BADM470 Business Policy and Strategy

The Body Shop Canada Case Study

Key Events

The Body Shop is a multi-national entity founded over thirty-four years by Anita Roddick in Canada.  The Body Shop Company deals in the sale of "naturally-based conventional products with a twist." The Body Shop is also known for its presentation as the champion of activism, environmentalism, and social responsibility.  

The Body Shop Canada is an international retail company and therefore operates in the retail industry with its stores located on an average of 100sqm^2. It competitors, therefore, include retail business selling conventional consumer products.  The relevant issues include the Company's search for a potential franchisee, as mentioned by the Company's lawyer. Other relevant is uses are the terms and conditions through which the Company's franchisee arrangement would be undertaken.  These include the purchase price, royalty fees, among others.  

Problem Statement

Franchises are some of the globally most-effective measures of operating entrepreneurial activities.  In a franchise arrangement, the franchisor (seller) offers the franchisee (buyer) the rights to operate under the seller's name, brand, or copyright while paying back royalty fees or a percentage of profits.  The paper seeks to assess the Body Shop's need for a potential franchisee (Mr. Kingston) and also evaluate if The Body Shop's offer is a profitable venture for Mr. Kingston.  The paper also seeks to evaluate the different stores' options that Mr.  Kingston can choose from, given their strengths and weaknesses.

Situation Analysis  

According to the available data and projections, the franchisee sector is an attractive and profitable venture. Based upon prevailing market information assessed, the opportunities significantly out-weigh the existing market threats and or weaknesses. Franchises in the retail industry are a profitable venture because buyers take advantage of already established company patents that have reliable market demand and loyal customers.  Therefore, franchisees who trade under such established business names and brands exploit the already prevailing market demand to their advantage, which makes franchising an attractive business practice.  

Swot Analysis

Strengths

• Diverse and broad geographical presence
• Strategic positioning as the champion of social responsibility
• Effective publicity
• Unique products offered
• Use of the  e-commerce marketing tools
  
  

Weaknesses

• Lack of customer incentives such as sales discounts  
• low advertising practices 
  
  

Opportunities

• Newmarket potential in over 37 countries
• It is strategically located in prime retail areas.
• Technological advancement (e-commerce)
• Customer loyalty

Threats

• High capital requirements
• Stiff market competition  
• Potential legal constraints  

Porter’s Five Forces  

Rivalry Among Competitors

Because of its business practice and model, The Body Shop Canada is effectively controlling the level of competition in the retail industry. It has generated significant customer loyalty, which gives it the ability to operate as an industry leader. Such a scenario is creating significant industry competition leading to high industrial growth and development.

Bargaining Power Of Suppliers  

The retail industry is comprised of numerous company suppliers and creditors, which reduces their bargaining power.  Also, since The Body Shop is a leading manufacturer, it has significant control over its suppliers, which helps it to maintain high profitability.

Bargaining Power Of Buyers

The bargaining power of buyers, according to Michael Porter's five forces, has a significant effect on the producer's profitability. Porter argues that industries characterized by low switching costs and high bargaining power reduce the producers' profitability level. For The Body Shop Canada, buyers have low bargaining power because of the high switching costs associated with changing from consuming "holistic health goods" to other unnaturally good products of its competitors.

Level Of New Entrants

Porter argues that industries associated with low entry requirements such as start-up capital and legal needs have high competition and consequently low company profitability. For The Body Shop Canada, however, the level of entry in the retail industry is low, leading to a low level of competition.  With a low level of competition, The Body Shop Canada enjoys a reliable market demand for its products resulting in high profitability.  

Threats Of Substitute Products/ Services  

Michael suggests that substitute products in an industry critically affect the profitability of a firm. If a given product such as The Body Shop Canada's natural products is easily substituted, then a buyer can easily change preferences.  In such a scenario, opting to purchase an alternative product implies that The Body Shop Canada's profits will decline.  However, The Body Shop Canada offers consumer goods that have a "twist," and these cannot easily be substituted by any other products.  Therefore, since buyers cannot easily substitute its products with others on the market, its profits are kept intact, and its market share remains the same.

Alternatives and Decision Criteria

The decision-maker needs to use the market growth criteria, the business model of operation, strategy, competition, and the opportunity window. The costs of operation and the profitability criteria are also essential evaluation criteria for analyzing the different alternatives.  The market growth criteria will assist Mr. Kingston in assessing the reliability and availability of the market for the products sold by the different alternatives. He also needs to evaluate the applicable alternatives’ business model that can enable a continued market growth to overcome the existing competition.  

Analysis

The four alternatives are essentially analyzed following the profitability measure and performance analysis.  It includes an evaluation regarding the different profitability margins and percentage contributions in relation to the total sales. For example, the operating costs and the costs of goods analysis were conducted to evaluate their percentage contribution to overall sales and profits.  By doing so, Mr. Kingston can determine which of the four franchises alternatives is more costly to operate. For example, table 1 of the paper reflects that between the London and Sarnia stores, it is better to opt for the Sarnia store.  Even though Sarnia's operating expenses take up a higher sales percentage than in the London store, Sarnia has a better net profit percentage rate compared to the London store. Secondly, the London store requires higher capital to operate, whereas the Sarnia store needs much less capital to run.

Sarnia's net profit percentage of its total sales (8.4%) is the highest out of all the four alternatives available to Mr. Kingston, especially in the first year.  Purchasing a single franchise can generate a net profit percentage contribution of 5.0%, whereas the two franchises are likely to generate a 5.8% net profit contribution to total sales in the first year.  Due to such a financial measure, the store at Sarnia is a better investment alternative.

On the contrary, however, if Mr. Kingston conducts an analysis on the loan requirement condition provided, all the alternatives do not qualify except the investment in a single franchise.  As noted within the guidelines, Mr. Kingston can only borrow 80% of the alternatives' fixtures and only 50% of the inventory in each alternative.  In table 2, the computation shows that the loan requirement for purchasing Sarnia, London, and the two new franchises is beyond the acceptable limit.  It only in the single franchise alternative where the required loan is within acceptable limits.

Recommendation

We recommend alternatives involving the new single franchise and the two new franchise options as the ideal investments. Unlike the London and Sarnia stores, the debt to asset ratios for these franchises is significantly low and within acceptable limits.  Although Sarnia has a better net profit-generating capability, its acceptable loan amount creates a significant leverage ratio. Mr. Kingston can use other alternatives such as investors' equity to meet the capital gap of $ 7900. The financial evaluation of these franchises depicts that they are capable of meeting Mr. Kingston's profitability objectives, market demand, low operational cost targets, and relatively competitive.

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