.
The Body Shop was once at the cutting edge of it sector. However, the retailer appears to have lost its way in recent years.
Whatever tactics prospective new owners decide to take, it is clear The Body Shop has some work to do to recapture the attention and spend of today’s beauty shoppers.