Why Is L’Oreal Trying To Sell Off Its Natural Beauty Brand, The Body Shop?

-2.58%
Downside
97.27
Market
94.76
Trefis
LRLCY: L'Oreal logo
LRLCY
L'Oreal

In its Q4 2016 earnings call, L’Oreal has admitted to exploring options to sell off it ownership of The Body Shop. The persistent weak performance of the Sussex-based beauty retailer known for its natural and fair-trade ingredients, has made L’Oreal come to this decision. The Body Shop was once a brand known for its socially conscious products. However, after L’Oreal’s acquisition of the brand and after the demise of its original founder, Anita Roddick, the brand had started to lose its appeal. If L’Oreal is successful in selling off the company, The Body Shop might need to undergo a brand image makeover in order to appeal to its target client base once again.

The Body Shop’s Acquisition By L’Oreal And The Present Scenario

The Body Shop was founded in 1976 by Anita Roddick and the beauty company was known for its ethical products, exotic ingredients, environment friendly practices, and social activism. In 2006 L’Oreal acquired the company for £652m. Though Roddick faced criticisms at that time for selling the company to the corporate beauty giant, she ensured that The Body Shop will steadfastly continue following its own principles and ethics as this was also mentioned under the terms of L’Oreal’s takeover. In fact, Roddick even claimed that she might turn out to be the “Trojan horse” who could influence L’Oreal to adopt some of her ethical ideas into its other businesses. However, Roddick passed away in 2007 and industry experts felt that there wasn’t too much common ground between The Body Shop and L’Oreal’s other brands.

Relevant Articles
  1. Is There More Room For Growth In L’Oreal Stock?
  2. After Underperforming The Markets, Can L’Oreal Stock Rally?
  3. L’Oreal Stock Poised For Bounce Back After Rough Month?
  4. After Dismal Performance Last Month, L’Oreal Stock Looks Set To Rebound
  5. L’Oreal Stock Looks Set For A Rally On The Back Of Strong Earnings Growth
  6. Forecast Of The Day: L’Oreal Makeup Revenues

Present in over 3,000 stores across 66 countries, The Body Shop’s sales fell by ~5% to reach €920.8m in 2016 while its operating profit declined by 38% during the same period to reach €33.8m. The company’s operating margin fell below 4% in 2016 while that of L’Oreal’s main consumer business stood at 20%. There have been reports that L’Oreal has already appointed bankers to analyze the options for selling off the company to prospective private equity buyers. L’Oreal is aiming to sell the brand for a possible value of €1 billion.

What Does The Body Shop’s Lackluster Appeal Indicate?

Some of the loyal fans of The Body Shop felt frustrated when the brand, known for its ethical practices, was taken over by a commercial giant. This might have been one of the reasons behind The Body Shop’s declining demand. The Body Shop might be an example of what happens when a brand’s core values are lost due to being absorbed by a larger corporate identity. Recently, both L’Oreal and Estee Lauder have acquired a number of brands that are known for their niche values. These brands click with the target clientele because of the values they promote. It is essential that the authenticity of these brands remains intact post their acquisitions because this is the unique selling point for the brands. The moment that attraction is lost, the brand becomes just another name in a sea of similar brands and hence loses the customer loyalty.

Competition Has Grown Stronger

The Body Shop is currently under threat by bigger and more powerful competitors in its field, such as premium ethical brands like Dr. Hauschka, Chantecaille, and Lush and Neal’s Yard.

Also, the concepts such as not testing on animals is not an uncommon practice for other beauty brands in today’s world. It doesn’t provide The Body Shop an edge over others like before.

Additionally, though, L’Oreal is a digitally advanced company, launching its beauty applications on mobile or appointing its beauty influencers in the social media, it has done little to connect this brand with the younger consumers of today through these means. In an age when the brick and mortar stores are losing relevance and the digital sales are rising, The Body Shop continued spending money to build a larger store network. L’Oreal’s plans of opening 3,000 more stores for The Body Shop after it gained ownership was reduced to only 1,000, and its aim of introducing the brand to 40 more countries didn’t achieve fruition.

…And The Body Shop’s Brand Positioning Has Grown Weaker

Though last year, the brand tried to revive its image with 14 goals for 2020 that included promises like all its natural ingredients would be sustainably sourced (as opposed to just under 50% of its ingredients falling under this category currently) and ensuring that almost 70% of its packaging would not originate from fossil fuels (as opposed to 30% today).

However, The Body Shop needs to seriously think about its brand image in order to once again appeal to its consumer base.

When The Body Shop was led by Anita Roddick, the brand was known for its mass market and ethical appeal and socially conscious customers leaned toward the brand. However, the ethical essence of the company has eroded since then. Though the company is making new promises to reinvent and reinforce its older image once more under its current CEO, Jeremy Schwartz, however, the brand has a tough challenge ahead of itself. It might have to choose between becoming either a mass market commercial brand (like a Maybelline or a Garnier) or a brand built over social and environment consciousness. It just cannot settle for being a half-ethical brand as that image neither appeals to the buyer of mass beauty products or those looking for environment friendly options.

Editor’s Note: We care deeply about your inputs, and want to ensure our content is increasingly more useful to you. Please let us know what/why you liked or disliked in this article, and importantly, alternative analyses you want to see. Drop us a line at content@trefis.com

Have more questions on L’Oreal? See the links below.

Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for L’Oreal