THE BODY SHOP
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The Body Shop Canada
“You’re not the kind of franchise applicant we usually get,” said Richard Peddie,
company lawyer for the Body Shop Canada, as he opened his meeting with
potential franchisee Paul Kingston. “I suppose we’ll find out whether that’s an
advantage or disadvantage,” replied Mr. Kingston. Mr. Peddie’s comment had
taken Mr. Kingston by surprise, and though he was pleased with his response, the
comment had produced a sinking feeling in the pit of his stomach.
Paul Kingston
Mr. Kinston, age 36, was in his final semester of the M.B.A. program at the Ivey
School of Business, Western University in London, Ontario. Prior to starting the
MBA, his employment background included a stint as a high-school business
education teacher and seven years of retail management. He had managed
independent stores and also had managed for one of Canada’s national department
store chains.
He had investigated a number of job possibilities, but had received no offers and
was still unclear about the direction he wished to follow. His strengths appeared
to lie in the marketing and human resources area. He had little interest in joining
a major retail company: “I’ve been on that treadmill before,” he said. He felt that
whatever his eventual career choice would be, he wanted to do “something that
will make some differences to me and to others.” The idea of working for
himself was appealing: “At least I’d be sweating to put money in my own
pocket.”
While perusing the job advertisements on indeed.ca, he came across one placed by the
Body Shop Canada. The notice stated that the company had a number of operating stores
available for franchise, including locations in London, Ontario and Sarnia, a smaller city
about 100km away. Mr. Kingston was aware of the company’s enormous international
success and was surprised to discover that franchises might be available. Furthermore, he
had never known the Body Shop Canada to advertise for franchisees.
The Body Shop1
The Body Shop was the
ainchild of Anita Roddick, a forward thinking Briton with a
strong commitment to an ideal. The company offered conventional consumer products
with a twist: it sold only naturally based products and disdained its competitors’
exaggerated product claims. In fact, it did no advertising at all. The company positioned
itself as a champion of social responsibility and activism. It promoted holistic health,
environmental responsibility, charitable acts, Third World development, women’s issues
and other causes. It generated considerable publicity for itself by these means.
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In the 34 years since its founding, one little store had grown into a chain of over 950
stores located in 37 countries worldwide. In Canada there were 72 shops – 56 franchised
and 16 corporate owned.
The Body Shop Canada stores, averaging about 100 square meters (1100 square feet),
were in prime retail locations, either on main shopping arteries or in mall. Stores sold
only proprietary products, always at “list prices.” There were no sales and there was no
discounting. The line consisted of nearly 400 items that could be purchased at every
store or ordered at stores and delivered through the mail. All stores were of similar
appearance; they were decorated in identical colour schemes, with displays, fixtures, and
even window displays standardized from store to store across the country. Customers
tended to be loyal, even fanatical, in their support of the company. Once someone
ecame a customer, he or she would probably not purchase a competitor’s product again.
The Initial Contact
Mr. Kingston was well aware of the success record of franchise operations, and of this
one in particular. In fact, he had just attended a conference where a major national
etailer had spoken of the Body Shop Canada in glowing terms. However, he had never
given any serious consideration to purchasing a franchise. He thought that for someone
with imagination and good business sense, a franchise would be far too restrictive.
However, with a “what have I got to lose?” mentality, he emailed the address listed in the
advertisement and asked for more information. Within a week he received a reply, on
ecycled paper.
Franchise Information
The package that a
ived contained 35 pages of information about the company and its
operations. The presentation seemed almost amateur, with much of the material poorly
scanned. Nonetheless, Mr. Paul took a night off from analyzing cases to study the
documents. The material consisted of:
• Company background XXXXXXXXXXpages
• Environmental issues 15 pages
• Information on the franchise agreement 3 pages
• Financial data XXXXXXXXXXpages
• List of cu
ent franchises XXXXXXXXXXpages
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The synopsis of the franchise agreement outlined the standard elements of a franchise
agreement and included the following, additional facts:
• The Body Shop Canada would lease the premises and sublet it to the franchisee;
• The franchisee must operate the business and be in the store at least 40 hours per
week;
• The franchisee must purchase the complete product line from the franchisor (The
Body Shop);
• The franchisee must retain effective ownership and control;
• Any sale of the franchise to a new franchisee must be approved by the franchisor;
• The franchisor may terminate the franchise if the franchisee fails to operate within the
law or fails to ca
y on business as prescribed by the franchise agreement; and
• No royalty fees would be paid except a monthly administration fee of $200, and a
promotion and publicity fee of 2 percent of gross sales.
Cost to start a new franchise were estimated as:
Franchise fee
Fixtures
Design Fee
Opening inventory
Legal Fees
First and last month’s rent
Training accommodation costs*
Site selection
Public relations**
Management aptitude test***
Total
$15,000
100,000 – 120,000
5,000
90,000-110,000
5,000
5,000-6,000
0-5,000
6,000
0-3,000
900
$ 226,900-$257,900
* Potential franchisees must attend a training program in Toronto at their own expense. At the end
of the course they must pass an exam before being awarded a franchise.
** This fee would depend on whether the Body Shop had an existing store in the market.
*** The Body Shop Canada was phasing out its management aptitude test. At the time of this case the
test was used only to choose between two applicants who were otherwise tied.
Mr. Kingston estimated that he could come up with a maximum of $125,000 himself
through a combination of savings and a personal line of credit from his bank. He would
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have to finance the inventory and part of the fixtures through a bank loan. Given the
excellent track record of the Body Shop Canada and his experience and qualification, Mr.
Kingston believed he would have no trouble bo
owing the necessary capital from a bank.
Using the company’s sales and operating projections, he created pro forma financial
statements for the first two years of a single new franchise. Exhibit 1 shows the
statements. 2 Mr. Kingston thought that the numbers looked promising and that it was
worth devoting time, even at the expense of preparing cases, to find out more about the
Body Shop Canada.
Mr. Kingston’s Plan
If buying a franchise for the Body Shop made sense, then why not try to buy two? Mr.
Kingston’s education and personality combined to make him ambitious. He had
examined the list of franchisees and realized that 13 of them had multiple stores. One
couple owned five.
Mr. Kingston reasoned that there would be economies of scale for a multi-store operation
ecause some of the start-up costs and operating expenses would be higher than for a
single store operation. Would he have enough capital? Would he be able to secure
competent management to operate on a
oader scale? Both problems seemed resolved
after discussions with two close friends.
He had two friends, both women, who were tremendously enthusiastic about the
possibility of becoming involved with the Body Shop. Both said they would quit their
cu
ent jobs at a moment’s notice and would want to purchase a minority equity position,
probably 10 to 15 percent of the store they managed (around $20,000). Mr. Kingston was
certain the two women would be ideal managers and business partners. Their equity
holdings would provide him with additional capital and them with a strong incentive to
work hard. If worse came to worst, he would be in a strong position to buy them out in
the future.
Mr. Kingston thought that the best organizational structure would be to create a holding
company with him as a sole owner, and for the company to enter into separate partnership
agreements with each of the women. Each partnership would hold one store. He revised
his pro forma statements to account for two new franchises (see Exhibit 2).
Mr. Kingston was thrilled with the projected results. He believed that he had used a
conservative set of assumptions and that even under these conditions he could expect to
eliminate all debt within three years. Even if there were zero sales growth after the
second year he could expect after-tax earnings in the area of $150,000. That night he
completed the formal application for a franchise and began to dream....
2 The Company made no provision for profit sharing among non-management level employees. Mr.
Paul’s decision to allocate 10 percent of store gross profit for this purpose was consistent with his business
philosophy.
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The Option of Buying Existing Franchises
In the course of his investigations, Mr. Kingston had been able to discover more about
the two existing locations available for franchise. The store located in Sarnia, Ontario
was already a franchise operation. The cu
ent owner had been experiencing personal
problems and was keen to sell the business. The store was small, only 40 square meters
(approx. 450 square feet), but was favorably located in the best mall in the Sarnia. Many
people described the location as the only good retail location in the city. A friend who
lived in Sarnia expressed some concern that the store had not always been well managed,
sometimes appearing to be poorly staffed and inadequately stocked.
The London store was corporately owned and was being offered as part of a plan by the
parent company to divest itself of all corporate stores (except for some in Vancouver and
Toronto). It was one of three outlets in London and was located in one of the newest
malls in an area su
ounded by up-scale housing and extensive development. A major
university (Western) was less than five km away and plans were under way to expand the
mall by some 70 stores within two years. The Body Shop had recently been moved to a
etter location within the mall and almost doubled in size to about 80 square meters.
Mr. Kingston felt certain that sales in these stores would be well above the levels
projected for start-up operations, but had no way to determine by how much. The
locations really interested him. He owned a house in London and he would be happy to
stay. One of his two potential partners also lived there, and the other had recently moved
to Sarnia, near the United States border. The Body Shop’s Canadian operation had the
ight to expand into the virgin te
itory of several United States Border States, including
the one nearest to Sarnia. Growth prospects seemed unlimited! It appeared to be a
perfect fit. The only question was how much of a premium the on-going operations
would command.
About 10 days after completing the franchise application