Body Shop battles to repair battered margins

[LONDON] Remember 1992? A Clinton was campaigning for the White House, Britain was arguing about Europe, and The Body Shop could do no wrong, introducing its best-selling "body butter" and opening stores at a fevered clip, driving its London-listed shares to record levels. Fast forward to 2016, and things look similar for the Clintons and Britain. For The Body Shop? Not so much.

Sales are stalling as a host of new competitors elbow their way into the "green cosmetics" market, and Body Shop's operating margin has narrowed in each of the last three years, reaching a seven-year low in 2015. The chain is the worst-performing business of its owner, L'Oreal, which bought it in 2006 for 652 million pounds (S$1.26 billion).

The brand "has been a major disappointment," says Sanford C. Bernstein analyst Andrew Wood. "We do not expect any major change in the foreseeable future." Jean-Paul Agon, L'Oreal's Chief Executive Officer, has pledged to fix the unit, saying sales growth should accelerate this year. That effort is being led by Jeremy Schwartz, who moved from running L'Oreal's UK business in 2013. The third executive to try to transform Body Shop in the past decade, S

Mr Schwartz has reoriented the business around skincare, introducing new products such as Drops of Youth creams and lotions and hiring uniformed consultants to advise customers about products that suit their complexions. And he's added more expensive ranges such as Spa of the World Hawaiian Kukui cream, which costs 23 pounds - 9 pounds more than the company's regular body butter.

Mr Schwartz says he wants to establish the retailer as "the world's most ethical and sustainable global business" and win a new generation of customers. In February, Mr Schwartz, a marketing veteran of Coca-Cola Co and British grocer J Sainsbury, outlined a 14-point plan through 2020, committing The Body Shop to doubling, to 40, the number of ingredients it sources from small communities, planting trees, patrolling forests and using more environment-friendly packaging, including some made from recaptured methane, a key cause of climate change.

"Globally, we see that customers are looking for natural products," says the 53-year-old, who last year visited the Amazon in search of new ingredients such as the Jarana nut, which Body Shop is currently testing. "Our brand is highly relevant."

The Body Shop burst onto the scene in 1976 as a more natural and ethical alternative to mainstream cosmetics. Founder Anita Roddick, who died in 2007, pledged not to test products on animals, used natural ingredients such as tea tree oil, and burnished the company's green credentials by encouraging customers to return plastic bottles for refills.

These days, it's harder for The Body Shop to stand out. Rivals such as Lush, The Body Deli, Skin & Tonic and Fresh make similar claims and are benefiting from growing demand for natural-beauty products containing fresh ingredients. And big drugstore chains such as Walgreens Boots Alliance also offer their own "green" cosmetic lines.

Though Body Shop has grown from 2,657 stores in 2011 to about 3,300 in 65 countries, it "has struggled to get its message across in an increasingly crowded marketplace," says Charlotte Libby, an analyst at researcher Mintel. Sales reached 967 million euros in 2015, or 3.8 per cent of L'Oreal's total. That's an average growth rate of just 2.6 per cent a year since 2007, about half the pace of L'Oreal's sales expansion in the period. Last year's operating margin was 5.7 per cent, down from 8.1 per cent in 2007.

'Lashings of Shea' Bernstein predicts like-for-like sales will increase 1 per cent or less a year through 2018, versus annual growth of more than 4 per cent at L'Oreal in the period. Body Shop looks like "the worst sizable deal L'Oreal has done," says Deborah Aitken, an analyst at Bloomberg Intelligence. Skincare retailer Kiehl's, by contrast, has grown at a double-digit pace since L'Oreal bought it in 2000.

Mr Schwartz's pitch sounds promising - consumers are clearly shifting toward greener cosmetics, and the company's skincare sales have been expanding at more than 10 per cent annually since he took over - but then so did his predecessor's. In 2011, Body Shop announced plans to redesign its stores and packaging. New products like Chocomania bath and body care (featuring "lashings of shea and cocoa butter and 11 other feelgood community trade ingredients") helped spur sales in 2012, but the boost was short-lived.

Offering body scrubs enriched with organic, fair-trade argan oil and talking up sustainable credentials may not be enough to get people buying more, according to Nicholas Micallef, an analyst at researcher Euromonitor International. Consumers are seeking cosmetics that promise dermatological benefits, and Body Shop is focused more on its environmental message, Mr Micallef says. Buyers "want skincare solutions," he says. "Just having natural products isn't good enough."

BLOOMBERG