The Body Shop: Anatomy of the current market.
With the challenging economic environment from high-interest rates, supply chain and cost pressures and reduced consumer demand[i], it is no surprise that insolvencies in the UK continue to be so high. The January UK statistics[ii] show 1,769 firms being declared insolvent and in the last two years, this monthly figure has routinely been 1.2-1.5x times above the pre-pandemic average. In 2023, corporate insolvencies hit a 30-year high in England and Wales[iii][iv].
That backdrop has been particularly testing for the retail trade sector[v] – further affected by e-commerce trends and the post-pandemic hangover. In the past couple of years, we’ve seen homeware retailer Wilko[vi], stationery-and-gifts-retailer Paperchase[vii], retro retailer Cath Kidston[viii], and fashion retailer M&Co[ix] falling into administration. For short commentary on many of these names, check the Centre for Retail Research’s Who’s Gone Bust in Retail? site.
The latest retail shelves to fall and the article’s centrepiece is ethical-beauty-retailer The Body Shop.
About The Body Shop
In 1976, Anita Roddick founded the company in Brighton, southern England. She used ￡4,000 to open a small stand-alone shop of natural-ingredient cosmetics and personal care products to support herself and her two daughters while her husband spent two years riding horseback from Buenos Aires to New York.
By the time Dame Anita Roddick sold her company to L’Oreal in 2006, The Body Shop had around 3,000 stores and operated in more than 60 countries.
A fitting story for March that spotlights the capacity and ingenuity of remarkable women. In case that introduction captivated you, read more here and here, and her obituary here.
If you think you're too small to have an impact, try going to bed with a mosquito. – Anita Roddick
Valuation evolution
Deconsolidation from Natura
Despite its historied origin, the past 15+ years haven’t been kind to The Body Shop, and in the past five years, the challenges have intensified tremendously.
At the macro level, the triple crisis from Brexit uncertainty, Covid-19 store closures, and the Russian invasion of Ukraine created a hard-to-navigate environment, more so in the UK.
At the sector level, competition has become fierce through e-commerce, direct channels, and digital marketing. This is best exemplified by the pre-tax profits of the 150 largest UK retailers having halved in the past 10 years.
More so, although The Body Shop was a trailblazer in the ethical products space, this is no longer the niche market they created. Lush and L’Occitane have assertively moved into that space and even Boots and supermarket chains now offer natural and sustainable beauty ranges.
Diane Wehrle, retail expert from Rendle Intelligence and Insights, has sentenced[xi]:
The Body Shop hasn't actually deteriorated but it hasn't moved.
… for younger people, it is now the brand of their mum.
All in all, between 2019-2021 yearly revenues neared ￡500 million while in 2022 revenues dropped by 16% to ￡408m and the Q3-2023 results anticipate a further 13% drop.
The 2023 full-year results are planned for the 12th of March.
Many arguments explain this performance decrease and are well articulated in the links peppered throughout the article. The most The Body Shop specific is that the company prioritised their activism and campaigns over operations and the evolving consumer landscape.
The transcripts of the quarterly earnings calls from L’Oreal and Natura also suggest that The Body Shop might have been relegated to a second-tier citizen. Under the French group revenues and EBIT from The Body Shop represented less than 1% of the consolidated positions. It was a stronger contributor to Natura with 10-12% of revenues but as the group admitted “it did not have the retail expertise to revive the retailer across the globe”.
Into administration
The Body Shop was sold to private equity group Aurelius and the acquisition from Natura was finalised in November 2023. Despite initial optimism about sustainable growth under the Private Equity group, The Body Shop went into administration in February 2024.
The fact that the Sep-23 account fillings highlight the “going concern” status with expected positive cashflows even under stress scenarios will certainly be a bad look.
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More so, The Body Shop took out a series of loans from Aurelius making the latter both shareholder and creditor. These loans seem to be secured against the company’s most valuable assets including its
Meaning Aurelius would have a priority claim over them and exemplify the aggressive playbook in private equity.
As of now, The Body Shop is preparing to close almost half of its 198 UK stores. Seven stores will close immediately including sites on London’s Oxford Street and in Canary Wharf.
Conclusions
The retail sector is currently navigating a challenging landscape with a stark divide between companies moving to a post-pandemic recovery and those struggling with financial and operational difficulties. Escalating costs in logistics, utilities and labour, coupled with a complex macro environment exert significant pressure on the industry.
The interest coverage ratio (ICR) has deteriorated markedly. From the pre-pandemic era to 2021, the global proportion of Wholesale and Retail firms with an ICR below 1 has surged from 13.5% to 52% [xii].
The Body Shop's situation reflects this trend, with the company facing challenges similar to those of Wilko, a former household name that has struggled to adapt to evolving consumer preferences. Many of these struggles are partly attributed to potential management missteps and highlight the role of effective leadership.
Moreover, the rise of alternative financing through non-bank institutions introduces both opportunities and risk. While competition in financing is beneficial, there are concerns about exploiting covenant-lite deals or weak governance structures and extracting value at the expense of market stability.
This is very much a developing story at the moment, so let me know what you think will happen and what product you wish survives the administration - some ideas below. In my case, I'm rooting for Stakeholder Capitalism and the cactus body brush.
[i] Consumer trends, UK: July to September 2023 link
[ii] Company Insolvency Statistics Releases link
[iii] Corporate insolvencies hit a 30-year high in England and Wales in 2023 link
[iv] Number of medium and large retail companies failing in the United Kingdom (UK) from 2007 to 2023 link
[v] Data reveals retail sector accounted for 19% of UK administrations in 2023; which retailers closed link
[vi] [Aug-23] Wilko in administration: information for employees and creditors link
[vii] [Jan-23] Paperchase: Tesco buys stationery brands but not its shops link
[viii] [Mar-20 and Mar-23] Cath Kidston to close all 60 UK stores with the loss of 900 jobs link and Retailer Next buys Cath Kidston in ￡8.5m deal link
[ix] [Dec-22] M&Co plunges into administration link
[x] It was listed in the Unlisted Securities Market. This was a stock exchange set up by the London Stock Exchange link and later replaced by the better-named Alternative Investment Market.
[xi] The Body Shop: What went wrong for the trailblazing chain? link
[xii] Share of company debt with interest coverage ratio less than one worldwide from 2019 to 2021, by sector. Link
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8 个月I hope their shower gel survives, it is great! Unfortunately their products are very expensive and they are not really that different from anyone else these days. They were nice for Christmas presents. Another great brand goes down the pan :(