Australian Financial Review
Sydney, Australia
December 18, 2002

Body Shop's Packaging Starts to Unravel

Author: Jon Entine. Jon Entine [http://www.jonentine.com] is an independent writer, scholar-in-residence at Miami University (Ohio), and an adjunct fellow at the American Enterprise Institute in Washington, DC.

As the Body Shop International's stock craters, questions abound whether the ethical and financial problems of the parent will be visited upon Body Shop Australia. Jon Entine reports.

Anita Roddick can expect a lump of coal in this year's Christmas stocking. The erosion of the financial prospects of Body Shop International the company she founded 26 years ago appears to be accelerating, its stock losing a third of its value in the past two months in anticipation of another dismal, underperforming holiday season.

Touted a decade ago as the "shares that defy gravity", Body Shop has long since rediscovered Newton's Principia, plummeting from 372 pence to near 70p, a loss in valuation of more than GBP500 million ($314million).

It's a long way from the days when Roddick was being hailed as the "Mother Teresa of Capitalism".

Back in 1994, she was in San Francisco to open a freshly-minted Body Shop yet another franchise in what is now a 50-country, 2,000 shop chain, with 70 franchises in Australia.

It was morning and the scent of patchouli filled the store. But the crowd was more Britney than bohemian. Girls in designer jeans chattered on purple cell phones, standing painted nails-to-painted nails beside mums with Gucci bags. It could have been any Body Shop from Tokyo to Sydney.

Corporate executives? "Robber barons," Anita hissed. (Everyone calls her by her first name.)

Investment bankers, who had helped make her wealthy? "Blood-sucking dinosaurs." Rough words but delivered with sincerity. There is a magnetic force about her. Charisma.

It was still the best of times, with the media lauding her as a trail-blazing feminist who packaged politically correct causes in jars of facial cream. "I'd rather promote human rights, environmental concerns, indigenous rights than promote a bubble bath," she gushed. Here was a harbinger of the New Age, weaned on can-do chutzpah and do-right rhetoric. It was impossible not to notice that Roddick was framed by shelves of Body Shop bubble bath, fourteen varieties.

The soap bubble has long since burst. That franchise is now gone, along with 200 others in the United States and the United Kingdom that have folded or been taken over by the British-based multinational. Body Shop International has eked out meagre operating profits in recent years, earning GBP26.7million on turnover of GBP400.7million in 2002.

"On an ongoing basis, it is barely profitable," says Matthew MacEachran of Investec Henderson Crosthwaite in London. "Their extraordinary expenses, reorganisation charges, and costs of acquiring failing franchises have become recurring and commonplace."

As the accounting saying goes, "profit is opinion, but cash is fact". In that regard, Body Shop is in precarious shape. Store profits and earnings per share, in decline since the mid-1990s, are sinking fast.

In Britain and America 60 per cent of its business profits fell nearly 25 per cent last year. "They haven't had positive net cash flow for more than five years," says John Stevenson of ING Barings Charterhouse. "They've pissed away more than GBP110million."

In August 2000, Roddick tacitly acknowledged the depths of the problems, deriding her creation as a "dysfunctional coffin". It was an odd comment as she and husband Gordon were desperately searching for a suitor to take the damaged goods off their hands. Not surprisingly, only bottom feeders expressed interest. After talks collapsed early this year, and facing grim prospects, the Roddicks announced that they were reducing their management roles once again. They installed yet another executive team on a short leash, the fourth corporate makeover in a decade.

"As an innovative leader and growth company," says Stevenson, "they're a dead concept."

Australians may be shocked at the turn of events at Body Shop, whose problems have gone unreported in the local press. According to University of Technology sociologist Eva Cox, now verifying her third "social audit" of the Australian franchises, employees retain a positive view of the company. "It's a young, female, energetic, healthy culture."

Graeme Wise, who owns most Australian shops, seems "passionate about doing the right thing". Wise took control in 1999 after what insiders say was a bitter divorce from long-time business partner Barrie Thomas, who now owns 17 New Zealand franchises.

Is this a tale of two inextricably linked but different cultures the once idealistic but now bumbling British parent and the younger, still enthusiastic Australian progeny?

It's not clear if Australia suffers the grinding declines experienced by franchisees worldwide. Wise refuses to disclose the finances of his privately owned franchises other than to say that they are "performing well". BSI has not broken out Australasia data since 1998, when the region turned a profit of GBP1.8million on sales of GBP33.8million, 5 per cent of worldwide sales.

While Body Shop is moving to a company-owned business model in its largest markets, most shops in smaller, less lucrative markets like Australia are run by franchisees.

From the company's earliest days, franchising appeared to be the goose that laid the golden egg. According to Roddick's autobiography, Gordon realised that the best way to expand was through "self-financing".

He all but gave away shops at first, positioning Body Shop as a low-risk wholesaler supplying franchisees who shouldered the start-up costs.

Body Shop thrived on the idealism of young women like Anne Downer, a Brit living in Singapore. On a visit home in 1981, Downer wandered into a Covent Garden shop and fell in love. "I thought Anita was quite a maverick. I liked her wacky sense of `let's do it differently'." The 22-year old hopped on a train to headquarters, eventually coming away with rights to eight Asian countries for a few hundred pounds.

Body Shop had a guaranteed outlet for wholesale products. It gradually jacked fees, pocketing hefty chunks of franchisee's investment. (US franchisees now pay as much as $US774,750 ($1.4 million) plus a 5 per cent sales royalty.) But as competition intensified, margins shrank. At first, BSI felt little pain for it continued to profit from expansion. But it was not long before often naive entrepreneurs, leveraged to the edge, realised they were at the mercy of a multinational company with its own agenda.

Over the past decade, franchisee blow-ups and suits have erupted throughout the world, except for Australasia. In 1995, Downer collected $US6.2million to settle a dispute after BSI occupied her Singapore stores and snatched her Asian franchise rights. It tried to force her into bankruptcy on Christmas Eve, which the courts denied. It paid $US878,900 to its former Norwegian head franchisee, who alleged breach of contract. Gordon agreed not to contest charges filed in an Israeli court accusing Body Shop of libel and kowtowing to the Arab boycott, which led to it being stripped of the right to operate in Israel.

"Body Shop may be a great platform for Roddick's whims, but as a business model it just doesn't work for most franchisees," contends Lyn O'Donnell, a British franchisee who settled a fraud suit against BSI for GBP301,000 in 1998.

All told, Body Shop has paid out more than GBP100million to settle 14 franchisee suits and buy out dissident franchisees and is on the verge of settling a US class action. Although details in each case are different, franchisees broadly contend that financial problems reflect deterioration in BSI's operating ethics. Product supply and quality of its cosmetics, which franchisees must source from the parent company, top their list.

Unlike premium firms that pitch themselves as natural, Body Shop relies on bright colours and heavy scents petrochemical laboratory creations. This is in direct contrast to its claims of being environmentally friendly. A spokesman responds that its products are "inspired by nature".

Choice magazine rated Body Shop's moisturiser and shower gels high but panned a shampoo, also noting its high cost. "Low-end at a premium price," sniffed America's Women's Wear Daily. Its eye gel came under attack from US Consumer Reports, which noted that chemical fumes that irritate the skin create its cooling sensation. The eye gel, moisturiser, and baby cream were the subject of scathing exposes by German consumer magazine Oko-Test (Green Test), which found cancer-causing formaldehyde. The investigating scientist said the formaldehyde resulted from overuse of synthetics to control system-wide bacterial contamination. "Their products are filled with bugs," says Dieter Wundrum, who later became a consultant for Body Shop before quitting in disgust.

Quality control has been a persistent problem. Its pumice foot scrub was regularly contaminated, according to BSI's founding cosmetologist Mark Constantine, a finding confirmed by managers and internal company memos. The US Food and Drug Administration cited Body Shop for eight health violations in 1993 after employees complained that it suspended standard microbiological procedures to pump production before Christmas. The company shipped and sold hundreds of bottles of contaminated banana shampoo before getting wind of the FDA investigation.

Body Shop claims it has put such problems in the past. But just last December, Denmark's Green Guide blasted its two best selling cosmetics for containing chemicals that it labelled "poison".

Roddick's reputation for charitable giving has also stirred resentment among franchisees, who often give generously in time and money but see the head office garner credit. Roddick has crowed that she "gives most of our profits away". But BSI didn't contribute to charity over its first 11 years and did not increase donations to average corporate levels until a wave of negative publicity in 1994.

Controversy has centred on its "Trade Not Aid" promotions, particularly its sourcing of Brazil nuts. The former face of this promotion, a Kayapo Amazon chief, successfully sued for exploiting his image. University of Chicago anthropologist Terrence Turner ridiculed its initiative as a gimmick, calling it "Aid Not Trade" aid by developing peoples to Body Shop with no real trade in return. Survival International's Stephen Corry, who once partnered with Body Shop in the Amazon, goes so far as to characterise the company as "sleazy" and "no more ethical than a heap of beans".

Much of Body Shop's good press flows from its reputation as a pioneer in social accounting, in which companies self-report social, environmental and financial performance. Here the story is mixed. A Financial Times survey ranks it second among companies for managing environmental resources. But questions linger. BSI has quashed at least two environmental audits after embarrassing problems turned up.

"I visited the plant a few years ago," wrote one former auditor, who asked to remain anonymous. "It was weird to see these truly gigantic extrusion machines, each the size of a family house, pumping out millions of plastic bottles, while 18-wheelers drove by outside painted with politically correct slogans."

David Brooks, a former Environmental Protection Agency lawyer, BSI's US environmental director in the early 1990s, dismisses its environmental initiatives as "window dressing". He detailed lacklustre recycling practices, and regular discharges of hazardous waste into the water system near its headquarters in New Jersey, then covered up by top executives.

With financial problems multiplying, BSI recently discontinued publishing assessments. Wise says he remains committed to the practice. Yet he refuses to release financial data, the environmental survey has no contextual information, and the social audit amounts to a survey of staff and consumer perceptions. It does not provide wage and benefit data or information from key stakeholders including vendors or sub-franchises.

"Their reports are clearly inadequate," says Simon Zadek, head of British-based Accountability, which wrote the standards Body Shop contends it follows. "Good practices require companies benchmark financial, social and environmental performance, not only internally but against outside measures and firms. They're not doing that."

Cox admits the shortcomings in the audits she verifies but says they're an important, if small, move towards corporate transparency. "All I can say is that it is perceived by current employees as being a good company. Many companies do these surveys, but they are used only internally. The positive here is that Body Shop releases this data publicly, which encourages accountability."

Few doubt Body Shop's idealism about broad principles, from human rights to empowering women. However, Anita Roddick, the symbol of the brand, has been dogged by ethical questions that begin with the very founding of the company. Just how ethical is it at its core?

Roddick boasts that Body Shop is her original creation. That is a clear fabrication. The Body Shop saga begins in 1970 when young Anita travelled to San Francisco with then boyfriend Gordon to visit his best friend, David Edward. Edward's former wife, Alma (now Dunstan-McDaniel), remembers dragging Anita to a favourite shop, filled with tie-dyed decorations and redolent with incense.

"That was the place to buy shampoo and body cream," Alma says. Owners Peggy Short and Jane Saunders had carved the original store out of a converted garage, calling it The Body Shop. Alma recalls Anita buying armfuls of hand-cut soaps, loofah sponges, and cosmetics in small plastic bottles with hand-written labels.

Roddick's copycat Body Shop with similar hand-sketched logo, plastic bottles, and "breakthrough" recycling policy emerged six years later. Comparisons of the brochures of the American original and Roddick's copycat store are telling. Four O'clock Astringent Lotion morphed into Five O'clock Astringent Lotion. Korean Washing Grains, uniquely developed by the women who sewed kimonos for the Americans, became Japanese Washing Grains. Roddick even lifted the blurb on the original brochure masthead, which noted: "All of our products are Biodegradable & made to our specifications"; "Bottles 20cents or bring your own." Anita's translation: "All our products are biologically soft and made to our specifications"; "Bottles 12p, or bring your own." Roddick copied product descriptions word-for-word, including grammatical errors.

For years, Short and Saunders were unaware of the brazen heist. As a result, when the Roddicks approached them in 1987 to buy the rights to the Body Shop name for $3.5million, they jumped. They renamed their shops Body Time. Only later did they stumble upon the copycat brochures.

"What really got them angry," says a colleague, "was the ongoing deception Anita's lie that she originated the idea, the green colour scheme, the products, all the things that gave the company its unique identity. Never in our wildest imagination did we think that Roddick, with all her claims about being so honest, would keep this fabrication going."

The Roddicks steadfastly deny "any knowledge" of the original sin, often brandishing a pre-discovery quote from the founders that Roddick "didn't rip us off". That brings a blunt response from Alma. "That's bullshit, because I took her [to the original]. She had a number of those products in her suitcase to go home. She made sure she had one of each. It was a lie from the start. Anita ripped them off."

Roddick would later embellish her founder's myth with claims that she had come up with exotic products during her wanderlust travels. According to recorded interviews with Constantine and public relationsdirector Janis Raven, her stories are fiction. "I was fully aware that she hadn't had the idea about wandering in Polynesia," Constantine told me, referencing one of many tall tales. "The wonderful joke with Janis Raven was always: `Janis, can't you do something about Anita? You created all this bloody publicity thing.' You create the monster you can't control."

Sitting in her London office, Raven chose her words carefully. "I think Anita Roddick is a very brilliant woman." She paused. "You know, Anita's gone over the top. We used to joke that I've created this Frankenstein. If you start believing all this stuff that is written about you, you have got to go dotty, haven't you? She started to believe her own publicity and this is always the death knell to anybody."

Journalists who have probed these founder fabrications have been the target of personal attacks and legal threats. In its assessment of BSI's ethics, widely respected Trillium Asset Management assailed its "consistent use of character assassination" against reporters, franchisees and other critics. Even Body Shop's social auditor gave it a rock-bottom rating for aggressively defensive responses to criticism.

Perhaps inevitably, Body Shop's ethical contradictions are intimately tied to its franchisee relations, raising doubts whether it can restore the trust necessary to revive. That link is underscored in an continuing battle over a 1997 bankruptcy filing by a Canadian couple, who once owned six shops. Last June, an Ontario judge blasted Body Shop for "egregious breach of widely accepted commercial morality ... not consonant with our system of justice and general moral outlook". Body Shop appealed. In a ruling on August 19, the Canadian Court of Appeal affirmed the finding that it had engaged in "dishonest and unconscionable" practices in dealings with its former franchisee.

These endless dust-ups leave analysts aghast. "The Roddicks are just not suited to be running a public company," observes Seymour Pierce's Richard Ratner. "At the end of the day, Body Shop is tired and dysfunctional." Ratner believes it has a long shot at stabilising its business if new executive chairman Adrian Bellamy "can keep the Roddicks at a distance".

That's unlikely. The Roddicks control more than 50 per cent of the voting stock and control the board with a minority of independent members. That's typical of public companies but contradicts corporate responsibility standards that Body Shop voices support for. Roddick's recently anointed herself creative consultant, offering "essential expertise in product, marketing and values" the issues at the heart of Body Shop's problems. "Being now a non-exec is going to be much more fun for me because you can be much more than a tyrant." This advice is expensive: she pockets GBP195,000, which combined with the Roddicks' board remuneration brings the couple's annual take to GBP465,000.

Does the parent company's troubles threaten the survival of Body Shop Australia? Wise remains upbeat, claiming that "customers continue to shop with us in increasing numbers" he refused to supply details and that it will prosper as "an activist organisation and a retailer committed to customer service excellence". Asked about the controversies that swirl around the Roddicks, Wise offered unqualified support. "I have been inspired and motivated by the values inherent in the philosophies that Anita and Gordon Roddick brought into the business they built."

Eva Cox for one is not convinced. "There is very real danger that their worldwide problems will damage them. After all, Roddick is the brand. Good corporate citizenship requires attention to actual stakeholders: its workers, customers, and suppliers." Her concerns extend beyond the parochial fate of the interlocked Body Shops. "In the end, you have to run your business with probity, and ethically. If Body Shop falls over, it will do tremendous harm to the cause of socially responsible business. It's all a bloody shame. I hope they can pull up their socks before it's too late."