L’Oreal mulling €1bn sale of struggling Body Shop

French cosmetics giant L’Oreal is considering a €1 billion sale of The Body Shop, the struggling ethical British skincare firm it bought for £652 million about a decade ago.

The Financial Times reports that L’Oreal has appointed financial advisory Lazard to review options for the unit, with an outright sale earmarked among the “most likely outcomes”, according to two people familiar with the situation. Private equity houses are among the likely suitors, it’s thought.

The Body Shop was founded in 1976 by the late Dame Anita Roddick. With its use of natural ingredients for beauty products, it was a high street success, with rapid expansion following its launch.

But recent times has seen the unit - which still has more than 3,000 stores around the world and employs more than 20,000 people - face some difficult challenges, with sales underperforming when compared to L’Oreal’s overall performance. The Body Shop posted sales of €600 million for the first nine months of last year; in the same period, L’Oreal made €19 billion.

L’Oreal is set to publish its 2016 annual results this week when it is widely expected to confirm it is exploring the future of its retail unit.

Some analysts think The Body Shop’s woes are down to L’Oreal’s leadership and, should it be sold, could well be revitalised.

"They [L'Oreal] are trying to get rid of it because it's underperforming,” Warwick Business School’s Professor John Colley told BBC News.

“But anyone bidding will see a clear turnaround. Independent ownership would probably serve the firm well. A refreshed image would almost certainly work.”

Harsha Wickremasinghe, associate at Livingstone, comments: "It is surprising that an owner of the magnitude of L’Oreal has failed to capitalise on the potential The Body Shop had. However, L’Oreal's strengths lie in developing and nurturing brands, not as a retailer operating a sprawling store estate. Whilst it represents a small sales contribution to L’Oreal, it will undoubtedly be a source of frustration for the cosmetics giant that they could not drive the business forward in the way they anticipated when they acquired it in 2006."

Previously viewed as an innovator, The Body Shop has lost its way in recent years. The messaging is mixed, the product proposition is not compelling enough and its stores lack inspiration and the retail theatre that is required to draw shoppers through its doors. Unsurprisingly, the competition has become fierce in recent years with rivals such as Lush boasting a stronger proposition whilst effectively communicating its strong ethical stance to their customer base.

Wickremasinghe added: "Furthermore, The Body Shop is heavily exposed to the UK, one of the most competitive beauty markets globally. Whilst its brand equity is flagging here, it is still well regarded overseas - particularly in Asia. As a result, there is a significant opportunity for a new owner to drive growth across this region.

“Maintaining such a cumbersome store estate in a sector where consumers are rapidly shifting online is difficult to justify in the long term. I expect a new owner could look to slim its UK store portfolio and divert a significant share of marketing spend to reinvigorating sales online."

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