The Future of The Body Shop and its International Franchisee Network

Background

The Body Shop was founded in Brighton, England in 1976 by the late Dame Anita Roddick and the shop soon found success by championing its ethical products and taking a strong stance against animal testing. By the 1980s, The Body Shop was the go-to brand in the UK for ethical skincare and cosmetics, with its colourful stores emitting fruity scents attracting customers of all ages. The business quickly grew from its humble beginnings, expanding internationally using a franchising model and the group floated on the London Stock Exchange for £80 million in 1984. The brand continued to experience international success throughout the 1990s and beyond. 

So where did things go wrong? The difficult trading conditions and weak consumer spending experienced by the retail sector in general over the past few years have undoubtedly played a part. The impact of this has been exacerbated by the fact that while many of its rivals trade extensively or exclusively online, many of the elements of The Body Shop’s business that appeal to its customers such as refillable stations and a sensory shopping experience cannot be easily replicated online. With the "TikTok generation" preferring to shop by e-commerce channels, any rescue plan for the brand will need to consider how it will appeal to the new generation of shoppers. This is particularly important in jurisdictions such as China, in which The Body Shop’s entire operations are online – as discussed in more detail below. 

Another challenge The Body Shop has faced is that the ethical, sustainable and animal cruelty-free credentials it became famous for used to be key differentiators from other brands. Many customers however now expect these qualities across of a variety of the products they use, including beauty and cosmetics products. This means other brands in the sector have focused on developing products with these credentials, with the global market value for natural cosmetics and personal care expected to reach roughly $59 billion by 2031. The Body Shop now has more competitors than ever before, and will need to establish new differentiators to set itself apart in the market. 

Frequent ownership changes over the last seven years may also have contributed to its financial struggles. Dame Anita Roddick sold the business to L’Oréal in 2006, a move which garnered criticism at the time with concerns that a sale to such a huge company meant The Body Shop was moving away from its ethical roots. L’Oréal operated the brand for over a decade, before selling it to Brazilian cosmetics company Natura in 2017 for £880 million. Six years later Natura sold The Body Shop to private equity giant Aurelius for just £207 million. 

Given the challenges highlighted above, we hope any rescue package for The Body Shop will bring stability and a clear direction for the brand in order to revive its previous successes. The Body Shop is, at the time of writing, still trading (albeit with some closures and challenges already materialising), with further corporate store closures and staff redundancies planned by the various administrators. As of yet there have been no details of any rescue packages released, and the impact on its franchise network (if any) is unknown.  

Franchise Network

The Body Shop entered into its first franchise partnership in 1978, and has since grown its franchise network to over 30 head franchise partners across Europe, the Middle East & Africa, Latin America and the Asia-Pacific region, with approximately 1,600 franchise branches and 1,000 corporately owned stores Worldwide (prior to the recent store closures). 

Current media speculation regarding the insolvency of certain parts of The Body Shop’s business is that the group’s franchise network will not be impacted. Even if the Body Shop’s franchisor entity is not a subject to insolvency proceedings itself however, there is likely to be knock-on effects, as considered below. 

Franchisee termination rights

Whether the insolvency of The Body Shop’s franchisor entity (or entities within its group of companies) enables its franchisees to terminate their franchise agreements depends on the contractual terms. In contrast to 'typical' commercial contractual agreements which often entitle a party to terminate the agreement if the other party becomes insolvent, it is not market standard for a franchise agreement to give a franchisee the right to terminate due to the insolvency of the franchisor or one of its affiliates. Even if The Body Shop’s franchise agreements do allow a franchisee to terminate in the event of insolvency, in many territories local law will prevent a company from terminating a contractual agreement on the basis of the other contracting party’s insolvency, leaving it up to the appointed insolvency practitioner to decide whether or not a contract should be terminated for the benefit of the creditors of the insolvent party. 

In any event, given the capital expenditure involved in establishing and operating a franchise business, in particular a retail based franchise, we would expect many franchisees will want to continue operating their franchise business (even if they do have termination rights) in order to give the franchisee the best opportunity to generate a return on the initial and on-going capital investment. That said, if the group’s financial uncertainties begin to impact The Body Shop’s franchise network and/or supply chain, franchisees may of course take a different view. 

Disruption to product supply 

The supply chain of The Body Shop’s franchisees may also be impacted. In many franchise relationships, the franchisor or a member of its corporate group supplies the franchisee with the branded products that the franchisee sells in its stores – in order to ensure consistency in product quality, branding etc.  If the entity supplying franchisees with The Body Shop products is one of those subject to insolvency proceedings, the franchisees may experience issues or delays in the supply of products if, for example, the relevant The Body Shop supplier entity is unable to pay its own upstream raw materials or product suppliers, manufacturers or logistics providers. If the entity supplying The Body Shop franchisees with products is not one that is subject to insolvency proceedings itself, media reports indicate that cash pooling practices across The Body Shop group may still cause cash flow issues in trading parts of the business.  

Some franchisors grant franchisees the right to purchase products directly from approved third party suppliers. In these circumstances, the franchisor entity is also likely to be a customer of the relevant supplier, and if that franchisor entity or one of its affiliates is subject to insolvency proceedings, such third party suppliers may have difficulty recovering payments due to them and therefore experience cashflow issues themselves. If third party suppliers are trying to recover payment from certain The Body Shop companies who are their customers they may be hesitant to supply affiliates or franchisees of such customers in order to limit their exposure to bad debt, or require preferential commercial terms which could exacerbate existing cash flow issues.  

Impact of potential rescue packages

It is too early to say what any rescue package for the insolvent parts of The Body Shop’s group will look like – and indeed there may be more parts of the business that enter into administration. A buyer for the group as a whole could be found, however ultimately administrators are required to focus on generating as much value for the business in order to return funds to the various creditors. As we have seen with many high street brands who have entered insolvency proceedings over the past few challenging years, rescue packages for The Body Shop may be limited to offers for the group’s intellectual property rights ("IP rights") and its products and stock only – excluding the other parts of the business such as some or all of the bricks and mortar stores. This could mean that, in some markets at least, The Body Shop becomes a brand that is sold exclusively online, or by a multi-brand retailer.  

The future impact of this on the brand’s franchise network is unclear – at the moment we consider it unlikely that a purchaser of The Body Shop’s group or its IP rights would seek to terminate or otherwise disrupt a successful franchise network, however this will ultimately depend on the nature of any rescue package and the new owner’s own corporate plans.

Impact on The Body Shop’s brand

Depending on the nature of any rescue package agreed for the affected areas of The Body Shop business, there may also be an impact on The Body Shop’s brand value and its reputation. For example, multiple staff redundancies across numerous different territories may negatively impact the public’s perception of the business and it’s true that closing down sales can have a chilling effect on how products are perceived. Realistically though, whilst the administration may surprise or shock consumers, they are likely to understand the context behind these events given how tough the retail market has been in recent years. The brand legacy and commitment to product quality and ethics works very much in The Body Shop’s favour to allow the brand to ride through this difficult period. Any negative brand impact resulting from the administration is likely to be limited and also restricted to the impacted markets rather than the international franchise network as a whole. Indeed we’ve often seen a renewed wave of consumer love and affections for iconic brands which find themselves in distress, as consumers aren’t ready to let go and see the brand disappear entirely. 

Intellectual Property 

When a business faces commercial difficulty, the main priority is to rescue it, keep trading in some form, pivot operations or get the best deal possible for what’s left behind. This is understandable – the essence of a business is that it provides products or services – but in situations like this, the intellectual property considerations are often left behind. As noted above IP rights can be some of the most valuable assets of a business, especially for companies with a strong brand legacy. The brand value derives from the years of success, the growth and the reputation which has been built. However, when a business goes into administration (especially when the rescue is a challenge and there’s no buyer on the scene) the IP can be forgotten and remain registered to a dissolved company. IP rights which remain in a UK registered company at the point it is dissolved are deemed to be ownerless property, and ownership of any UK rights reverts to the Crown. It is possible to recover these IP assets but it is difficult to have a great deal of control over the process, it can take a long time to recover marks from the Bona Vacantia Division and financial consideration of £1000 must be paid per mark which can make the exercise very expensive for a large scale portfolio. Post-Brexit, EUTM registrations owned by dissolved UK companies have also entered a strange twilight zone – no longer recognised by the UK Bona Vacantia Division as a UK based asset over which they have control but equally lacking any public body at EU level capable of assisting in their recover. This makes the recovery of a portfolio complicated and the process is on the whole unsatisfactory: it certainly doesn’t allow the value of IP assets to be easily realised.

As a result, IP assets should be given due care and attention before the company is fully wound up and a strategy should be put in place on where the IP is going to sit once the dust settles. For a large international brand like The Body Shop, IP rights might not all be consolidated within one IP holding company – it’s common, due to the way brands expand internationally and largely in response to opportunities which arise organically, for IP ownership to be fragmented across the group. If a buyer is found for the business in the ‘distressed’ territories then they can take over the IP ownership – but that’s a difficult proposition where the brand continues to trade in other territories. That situation has the potential for the brand to start to look and feel very different across the world, which can be difficult conceptually for the remaining successful territories and can also create consumer confusion, diluting the overall strength of a brand. Where assets are bought outright, it’s also very difficult (if not impossible) for the remaining international businesses to impose restrictions or controls on how that brand should be used going forward – the best outcome is finding a purchaser who is aligned on the values of the business. This loss of control can be tough to deal with, and third party use which doesn’t align with the same strong commitment to ethics and sustainability could create wider brand damage in other territories.

Consideration should be given therefore whether any existing arm of an international business which will continue to trade can buy out the IP assets of the businesses at risk, even moving them into an IP holding company for safekeeping. This would allow the remaining international business to retain control and ownership over the IP assets, either then using the brand via an online only offering in key markets, or potentially licensing third parties to use the brand on a long term basis or for well-timed marketing activations and collaborations. Licensing can be an attractive option if the business has the infrastructure to handle the relationship or can work with a third party licensing company to run it: it creates an ongoing revenue stream and means the company retains controls over the brand. 

So what happens if a buyer can’t be found and the business doesn’t want to retain the IP? Is there a marketplace for brands where IP rights can be sold? Sadly not, though the US has dipped a toe into the water with IP rights auctions. The issue with an auction is you can’t control the buyer – or the final price – and there is a perception that if it’s at auction, the interest in the brand must not be that high (and therefore the value of the IP rights must be low). Brands therefore have to rely on professional networks to seek opportunities, go to market with an offer, speak to IP finance professionals to assess the value of the IP, and entertain brand licensing companies to see who in their client lists might be interested in buying the IP assets. 

Impact on the Asia-Pacific Market 

The announcement that the UK arm of The Body Shop was placed under administration not only came as a shock to investors and consumers in the UK, but also to people in the Asia-Pacific markets where The Body Shop brand is very well regarded. However, while the brand is uniform across the world there are important legal differences as to what the future may hold for The Body Shop brand arising due to different local laws and legal structures under which The Body Shop has been operating in different parts of the world.  The outlook is therefore currently unclear.  

According to the latest news at the time of writing, The Body Shop’s Singapore franchise for instance is not affected by the UK, EU and North American businesses entering administration, and all 30 stores in Singapore remain open.  The Body Shop in Malaysia is a head franchise market and is not affected either. The same applies for India where the outlook seems to be more optimistic with plans to continue its expansion of and focus on omni-channel operations, while leveraging newer opportunities in retail, quick commerce and high convenience formats. In mainland China, The Body Shop is still selling through cross-border e-commerce platforms but does not have any bricks and mortar stores.  What will happen to the bricks and mortar stores in Hong Kong and Macau remains to be seen.  

While it is too early to tell exactly how things will pan out for The Body Shop in the Asia market, in our view there are several possibilities if the operations in the Asia-Pacific markets experience protracted decline and are or become as loss-making as the brand’s troubled UK, EU and North American operations:  

1. Firstly, going into administration (or filing for bankruptcy in some countries) under which the appointed administrator restructures a country’s business. This may include a sale of the business to a new operator, cutting costs via certain store closures, staff redundancies and/or the renegotiation of contracts with landlords and suppliers or even changing the brand and its position in the marketplace. This is a move aimed at saving the business from liquidation or collapse, something which is currently taking place for the UK and EU parts of the business who have initiated administration proceedings. 
   
   
2. Secondly, if restructuring under administration or bankruptcy proceedings fails, then the brand is likely to go into liquidation under which the entire business will be wound up, assets liquidated and secured creditors paid out ahead of unsecured creditors from the proceeds of such liquidation. This is what has happened to The Body Shop’s operations in the US and Canada.   
   
   
3. Thirdly, separate from going down the path of administration or bankruptcy proceedings, the owner of The Body Shop may choose to sell any of its Asia businesses to an interested buyer, as they have previously done for Japan - Aurelius (owner of The Body Shop) sold off The Body Shop’s loss-making operations in most of mainland Europe and parts of Asia to an international family office.  The Body Shop’s Japan business was part of this deal.   This can be a good move if eliminating the loss-making subsidiaries can help the group owner to best use its financial resources on other subsidiaries with more promising future in the Asia market.  
   
   
4. Finally, as the least disruptive option, subsidiaries in the Asia market will possibly undergo some degree of restructuring regardless of the outcome for other areas of the business, such as cutting costs via store closures, job cuts and other cost control measures while adjusting or refocusing its strategy to drive growth within the business particularly across its digital channels.  This may help to improve the P&L of the subsidiaries in the Asia market with a more “lean” assets model as well as increasing revenues through online sales channels.  

Conclusion 

The Body Shop currently operates around 2,500 retail locations in more than 80 countries and has over 30 head franchise partners around the world, including in Asian markets such as Singapore, India, and Malaysia.  

As things currently stand, our projection is that the impact of the administration proceedings on The Body Shop’s global franchise partners or franchise businesses in the Asia-Pacific markets is likely to be limited to reputational damage to the brand and some supply chain disruption.  The essence of franchising is that the franchisor authorizes a series of business resources, for instance trade marks and other proprietary technologies, to the franchisee in the form of a contract, and the franchisee operates according to a unified business model and in return pays royalty fees to the franchisor.  Therefore, whether the potential franchisees are confident about the brand and its business model are crucial in relation to their buying into the franchise business.  The administrators from FRP in respect of The Body Shop’s UK operations are of the view that relationships with key franchise and wholesale partners in Asia-Pacific, the Middle East and Europe would be “a cornerstone of future success” of The Body Shop.  We also believe the success of the franchise business of the brand plays a significant role in the future survival and success of the brand in the Asia-Pacific markets and beyond.      

The Body Shop’s success in the past was based on its distinct brand identity, with its focus on natural ingredients and fairtrade products being at the core of its marketing, making the brand ahead of its time. However, in recent years it has fallen behind the many other competitors operating in the market that replicate some of the essential ingredients of The Body Shop’s brand image.  Therefore, for the brand to survive, it really needs to go back to what made it different in the first place and re-position itself in terms of market, brand image, products (including price) and the different business strategies it can use to get its products to market. As founder Dame Anita Roddick once said – "If you do things well, do them better. Be daring, be first, be different, be just." If The Body Shop can embrace that attitude, we have every reason to believe it can survive and thrive.