Body Shop

Anita Roddick, OBE, and The body Shop International Plc FEDBACK FOR QUESTION WEEK 3 for week commencing 19. 03. 12 1. Evaluate the Financial Position of the Company (at the time of the case study) and comment upon the apparent success or otherwise of its strategy, based on your findings. Introduction We may consider a company’s strategy from a number of aspects, but generally we are interested in answering the question: How well is the company’s present strategy working? To understand and analyse success in terms of strategy, we must begin by understanding what the strategy is.From Thompson, Strickland and Gamble (2012) we might examine the following areas * Identify competitive approach * Low-cost leadership? * Differentiation? * Best-cost provider? * Focus on a particular market niche? * Determine competitive scope * Broad or narrow geographic market coverage? * In how many stages of industry’s production/distribution chain does the company operate? * Examine r ecent strategic moves * Identify functional strategies We can also assess performance in terms of both quantitative measures (financial and strategic achievements against budget, plans, etc. and look to see if its performance is above or below the industry average. We can also look at qualitative measures (such as brand awareness /status, consumer attitudes to the company, and so on). There is only limited information in the case regarding some of these areas, but I will attempt to look first at the strategy followed by Body Shop, then at the financial ratios based on its figures, non-financial measures and then finally draw conclusions that attempt to answer the question.Strategy being followed by Body Shop Porter’s Generic strategies, as amended by Hitt, Ireland and Hoskisson (2002) are shown below. If we consider first, their competitive approach, there is no evidence in the case study that Body Shop has any concern about Cost Leadership, and in fact we know from the Tradi ng Charter and Mission (case, page 539) that the firm pays above market rates for goods it buys from suppliers in poorer countries, where it can, which is not something a cost-leadership company would normally do.We also have plentiful evidence from the case that Body Shop occupies a unique position in the cosmetics retailing industry, as it takes a highly principled stance on many issues, as indicated in my earlier answer to question 2, and shown in the firm’s mission statement, which mentions many areas of Corporate Social Responsibility – ecological and ‘green’ issues, human and civil rights, against animal testing of cosmetics, and so on. The company must therefore be following a Differentiation strategy.The question then is whether this is broad or narrow in focus, as suggested by Thompson, Strickland and Gamble, as mentioned earlier – their competitive scope. The decision here rests on how one defines the market: Body Shop is a retailer that a lso manufactures, within the cosmetics industry. It is a specialist retailer, not selling anything apart from its own products and is not configured and structured like bigger retailers such as – in the UK – House of Fraser, Debenhams, Boots, Marks and Spencer or Tesco, all of whom retail cosmetics amongst many other product ranges.I therefore conclude that Body Shop is a Focused Differentiator. Firms that seek differentiation, according to Porter, seek higher profit margins through finding something unique about themselves, which consumers value more than the offerings of competitors. In the case of Body Shop we might see this as being their highly visible and principled ethical stance, and the range of products which they sell, being organic, fair trade and ethically produced and traded, so their competitive approach and scope is Focus Differentiation, as such a stance is not likely to appeal to all shoppers.Similarly, some, at least would be indifferent to the organ ic/fair trade/human rights etc appeal of the stores and others might consider the range of products to be relatively limited and not of sufficiently high brand status, as the products in Body Shop stores fit in price and value terms between the low-cost products offered in stores like Sainsbury and Tesco, and the high-end cosmetics of Helena Rubenstein, Elizabeth Arden etc, sold via stores such as House of Fraser and Debenhams.In terms of recent strategic moves, we can see from the case only that the firm has expanded reasonably quickly, via franchising mostly; from the case it seems that about 80% of stores are franchised out. In terms of functional strategies, we can see the small amount of vertical integration mentioned in the case, whereby the largest part of the business is involved in running the owned shops and franchise, and a small amount of manufacturing in terms of soap products, etc.It is important to note that for the next section, examining Body Shop’s finances, the franchising approach is important, as it has a major impact on revenues – however successful a store is, the majority of revenues will go to the franchisee, not the Body Shop. According to Cavusgil, Knight and Reisenberger (Called CKR in future – from p 246), the initial revenue to Body Shop will be from the franchising fee, but then they will get regular revenues from product sales to the stores and from the royalty fees. This is likely to amount to about 30% of revenue in total (25% from product charges and 5% royalty fee).Body Shop’s Financial Position We are asked to evaluate the firm’s financial position. Briefly, Body shop is a retailer that sells in around 45 countries and uses a mixed mode of Franchising and FDI though investing in owned retail stores. So far as I can tell, about 80% of the 1,208 stores are franchised. Franchising is a particular form of retail expansion, where, according to Cavusgil, Knight and Reisenberger, an entrepreneur buys into an established brand system. The best known franchise is probably McDonalds, but Body Shop is a medium-sized international franchise, given its range of countries and umber of stores (much smaller than McDonalds, which has over 33,000 restaurants worldwide, and annual revenues (2010) of about ? 15 billion. I will come back to this more modern data later in my answer. When examining the financial basis of a business, there are – according to Thompson Strickland and Gamble – five areas which can be studied – 1. Profitability (the profits made by the business on its activities), 2. Liquidity (the ability of a business to pay its debts [creditors] and collect money from customers [debtors]), 3.Leverage (the amount of money invested in the business by shareholder – v – the amounts borrowed from financial institutions, to fund the business and invest in its future), 4. Business Activities (amounts of stock held in the business, how quickly it t urns over, and so on), and 5. Stockholder Interests (the amount of money paid in dividends, value changes in share prices, etc. ) * According to the lecture notes in week 10, Ratio analysis can be used to: * Compare the performance of a company over a period of time. Compare the performance of your own company with that of one of your competitors or the industry sector. * Detect weaknesses in aspects of your operations, e. g. debt management, stock levels etc. which you can improve. * Assess a company's exposure to short term risk through its liquidity (ability to meet debts). * Determine a company's profitability. Much of this data is useful only when considered against the performance of other firms and we have no data from the case to illustrate any of this. However, I have approached the financial situation analysis in two ways.First I look at the basic ratios for the firm and comment on them; second, I have compared the latest data for Body shop, with a number of its contempora ries, both in retail and in franchising, in order to make some valid comparisons. Profitability the commonest ratios are Profit before Interest payments on loans, Taxation, Depreciation and other fixed costs like mortgage payments. Often referred to as operating profit or EBITDA; for Body Shop in 1995 I have calculated this as Profit for the year/turnover*100 (from figures, case pp553/4), this is 33. 5/219. 7*100 = 15. 24%.Calculated in the same way, net profit would be 21. 8/219. 7*100 = 9. 9%. Liquidity the commonest ratio here would be the Current Ratio, which measures balance of current assets against current liabilities, which for Body Shop yields a ratio of 2. 29:1. Similarly the Quick Ratio, which is a similar calculation but ignoring inventory or stock, would yield a ratio of 0. 83:1. This indicates that the business is not perfectly liquid and would struggle a little to pay off all of its debts (a ratio of 1:1 indicating perfection here) – but this is not seen as a p roblem when the ratio is over 0. . Without any share price data it is impossible to calculate meaningful ratios for stockholders, so we can only note that the dividend paid to shareholder appears high, at ? 11. 50 per share for 1995 (case, p. 554). A major measure for stockholders, however, might be Return on Shareholders equity, as this is the best comparison to the return that the investor might make if he or she had invested their money in a bank Savings account. For Body Shop I calculate this as: Net profit/Total Equity*100 or 21. /110. 6*100 = 19. 7%. However, these numbers by themselves, tell us only that the business is profitable and is a sound going concern, with a decent profit margin and a fair coverage against its debts. For shareholder it is making a very good return on invested amounts of nearly 20% – at a time when savings accounts would maybe have yielded 6%) and is paying a handsome dividend. We might conclude that the business is financially sound, therefore .Moreover, using Franchising as a way to expand internationally is a relatively low cost and low-risk method, according to CKR, as the franchisee pays for the initial setting up of the store; the stock; staff recruitment and training; and advertising and promotion. They also pay – in this case – to Body Shop PLC for the stock they must subsequently sell in their store and the franchise royalties on turnover. This is a very effective business model and allows a strategy of international expansion to take place reasonably quickly and at reasonably low risk. Conclusions General comments about the success of the strategy and body Shop’s financesBased on this evidence, it is possible to state that Body Shop’s financial position is clearly comfortable and they appear to have a sensible strategy for international expansion, which is sustainable, in that they have transferred the majority of risk for their expansion to the franchisee. The group should be able to comfortably expand its foreign operations in this manner, for a number of years. However, at the moment, as I indicated in my answer to question 1, the company at present has a very simple structure and this may have to change as the number of stores, and the number of countries in which they operate, continues to grow.We also know, from my answer to question 2, that in terms of what we might call non-financial measures, Body Shop is highly regarded as an excellent example of an Ethical and Corporately Responsible company. We might therefore conclude that both the financial and non-financial evidence as presented supports the view that B0dy Shop is a well-run business and has a sensible strategy that will allow it to expand. Comments updating Body Shop’s Position Without comparative data, however, it is impossible to make much more of an analysis or draw conclusions from the business.We know that the case ends in 1995/6 and that about ten years after this, the firm was sold t o L’Oreal, a very large, French-based cosmetics producer. This caused some controversy as it was not clear if L’Oreal still tested products on animals (they do) and if so, how such a principled owner as Anita Roddick could sell out to a large corporate that seemed to embody many of the things she had supposedly dedicated both her personal and professional life to fighting. However, the sale went ahead and the business has been part of the French company now for 7 years.Today (2011) it has expanded to 2,748 stores, of which 1,639 (59%) are franchised. This is interesting as it tells us that the proportion of franchised stores has fallen since 1995, even though the number of stores has more than doubled in 16 years. This would indicate a change in strategy, but it is not clear whether this was pre or post the L’Oreal takeover. Finally, in order to look at Body Shop in comparative terms, I prepared data for them and a number of rivals, which is presented below. | | Revenue ? billion| EBITDA ? million| EBITDA %| Net profit? million| Net Profit %| House of Fraser| | 0. 596| 36. 8| 6. 7| 8. 2| 1. 3| Debenhams| | 2. 112| 189. 7| 8. 98| 97. 0| 4. 6| Boots| | 23. 330| 1,444. 0| 6. 17| 221. 0| 0. 9| Marks and Spencer| | 9. 50| 852. 0| 9. 00| 523. 0| 5. 5| Tesco| | 60. 93| 3,810. 0| 6. 25| 2,670. 0| 4. 4| Body Shop| | 1. 01| 144. 4| 14. 2| 41. 2| 4. 1| McDonalds| | 15. 06| 4,670. 6| 31. 0| 3,093. 1| 20. 5| I chose data for several large retailers, like Tesco and M&S who sell at least comparative products to Body Shop, House of Fraser and Debenhams because they sell higher level products and McDonalds as the most obvious franchiser example.Regarding the large retailers, although Body Shop remains a small business, internationally speaking (just about ? 1 billion in turnover), its net profit margins are at the top end of those of its retailing rivals, but fall well short of its main franchise rival. My conclusion which I made at the end of question 2â €™s answer – that I am sure the impact of the ethical stance affects the performance of the company – is thus thrown into some doubt, but it would need much more research into the comparative financial data in order to prove or disprove this view.