L’Oreal and The Body ShopA Case of Opposites Attract

Introduction

The look, the feel, the touch, the smell, the taste, these are all of the focuses of a multi-billion dollar industry whose success is based purely on aesthetics. However, not all of the companies in this industry sector operate on selling their products to improve the external beauty of its customers. One such company has been successful in fighting the ideals of traditional beauty and has created a niche market for themselves globally. Now, with a new acquisition, the reputation of this company stands to be impacted, either positively or negatively.

This paper explores the acquisition of one of the largest franchise cosmetics companies in the world, The Body Shop, by the largest cosmetics company in the world, L’Oreal. The main concentration of this paper lies in the conflict between the ethics and ideals that both companies have individually imbibed through their history and with the difference in their focus with respect to marketing, human resources management and portfolio diversification.

Knowingly a win-win situation for L’Oreal with respect to reputation management, the acquisition may prove to be in favour of presenting an environmentally and socially “cleaner” image. However, for The Body Shop, this transaction may end up harming the company's “squeaky clean” image rather than helping to support it. The answer to whether this partnership will be beneficial to both parties will largely depend on how each of the management teams learn to understand, appreciate and demonstrate the certain elements of both companies that have made them the successes they are today.

The Situation - L’Oreal & The Body Shop

Human Resources

For L’Oreal, workplace diversity is not just a human resources focused issue, it is also important to the business practices for many reasons. At the forefront of these reasons is creativity both in product development and communication in meetings. The importance lies in the fact that separate experiences and thoughts allow for all types of creativity and outlooks which is beneficial when trying to continually develop new and exciting products. It is important to have differing outlooks through a diverse employee base with various cultural backgrounds to consult with when discussing any issue or product in management meetings.

Employee recruitment tactics have always been a strong and favourable focus for L’Oreal. Reaching out to the community, schools, and assistance programs are common practice. This has allowed them to primarily stay ahead of the curve when it comes to employee selection and development.

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Although they have had some issues concerning diversity in the workplace and ethical practices with respect to animal testing, these are problems that have been subsequently resolved and left in the past; a point supported by the fact that L’Oreal states that they haven’t tested on animals since 1989. All of these actions have allowed this company to remain profitable. Nevertheless, with the new issues which were sure to arise during the 2006 acquisition of The Body Shop, things were sure to get more complicated.

L’Oreal managed to diversify even further in 2006 when they finally acquired The Body Shop. Now their clientele base was not only a mix of men and women of all races, it also included the environmental and socially ethical consumer, a very different type of consumer than L’Oreal was used to appealing to. It was going to be important for the employees working for L’Oreal to be able to communicate and relate to a more environmental and socio-conscious consumer in order to ensure the consistency of The Body Shop’s message to it’s existing customer base. It would be both important and difficult for the company and employees to convey The Body Shop’s continued connection with environmentally friendly practices, since this new acquisition was with a company which was not viewed by the general public as a socio-conscious business. It was the belief of both political and business professionals alike that when news of the acquisition was released, it was inevitable that the media frenzy would ensue. Animal rights group Naturewatch immediately demanded a boycott of The Body Shop products and former owner and seller Anita Roddick was accused of being a sell out, since it was she who had reprimanded L’Oreal only a few years earlier. Although she had been credited with stating that the company was guilty of “promoting unattainable ideals and sabotaging self-esteem”1, Roddick now states that “[She] does not see it as selling out, [since] L’Oreal has displayed visionary leadership in wanting to be an authentic advocate and supporter of [The Body Shop’s] values.”2 At this point, as well as in future operations, it was imperative for L’Oreal to be able to manage in a wide area of business locations. This responsibility was accompanied with a large mix of potential employees from varying backgrounds and the challenge of allowing this mass employee base (60,851 in December 2007) to be able to work and interact freely with the market and with each other.

The most important responsibility for those at L’Oreal who set policies (mainly within the human resources department) is to ensure that the integrity and values of each company remain intact and also independent from one another. Ethics and Social Responsibility

The acquisition between these two companies is one that will be remembered in the history books of business acquisitions if for no other reason than the fact that it happened between two companies that are morally and ethically opposite of one another. The extent of The Body Shop’s commitment to the community, the environment and to social activism is shown in the company’s mission statement3 and trading charter (see Appendix 1). The Body Shop’s trading charter is a great testament to the company's bold commitment to the environment, the community, and social activism. Some critics have remarked that the company’s strong ethical stance may cause a conflict with respect to the type of views, campaigns and behaviours that L’Oreal may want the company to move towards.

The Body Shop opened its doors at 9 am. on March 27th, 19764 and drew crowds with its strawberry-scents. By April 1984, the company launched The Body Shop stock. In 1993, it was in Madrid opening its 1000th store. The Body Shop was a global entity, bringing Greenpeace posters,

1 Farquharson, Matt (2006, Jan 5). Interview: Liaison Dangereuse. HR Magazine. Retrieved March 25, 2008, from http://www.hrmagazine.co.uk/news/index.cfm?fuseaction=archivedetails&newsuid=8b2ea266-916a-4f4e-9081-bd52a0ea625f2 Farquharson, Matt (2006, Jan 5). Interview: Liaison Dangereuse. HR Magazine. Retrieved March 25, 2008, from http://www.hrmagazine.co.uk/news/index.cfm?fuseaction=archivedetails&newsuid=8b2ea266-916a-4f4e-9081-bd52a0ea625f3 The Body Shop International plc. (2007). The Body Shop. Retrieved March 20, 2008, from www.thebodyshopinternational.com4 Older, Jules (1998). Anita! The Woman Behind The Body Shop. Watertown, MA: Charlesburg Publishing.

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values, and a strong sense of ethics and social responsiveness to the forefront. Dame Anita Roddick, President & CEO, changed the world with her bold views and personal drive to operate an ethically-minded business.

The Trading Charter and Mission Statements (see Appendix 1), emphasize in no uncertain terms, the depth of The Body Shop's commitment to the environment, the animals, people, and the cultures wherein the products are outsourced. The only products which are not outsourced and are manufactured by the company is Soapworks, which is 100% owned by The Body Shop.

L'Oréal is the leading cosmetics company in the world. With experience extending over 100 years, the company has shifted and changed, including more diverse offerings for the multicultural world, as well as animal-free testing of cosmetics. L'Oréal has underlying principles of ethics and responsibility, especially to the women it is catering its products to.

When it was brought to light that L'Oréal was acquiring The Body Shop in March 2006, anyone familiar with what The Body Shop represented and stood for, worried. Would The Body Shop remain the same ethics-centered company that it had been since its inauguration under a new conglomerate? Would it be tainted or irreparably damaged through this merging of glamour and ethics?

To partially solve these conflicts, The Body Shop became an independent non-publicly listed entity within the L'Oréal Group. It is a ring-fenced division with the same management team (Board and Executive Committee) and the same commitment to its values and ethics as before the acquisition. It is however important to note that the Board of Directors of The Body Shop report directly to the CEO of L'Oréal and is under the professional guidance of L'Oréal with respect to growth, maturity, product line expansion, and diversification.

A Values Report was presented in 20075 which entailed a dialog between the shareholders, the CEO's, and some of its suppliers in an effort to be transparent. These presented the situations, dilemmas, and future direction of L'Oréal and The Body Shop. Within this report, L'Oréal restates its commitment to The Body Shop's core values and goes further by looking to extend the benefits and virtues to its other group brands, using The Body Shop as a benchmark.

The Body Shop is a benefit to L'Oréal, but it cannot be stagnant. To keep up with its sense of social responsiveness, The Body Shop must continue to lead the way for other eco-friendly companies. Already others are pushing ahead. LUSH6 has surpassed The Body Shop in some aspects by minimizing its packaging and forcefully pushing the animal testing issues by not buying from companies which do any animal testing at all. Another of its competitors, L'Occitane, makes its shopping bags out of recycled algae found in Venetian canals.7

Marketing and Brand Management

L’Oreal is the largest cosmetic company in the world with headquarters in Paris, France. The company’s product line is extremely diverse and ranges from hair colour, make-up, perfumes, and hair care both for men and women. With over 500 brands worldwide, L’Oreal has been able to establish its presence in major cities all over the world8. L’Oréal has different brands that target different price ranges and cultures. Indeed, L’Oréal has French brands but also American brands with Maybelline New York, Italian brands with Giorgio Armani, and Japanese brands with Shu Uemura.

5 The Body Shop International plc. (2007). The Body Shop Values Report. Retrieved March 20, 2008, from http://valuesreport.thebodyshop.net/6 LUSH (2008). LUSH Fresh Handmade Cosmetics. Retrieved March 20, 2008, from http://lush.com/7 L'Occitane en Provence (2008). L'Occitane en Provence. Retrieved March 2, 2008, from http://www.loccitane.com/Default.aspx?a=426&c=1&l=1&s=2 8 Wikimedia Foundation, Inc. (2008, April 2). L'Oreal. Retrieved April 3, 2008, from http://en.wikipedia.org/wiki/L%27Oreal

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The tag line for L’Oreal is “Because you’re worth it!” The product line is priced and packaged such that the average everyday woman can afford to buy it but still feels that the product is above the quality and appeal of the drug-store brands. The price difference between L'Oreal and its nearest competitors is actually either nonexistent or too small to deter consumers from paying extra for hair-colour products that they can rely on for quality. The company’s product distribution strategy globally encompasses being anywhere where beauty and cosmetic products are in demand. To this effect, and because there are over 500 L’Oreal brands, their distribution channels include hair salons, perfumeries, supermarkets, health/beauty outlets, pharmacies, and direct mail.

A large part of the marketing appeal of L’Oreal products is the spokeswomen that sell the products. In 2005, the company spent 30.5% of its sales on advertising and promotions alone9. Like their in-store displays, L’Oreal’s spokeswomen are well known celebrities that exemplify the meaning of “class” such as Vanessa Williams, Cybill Shepherd, and Jennifer Lopez. The spokeswomen also change depending on which geographical market and/or cultural segment the company is targeting. For example, recent L’Oreal commercials have featured Aishwarya Rai, a famous Bollywood actress in India. L’Oreal chose to use her in their North American campaigns to target the large and increasing Asian population in North America in order to increase product appeal to this segment. By increasing their presence through using global marketing, product-line diversification, and customer savvy, L’Oreal has been able to penetrate the cosmetics industry of the United States, Europe, China, Japan, and the Russian Federation.10

L’Oreal has also strived to diversify its product line to fit different socioeconomic backgrounds and cultures. This gave the company the ability to market the many different perceptions of beauty around the world. The company has research and development centres in nearly every major market to ensure that the company is selling the cosmetic product that will appeal to the demographics of the population11. For example, to market their products in sub-Saharan Africa, L’Oreal established a research and development centre to study African hair types.

When entering into new markets, instead of penetrating the market from ground-up, the company is known for buying smaller well established cosmetic companies. L’Oreal changes their product line and marketing approach to fit the look of L’Oreal and reintroduces the product lines into the new market for instant success2. For example, L’Oreal acquired Soft Sheen, a U.S. line of hair-care products aimed at African-American women with the ultimate goal of being able to use this brand to expand their product line in Africa. By using this marketing strategy, L’Oreal has become very successful in winning the hearts of consumers in China and Japan.

The marketing strategy for The Body Shop has been termed as eco-marketing. With very high moral and ethical values, The Body Shop has tried to maintain a “squeaky clean” image with marketing campaign slogans such as “Against Animal Testing, Support Community Trade, Activate Self Esteem, Defend Human Rights, and Protect Our Planet.”12

The Body Shop has over 2,000 stores in over 50 countries and is the second largest cosmetics franchise in the world. The company carries a large range of cosmetics for the body, face, hair, and home. Most popular for their body butter creams, The Body Shop prides itself on producing animal testing free vegetable based products. With the exception of still using beeswax, The Body Shop maintains that they are 100% vegetarian.

The company has created a niche in the cosmetics industry and has managed to sell their specialty products through promoting to environmentally and socially responsible consumers. The appeal of The 9 L'Oreal (2005). L’Oreal half a year report. Retrieved on March 25, 2008, from www.L’Oreal.com10 Business Biographies (2007). Lindsay Owen-Jones 1946-. Retrieved on March 25, 2008, from http://www.referenceforbusiness.com/biography/M-R/Owen-Jones-Lindsay-1946.html11 BusinessWeek (1999 June 28). L'Oreal: The Beauty of Global Branding (int'l edition). Retrieved on March 31, 2008, from http://yahoo.businessweek.com/1999/99_26/b3635016.htm12 Wikimedia Foundation, Inc.(2008, April 4). The Body Shop. Retrieved April , 2008, from http://en.wikipedia.org/wiki/The_Body_Shop

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Body Shop comes from its founder Dame Anita Roddick, the leader from whom the high values and “pushing-the-limits” marketing campaigns were created. Launching ad campaigns such as the Ruby campaign where an obese version of a Barbie doll was shown with the tag line “There are 3 billion women in the world and only 8 look like supermodels,” set The Body Shop apart from any other cosmetics company in the world whose idea of beauty was based on selling the looks of celebrities and super models.

The company created alliances with organizations such as Greenpeace and most recently with Friends of the Earth and the World Wildlife Foundation. The Body Shop heavily relies on emotional and relationship marketing to attract and retain their customers through appealing to the ability of everyone being able to do the right thing for society and for the environment13. The company was also the first to create a program called Community Trade (CT). The concept of CT was that communities in need that provided The Body Shop with natural ingredients or handicrafts like wooden foot massagers from Nepal would be able to trade their services for a fair price to The Body Shop. This is the only way that The Body Shop trades with all of their suppliers worldwide in over 24 different countries. By 2008, The Body Shop hopes to have 65% of the company’s products attained through CT. In 2006 alone, the company spent $12 million in purchasing ingredients through CT14.

Financial Portfolios15 16 17

The Body Shop International, which runs the health and beauty chain, has endured a rocky ride since Dame Anita Roddick inspired its rapid expansion in the eighties and nineties. Despite making a remarkable recovery from its disastrous performance in 1999, when profits fell from £38m to £3.4m, the company that gave the world banana shampoo announced a fall in profits of up to 15% in January 2000. LUSH, during March 2001, then offered a cheeky bid of £175m, which was certainly not appreciated by The Body Shop owners.

During May 2001, The Body Shop issued profit warnings which stated that its profits would decrease by half compared to the last year due to management mistakes and launching too many new products and discontinuing its popular product lines. In early June 2001, The Body Shop was again under negotiations for a buyout by a Mexican company, Omnilife, for £350m. The Body Shop shares jumped £0.17 to £1.24 on the news, valuing the business at £240m. Later during the month when it was announced that the takeover talks for the potential buyout has ended, The Body Shop shares fell £0.185 to £96, valuing the company at just £201m.

February 2006 was the beginning of takeover bid discussions with L'Oreal and The Body Shop . The Body Shop shares increased from £0.18 to £2.65 on the news, valuing the company at £570m, valuing the 18% stake held by Dame Anita and her husband worth more than £100m. Analysts suggested that L'Oréal may have had to pay up to £650m for The Body Shop if it proceeded with a bid. The contrasts in terms of profit margins of the two companies are: The Body Shop £18 million in profits and L'Oreal £1.1 billion in profits.

During March 2006, The Body Shop agreed to a £652.3 million takeover bid by L'Oreal. It accepted an offer of £3.00 a share from the French firm - a large premium on its closing price of

13 Kent, T., Stone, D. (2007). The Body Shop and the Role of Design in Retail Branding, International Journal of Retail and Distribution Management, Vol. 35 No.7, pp. 531-543.14 The Independent (2006, March 17). L'Oreal buys Body Shop for£652m. Received March 30, 2008, from http://www.independent.co.uk/news/business/news/loreal-buys-body-shop-for-pound652m-470244.html15 The Independent. Received April 5, 2008, from http://www.independent.co.uk16 L'Oreal (2008). L'Oreal Regulated Information. Received April 5, 2008, from http://www.loreal-finance.com/eng/regulated-information17 Reuters (2008). L'Oreal & The Body Shop stocks. Retrieved April 4, 2008, from http://stocks.us.reuters.com/stocks/balanceSheet.asp

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£2.68(34.2% premium over the share price on February 21, 2006). Anita and Gordon Roddick made £130 million from the sale. The French firm said The Body Shop would enhance its business because of its "sizeable and complimentary brand" across 54 countries, which delivered revenues of £419 million last year.

The Analysis of the Acquisition

Human Resources

Prior to obtaining The Body Shop, L’Oreal was a company which prided itself on their practices when it came to employee assistance and diversity. Though they were not the most socially conscious of all beauty product companies, they had maintained that animal testing of makeup had ended in 1989 and has remained nonexistent since. They were a company with great success and a low turnover rate because of a satisfied employee base.

The Body Shop had an advantageous relationship with their employees as well, but for slightly different reasons. The company’s first major focus, similar to L’Oreal’s, was for their employees and their comfort level within the company. However, the policies which brought this comfort to the workers of The Body Shop came not from ease of mind as a result of the company’s commitment to diversity but more from their adamant and active protection of the environment and animal rights.

These two companies, who were so similar on their views towards employee relations but who looked at some key social issues with differing intensity, would now need to develop systems which would ensure that all of the workers felt secure in the new arrangements, no matter their background, experience, age, or other potentially discriminatory factor. To deal with these issues, L’Oreal launched the FIT programme in 2005. This formal induction programme involves six stages and occurs over the first month of employment. New starters, or people who have transferred in from another country or division, automatically enrol and are assigned a mentor who stays in this role for the first year of employment. At least five days before they arrive, HR ensures that log-in details, e-mails, and telephones are all in place, and that there is a desk and security pass ready, as well as a product 'goodie' bag. On their first day, the new arrival meets HR and their line manager; they are shown to their desk, introduced to the team and then they spend time with their HR manager, who explains how the FIT programme works. There is a team lunch and they are assigned a mentor, who stays in this role for at least the first year. Over the next fortnight, the new recruit meets other staff from all over the company - whether they are from marketing, health and safety or product planning. Within the first month, they have a review with HR, which is followed up at regular intervals.

This process, though arduous, has proven to be beneficial to this company who constantly had new employees joining the team and had just increased the amount and diversity of each new member. Positive feedback to the FIT program was found in a survey of 30 employees who began working during the acquisition. The results reported that more than 90% of the employees felt that they had a better understanding of what they were supposed to be doing, what the objectives and values of the company were, and where they fit into the bigger picture.18 This is a result which promises to bode well for L’Oreal since they seem to be ever changing, not only in their employee and clientele base but also in their business size and structure. Recruiting and keeping creative and diverse minds is a challenge that they should be able to minimize substantially with continued us of FIT.

Another action that L’Oreal took to assist in diversification of employees was to actively pursue employees through universities. Having partnerships with 129 universities in 46 countries19 allows for an 18 Paton, Nic (2007, March). Because they're worth it. Personnel Today,36-37.  Retrieved April 4, 2008, from ABI/INFORM Global database. (Document ID: 1247630991).19 Bradshaw, Della (2003, September 15). Because they're worth it: hiring the L'Oreal way: [LONDON 1ST EDITION]. Financial Times, p. 12.  Retrieved March 26, 2008, from ABI/INFORM Global database. (Document

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extremely broad base for selection and recruitment. Approximately 1,000 graduates and more than 1,50020

intern students benefit from this mutually beneficial relationship each year, thus providing help to L’Oreal as they attempt to bring together a wide spread of talented employees.

As a result of the supportive and positive relationship that L’Oreal works so hard to maintain with its employees, the environment has been so amiable that unionization has not been factor. This is conducive with the practices of employees at The Body Shop, since they too have enjoyed a stable relationship with their employer and thus have gone without unions.

For the future, L’Oreal has put in place a new program in addition to FIT, which tracks new employees over their first two years with the company - covering selling products in the field, personalized training and mentoring programs, as well as round-tables with more experienced staff to discuss culture and ways of working.21 This will be used to help bridge any gaps which may arise when it comes to positions on values.

One step that The Body Shop has taken to deal with the public relations issues regarding socio conscious responsibilities is their implementation of an integrated HR and payroll solution, which includes a 'self-service' module that reduces paper waste. Employees fill in time sheets and holiday or training request forms online which are then managed entirely by Northgate HR (a leading provider of HR, payroll and pension management outsourcing, and software solutions). This electronic paper saving system will definitely serve to support the company’s eco-friendly image and will help to smooth over some of the rough terrain The Body Shop has faced from political environmental groups since the acquisition.

L’Oreal appointed a Director of Global Values, by the name of Jan Buckingham, to oversee all related issues. This was done to ensure that The Body Shop’s values were not compromised and that the employees/customers feelings of comfort with and loyalty to the brand were maintained. Since their values are the fabric of business, she sits on The Body Shop’s Executive Management Board and reports back to the CEO of L'Oreal, Peter Saunders. On this board is a wide array of members including the team who are each responsible for maintaining corporate social responsibility and the values of The Body Shop. The members include: the directors of the global functions of finance, product development, supply chain, marketing and HR, and the four regional managing directors, responsible for running the stores, the at-home business, the direct-selling business, and the e-commerce business across the four regions – 1) the UK and the Republic of Ireland, 2) the Americas, 3) Europe the Middle East and Africa, and 4) Asia-Pacific.22 23

Ethics and Social Responsibility

The precedent is set to go above and beyond social obligations and mere competitive pressures to push what is considered the norm in the cosmetics industry. Therefore, social obligations, such as legal conformity, for the cosmetics industry are sufficiently fulfilled, but each of the main competitors go much further.

ID: 405269181).20 Paton, Nic (2007, March). Because they're worth it. Personnel Today,36-37.  Retrieved April 4, 2008, from ABI/INFORM Global database. (Document ID: 1247630991).21 Farquharson, Matt. Interview: Liaison Dangereuse. HR Magazine 01/05/06. Retrieved March 25, 2008, from http://www.hrmagazine.co.uk/news/index.cfm?fuseaction=archivedetails&newsuid=8b2ea266-916a-4f4e-9081-bd52a0ea625f22 Wagg, Oliver. In the spotlight: The Body Shop. Corporate Citizenship Briefing, issue 87 April/May 2006. Retrieved March 24, 2008, from http://www.ethical-jobs.com/stories/ccbl.php23 The Body Shop International plc. The Body Shop's 2006 Annual Report. Retrieved April 7, 2008, from http://www.thebodyshopinternational.com/NR/rdonlyres/A675B0BD-0195-4FF2-BD6C-1B5C351108ED/0/CLIENT81152203562022_lg2006AnnualReport.pdf

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L'Oréal falls under the Social Responsibility compliance set forth by Keith Davis,24 by ensuring its products are not tested on animals since 1989. Instead, it cultivates nature through genetic modification by testing its products on cells bred in a lab. The company follows a cooperative tradition-type ethical standard.

UNESCO and L'Oréal united to form the “For Women in Science” Award25 beginning in 1998. It highlights women in science from around the world, recognizing their research, commitment, and diversity. One of its competitors, L'Occitane, is also characteristic of the industry by following the prevailing norms and expectations of society. Both feel a sense of corporate social responsibility to improve society through their research, expertise, and capital, both human and monetary.

A few companies push themselves to overcome huge obstacles by standing firm in their beliefs - above and beyond others to lead the world through their example. The Body Shop and LUSH are both in this Social Responsiveness category, confidently blazing the path forward through their strong environmental ethics, value and belief systems. LUSH pushes further into the “Against Animal Testing” category, encouraging suppliers to take all animal testing out of any aspect of the companies they deal with, as well as taking on their governmental organizations.26

The Body Shop draws upon its five core values to shape the world it shares. These are to support community trade, activate self esteem, defend human rights, to be against animal testing, and to protect our planet.27 It has received the International Standard of Compassion - the only cosmetics company in Canada to receive such recognition by the animal protection movement. Ingredients must have a guarantee they have not been tested on animals after the cut-off date of December 31st, 1990.

Richard Sylvan suggested in his 1973 paper, “Is There a Need For a New, an Environmental Ethic,”28 that the indirect traditional ethical theories, our existing philosophies on environmentalism, are not enough. These traditions focus on a hierarchy with humans always at the top using the resources of the earth to their advantage. Although these cosmetic companies are exceeding standards in our present societies and cultures (by not following a western liberalism philosophy of basic human chauvinism), it is still not enough. L'Oréal uses a cooperative tradition structure by using nature for their own gains, for example their cellular testing of cosmetics. The Body Shop has a stewardship philosophy: they are here to manage the earth and care for it.

Our capitalist society can go many steps further but it would require a massive economic shift to putting the earth's needs on the same level as our own. This is where the world is headed in the years to come – a sense of community with the earth which far surpasses the current philosophies.

Marketing Analysis

In 2006, L’Oreal purchased The Body Shop with the idea of enhancing the French company’s luxury product line and increasing the presence of The Body Shop in the mass market and prestige sector. Although L’Oreal did state that The Body Shop would retain its brand and would operate independently from the parent company, there has been some doubt in the minds of The Body Shop consumers that this acquisition will precede smoothly.

24 Frederick, William C. , & Post, James E., & Davis, Keith (1991). Business and Society: Corporate Strategy, Public Policy, Ethics (10th ed.). Mcgraw-Hill College:Mcgraw-Hill Series in Management.25 L'Oreal (2008). For Women in Science Program. Retrieved March 2, 2008, from www.forwomeninscience.com26 LUSH (2008). LUSH Fresh Handmade Cosmetics. Retrieved March 20, 2008, from http://lush.com/27 The Body Shop International plc. The Body Shop's Values and Campaigns. Retrieved April 7, 2008, from http://www.thebodyshopinternational.com/Values+and+Campaigns/28 Sylvan, Richard (1973). Is There a Need for a New, an Environmental Ethic? Retrieved March 20, 2008, from http://www.uq.edu.au/~pdwgrey/web/res/sylvan.neweth.html

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Some of the uncertainty with consumers comes from the night and day difference in the marketing strategies of these two companies. L’Oreal’s marketing scheme has been based on selling external beauty while The Body Shop has focused its campaigns on appealing to the internal beauty of women and people. Another concern with respect to research and development is the fact that there have been claims that the French company continues to test on animals. Although L’Oreal has continued to state that they stopped testing on animals since 1989, this practice of a lack of ethical and social values is in direct contrast to those of The Body Shop29. The concept of a strongly ethical company fitting into the portfolio of a cosmetic company that has not shown the same level of ethical integrity is one that is making many, question the success of this acquisition.

There is no doubt that this acquisition will provide The Body Shop access to L’Oreal’s research and development centres to improve the quality and appeal of its products worldwide, as well as the ability of The Body Shop to expand further globally and increase overall sales for L’Oreal. It will also help to increase L’Oreal’s image as far as social responsibility and awareness go but it may not do the same for The Body Shop. There is a potential for The Body Shop to lose it’s customers on the basis of being bought out to a company that contradicts all of the ethical and moral values The Body Shop holds high. However, only time will tell the impact of this change30.

Financial Analysis

During 2007, L'Oreal attributed the decline to the seasonality of its Body Shop business, acquired in mid-2006. It noted that without The Body Shop, its operating margin would have risen to 17.6 %. In the first half of 2007, The Body Shop recorded an operating profit of €1.4 million. In the second half of 2006, its operating profit amounted to €58.3 million, implying a potential upside for the second half (see Appendix 3 – Table 3).

First half 2007 earnings per share rose to €1.94, up from €1.76 a year earlier and compared with 1.91. L'Oreal shares closed 1.4% higher at €84.39 ahead of the news. The shares have risen 11.2% since the start of the year, outperforming the Dow Jones Stock personal and household goods index by 7.4 %.

Gross profit for L’Oreal prior to the acquisition increased very significantly and represents 71.3% of sales, compared with 70.1% in 2005. This improvement mainly reflects an enhanced value of the product mix, and the continuing industrial streamlining programmes (see Appendix 3, Table 1).

The structure of the profit and loss account of The Body Shop in the second half has a profile which is quite different from that of the L'Oréal group (see Appendix 3, Table2). The consolidation of The Body Shop made a positive contribution to L’Oreal’s main operating items. L’Oreal’s operating items with The Body Shop can be summed up as follows: sales reached € 15,790 million, up by +8.7%; and gross profit amounted to € 11,221 million, up by 10.2 %.

After the year end release of annual reports (2007), the acquisition of The Body Shop, consolidated since July 1st 2006, made a positive contribution to the growth of both sales and earnings in the second half.

The sales of the L'Oréal group, at December 31st 2007, amounted to €17.063 billion, an increase of 8.1%. The Body Shop amounted to +5.7% sales growth. Furthermore, retail sales for the company increased by +7.9%. With a comparable store base, the increase in sales amounted to +3.3%.

The profitability of each cosmetic Division grew substantially in 2007 (see Appendix 3, Table 2). The profitability of The Body Shop is not comparable year-on-year due to the business becoming consolidated in the second half of 2006; but each year almost all of the profit is made in the second half.

29 Cosmeticsdesign.com (2006, Mar 22). L'Oreal's Body Shop acquisition meets with mixed reaction. Retrieved April 1, 2008, from http://www.cosmeticsdesign.com/news/ng.asp?id=66584-l-oreal-the-body-shop-takeover-ethical30 L'Oreal (2006 March). Acquisition of The Body Shop by L'Oreal. Retrieved April 1, 2008, from http://www.lorealshareholder.com/_docs/fichiers_contenu/0000000154/the_london_meeting_170306.pdf

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The earnings per share for L’Oreal grew strongly at +13.0%, which amounted to €3.36 million. Finance costs increased from €64 million to € 116 million in 2006 then to € 174 million in 2007 for L’Oreal. This reflects the cost of financing acquisitions, rising interest rates in the United States and Europe, and the continuation of their share buyback programme.There was exceptional growth in net profit after minority interests: +28.9% in 2007. (see Appendix 3, Table 3).

Cash flow at December 31st 2007 amounted to € 2,720 million, up by some 13%. Working capital requirement remained well under control at € 76 million. Capital expenditure at € 776 million decreased slightly as a percentage of sales to 4.5% compared to 4.7% in 2006. The net debt accounted for on December 31st, 2007 amounted to € 2,373 million, which was € 1 billion lower than that on December 31st, 2006 which shows a positive impact on the business.

For the shareholders’ interest and stake the Board of Directors of L’Oreal has decided to propose that the Annual General Meeting of Shareholders of April 22nd, 2008 should approve a dividend of €1.38 per share, representing an increase of +16.9% compared to the dividend paid in 2007.

The performance of L'Oreal in the last few years has been evidently positive. (see Appendix 4 – L'Oreal's Recent Share Price) Though the share price profile has been choppy, it is still upward sloping. Observing the fundamental and technical analysis of L'Oreal’s stock, it is evident that the share price will boost up alongside the company’s performance. Comparing its current ratios and the share price to the industry average and present market, L'Oreal - as the No.1 company in its industry – looks profitable in its business in future keeping up with the market. The growth rates back up its future performance. The company retains its earnings to a certain percentage so that it can operate efficiently up to its growth prospects, while the dividend payout has been steady, keeping the investors attracted. The return on assets, investment, and equity figure tells how efficient and appreciable the management is with its finances and operations.

Presently, The Body Shop accounts for a very small percentage of the company’s financial contribution. It is more likely to grow in the future and has contributed positively towards L’Oreal after its acquisition. In contrast, L'Oreal will continue to grow through deliberate and continuous acquisitions and performance.

Recommendations

The Body Shop needs to continue to be trend setters; leading the way to sustainable development, pushing their core values and extending these to all L'Oréal-owned companies, and by extension, other conglomerates. As one of the pioneers of eco-friendly cosmetics, they should be transparent with their knowledge, dilemmas, and concerns with other companies in order to better understand the underlying problems, current issues, and possible solutions to advance the industry and focus it into the most sustainable, eco-friendly direction.

By continuing on with their socially minded marketing promotions and strategy, The Body Shop can continue to retain the respect of its customers regardless of the acquisition. The Body Shop should not try to imbibe the marketing strategies with respect to advertising and promotions that L’Oreal uses as these are very far from the core values of The Body Shop.

The focus on “no animal testing” should not figure as prominently in their advertising as previously, as most companies are following suit with animal cruelty-free products becoming the norm. Additionally, in March 2009, the European Union has banned the marketing of cosmetics that have been tested on animals. This will also apply to those produced outside of the European Union.31

31 European Coalition to End Animal Experiments. Compromise Agreed on Major EU Legislation. Retrieved March 30, 2008, from http://www.eceae.org/english/index.html

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China is a nation which requires animal testing on their products, which is why The Body Shop does not market there. The Body Shop needs to challenge these outdated laws by offering alternatives. China also contains a huge market for cosmetics. With L'Oréal backing them, this cosmetics market can be animal-friendly and quite lucrative. After conquering China's laws, they should carry their campaigning to other countries where animals are still used for human testing.

The Body Shop should go back to its roots by embracing more Greenpeace, World Wildlife Foundation and Friends of the Earth campaigns. These will help them focus even more on their environmental issues, such as saving the rain forests, reforestation, climate change, or implementing more safe drinking water campaigns. It will also emphasize the fact that the company’s goals and missions have not changed which is very important to keeping their current customer base and to attracting new environmentally and socially minded customers.

Further expound upon how The Body Shop helps those communities it supports through its Community Trading. The Body Shop must ensure that the CT program continues as this is a large part of their commitment to communities in need. L’Oreal needs to support The Body Shop to make certain that this program grows within the body shop and that they fulfill their goal of CT purchases for 2008. Pushing the bar to become the leaders will enrich these communities, but also set an example for others to follow. It can use its influence to improve the human rights within these communities as a whole, not only the people directly influenced by them.

Continue to support their company, The Foundation,32 in innovative ways to influence eco-friendliness and small projects which are otherwise ignored and unfunded. Make the world aware of The Foundation through its acts of environmental rights and activism at the grassroots levels.

Finally, the carbon neutrality of their stores is a great step, but needs to be more detailed and clearer as well as spread out amongst every aspect of the company.

What is most important in terms of maintaining the comfortable and confident employee relationships enjoyed in the past is ensuring that the introduction and training programs remain as extensive, welcoming, and helpful as they have been in past years. Introduction to the company is not enough. It is also of great importance to both companies to continue to assist each employee to really amalgamate themselves with all of the aspects, people, and operations of the organization. Use of programs such as FIT will continue to act as effective assistance and it would serve the companies well to continue practices such as this to help out new and transfer employment when they join up with either the L’Oreal or Body Shop team.

Additionally, imperative to continued employee loyalty is that L’Oreal and The Body Shop each continue to focus on and pursue their independent company agendas, diversity, environmental and animal rights activities respectively. These company focuses may be motivated by various reasons but the importance of them is equally important to images in both employees and the public eye; the former influenced by the latter in most occasions. As such, it is clear that these concentrations on separate but equally important issues are pivotal to the success of these companies in sales and in minimizing employee turnover rates, two aspects of business which are of great importance to any company but appear to be of greater importance to these cosmetic distributors. These added training methods also lessen the chances of unions entering, increasing costs and complexity.       

L'Oréal and all companies under its wings, as Keith Davis suggests,33 have the expertise and thus the obligation to heal any environmental and ethical impacts it possibly can – even those which were not caused by themselves. This suggestion effectively moves L'Oréal even further toward social responsiveness. As such a huge company, they have the ability to influence the world; leading by example a globally sustainable and eco-ethical business. 32 The Body Shop Foundation. The Body Shop Foundation. Retrieved March 20, 2008, from thebodyshopfoundation.org33 Frederick, William C. , & Post, James E., & Davis, Keith (1991). Business and Society: Corporate Strategy, Public Policy, Ethics (10th ed.). Mcgraw-Hill College:Mcgraw-Hill Series in Management.

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Using The Body Shop as their prime source, L'Oréal should absorb some of The Body Shop’s core values as their own. This in itself would have a huge impact upon the world, changing and challenging current practices.

Conclusions

Despite trepidations to the contrary, the acquisition of The Body Shop by L'Oreal appears to have potential to be advantageous to both parties. Financially, this transaction has caused stock prices to rise. The Body Shop should continue to operate within a ring-fenced division to retain its raison d'etre while continuing to embrace and enjoy a new world level by being part of the L'Oreal Group. In its new, highly political position, The Body Shop has the opportunity to influence the researchers, shareholders, and board of L’Oreal of the paramount importance of eco-friendly products and promotions. Working together, both companies have the ability to make an impact on the cosmetics industry and on the world.

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Appendix 1 – The Body Shop's Mission Statement and Trading Charter 34

Our Reason for Being

To dedicate our business to the pursuit of social and environmental change.To Creatively balance the financial and human needs of our stakeholders: employees, franchisees, customers, suppliers and shareholders.To Courageously ensure that our business is ecologically sustainable: meeting the needs of the present without compromising the future.To Meaningfully contribute to local, national and international communities in which we trade, by adopting a code of conduct which ensures care, honesty, fairness and respect.To Passionately campaign for the protection of the environment, human and civil rights, and against animal testing within the cosmetics and toiletries industry.To Tirelessly work to narrow the gap between principle and practice, whilst making fun, passion and care part of our daily lives.

Our Trading Charter

We aim to achieve commercial success by meeting our customers' needs through the provision of high-quality, good-value products with exceptional service and relevant information which enables customers to make informed and responsible choices. Our trading relationships of every kind - with customers, franchisees and suppliers - will be commercially viable, mutually beneficial and based on trust and respect.Our trading principles reflect our core values.We aim to ensure that human and civil rights, as set out in the Universal Declaration of Human Rights, are respected throughout our business activities. We will establish a framework based on this declaration to include criteria for workers' rights embracing a safe, healthy working environment, fair wages, no discrimination on the basis of race, creed, sex or sexual orientation, or physical coercion of any kind. We will support long-term, sustainable relationships with communities in need. We will pay special attention to those minority groups, women and disadvantaged peoples who are socially and economically marginalized. We will use environmentally-sustainable resources wherever technically and economically viable. Our purchasing will be based on a system of screening and investigation of the ecological credentials of our finished products, ingredients, packaging and suppliers.

We will promote animal protection throughout our business activities. We are against animal testing in the cosmetics and toiletries industry. We will not test ingredients or products on animals, nor will we commission others to do so on our behalf. We will use our purchasing power to stop suppliers animal testing.

We will institute appropriate monitoring, auditing and disclosure mechanisms to ensure our accountability and demonstrate our compliance with these principles.

34 The Body Shop Canada (2008). The Body Shop's Mission Statement and Trading Charter. Retrieved April 2, 2008, from http://www.thebodyshop.ca/body_main.asp?Lang=EN&CName=ProfitsMain

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Appendix 2: L'Oreal's Mission Statement and Company Values 35

Mission StatementThe right to be beautiful day after day.

Company Values

Striving For Excellence

Perfection is our goal. We are determined to continue enhancing our brand portfolio with innovative products and to meet the most demanding standards of quality and product safety at all times.

A Passion For Adventure

Our expertise drives our passion for new discoveries and innovation in cosmetics. Each new achievement - each step forward - is in itself a new beginning.

Enrichment Through Diversity

Understanding and valuing each individual is an essential part of our corporate culture. Our staff members come from many different backgrounds and work together to offer a full range of products through varied distribution channels. Our goal is to serve the beauty and well-being of our consumers in all cultures throughout the world.

Valuing Individual Talent

Just as we are dedicated to enhancing the well-being of our consumers, we also make it a priority to ensure that each employee has the opportunity to develop his or her potential through personal and professional growth.

Leading Innovation In Beauty

Research is as much a part of our business as marketing, sensitivity to consumer needs is as important as scientific rigor, and know-how and expertise are as essential as intuition. Building on our unrivalled experience and expertise, fundamental research is a specific focus of investment that drives creativity and contributes to developing the cosmetics of tomorrow.

35 L'Oreal (2008). Company Overview. Retrieved April 6, 2008, from http://www.loreal.com/_en/_ww/index.aspx

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Appendix 3Financial Information for L’Oreal and The Body Shop 36

Table 1: Operating items of L’Oréal, in 2006, with and without The Body Shop

A   B  

€M 31.12.2005 As % of sales

31.12.2006 excluding

The Body Shop

As % of sales

Sales 14,533 100 % 15,355 100 % Costs of sales - 4,347 29.9 % - 4,414 28.7 % Gross profit 10,185 70.1 % 10,941 71.3 %Research and development expenses - 496 3.4 % - 531 3.5 % Advertising and promotion expenses - 4,367 30.1 % - 4,718 30.7 % Selling, general and administrative expenses - 3,009 20.7 % - 3,153 20.5 %

Operating profit before Foreign exchange gains and losses 2,313 15.9% 2,539 16.5%

Foreign exchange gains and losses - 47 0.3% - 56 0.4% Operating profit 2,266 15.6% 2,483 16.2%

C   C/A

€M31.12.2006 with

The Body Shop 2nd half

As % of sales Sales trend

Sales 15,790 100 % + 8.7 % Costs of sales - 4,569 28.9 %  Gross profit 11,221 71.1 % + 10.2 % Research and development expenses - 533 3.4 %  Advertising and promotion expenses - 4,783 30.3 %  Selling, general and administrative expenses - 3,309 21.0 %  Operating profit before Foreign exchange gains and losses 2,596 16.4% + 12.3%

Foreign exchange gains and losses - 55 0.3%  Operating profit 2,541 16.1% + 12.1%

36 L'Oreal (2008). L'Oreal Regulated Information. Received April 5, 2008, from http://www.loreal-finance.com/eng/regulated-information

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Table 2: Operating profit by branch and division (2007)

€M 2006 % of sales 2006 €M 2007 % of sales 2007By operational divisionProfessional Products 443 20.8 % 502 21.0 %Consumer Products 1,421 18.0 % 1,582 19.1 %

Luxury Products 776 20.6 % 844 21.5 %Active Cosmetics 221 19.6 % 256 20.5 %

Cosmetics divisions total 2,860 19.1 % 3,180 20.0 %Non-allocated(1) - 437 2.9 % -479 3.0 %

Cosmetics branch total 2,423 16.1 % 2,701 17.0 %The Body Shop 58 13.4 % 64 8.1 %

Dermatology branch(2) 59 17.3 % 62 16.9 %Group 2,541 16.1 % 2,827 16.6 %

(1) Non-allocated = Central group expenses, fundamental research expenses, stock option expenses and miscellaneous items. As % of total sales.

(2) (2) Group share, i.e. 50%

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Table 3: Consolidated Profit and Loss

In €m 2005 2006 2007 Change:2006-07Operating profit 2266 2,541 2,827 +11.3 % Financial expense and income -64 - 120 - 182  Sanofi-Aventis dividends 172 218 250  Share in net profit (loss) of equity affiliates -1 - 1 -  Pre-tax profit excluding non-recurrent items 2370 2,638 2,896 +9.8 % Income tax excluding non-recurrent items -730 - 803 - 856  Minority interests -1 - 1 - 1  Net profit excluding non-recurrent items after minority interests (1)

1639 1,833 2,039 + 11.2 %

EPS (2) (in euros) 2.6 2.98 3.36 +13.0 % Net profit after minority interests 1639 2,061 2,656 +28.9 %Diluted net profit per share (group share) (€) - 3.35 4.38 +30.9%Diluted average number of shares 630892470 615,723,220 606,012,471  

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Appendix 4: L'Oreal's Recent Share Price 37

Recent Share Price Trend: L'Oreal SA OREP.PA (Paris)

Financial Statistics:

Current share price as of Apr-4-2008: € 81.47 52-Week High: €99.97 52-Week Low: €74.25 P/E Ratio: 18.58BETA: 1.00EPS - 5 Yr. Growth Rate 18.32 Dividend 5 Year Growth Rate: 16.61Payout Ratio (TTM) 31.74ROA - 5 Yr. Avg. 11.39 RO I - 5 Yr. Avg. 15.83 R OE - 5 Yr. Avg. 20.34

37 Reuters (2008). L'Oreal & The Body Shop stocks. Retrieved April 4, 2008, from http://stocks.us.reuters.com/stocks/balanceSheet.asp

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