Company Spotlight MarketWatch: Global Round-up

Company Spotlight: The Body Shop

The Body Shop: successful consolidation into L'Oreal

Since being bought by L'Oreal in July 2006, The Body Shop has performed well. Like-for-like sales
increased by 9.7% in the six months to December 2006, masking even more impressive fourth quarter
sales. This, combined with increasing profitability, means the health and beauty specialist is en route to
becoming a thriving global brand.

The partnership seems to be paying off: L'Oreal's takeover of The Body Shop solved various problems for the
health and beauty specialist, which was suffering from a lack of funds. The retailer's repositioning as a masstige
brand - offering premium product at mid market price points - was failing to generate significant returns due to a
limited marketing spend, constraining communications with the retailer's new and larger target customer base.

L'Oreal's funds have allowed The Body Shop to raise the profile of its marketing strategy. This has included a
global partnership with the music channel MTV to raise awareness of HIV and Aids prevention through the
promotion of a limited-edition, co-branded fragrance called Rougeberry Eau de Toilette in 44 countries. This is
one attempt to expand the Body Shop's customer base and attract the attention of new shoppers.

The Body Shop's multi-channel strategy will also benefit from the investment the French cosmetics company
can provide, and the technological expertise that L'Oreal subsidiaries can share. The retailer's first UK
transactional website was launched in September 2006, and the company's home shopping business is also
growing well. Both of these complementary channels can expect continuing nurture from their parent company.

Ultimately, it is The Body Shop's ethical stance and masstige positioning which should, with financial backing,
guarantee the retailer's survival in a health and beauty market which will only become more cut-throat regarding
the survival of specialists. The retailer has justified its above average price-points with its strong ethics, and will
continue to attract affluent customers. The brand has already proved it translates well for international
expansion, and L'Oreal's financial backing will allow further international growth opportunities to be exploited -
with China, Brazil, Argentina and Chile expected to follow the successful launch in India.

Business Background

The Body Shop International operates a chain of cosmetics stores specializing in skin and hair care products
made from natural ingredients. The company operates in over 50 countries worldwide through a chain of 2,133
stores. The Body Shop International operates company owned stores in the UK, the US, France, Germany and
Singapore, with the remaining 45 markets owned and operated by independent franchisees.

The company sells over 1,200 health and beauty products. Its traditional emphasis has been on shampoos, bath
products, soaps, skin creams and conditioners made from natural ingredients.
The company sells beauty related accessories including exfoliating bath gloves, mitts, body buffers and foot files
and muscle toning, relaxing and invigorating massagers. In addition, it also sells men's toiletry ranges, perfumes
and seasonal products. None of the company's products are tested on animals, and many of the company's
stores offer recycling facilities.

Body Shop trades with over 35 suppliers from some 25 countries to source raw materials. The company
operates through a number of retail formats including stores in railway stations, units in large shopping malls and
town center stores. Body Shop is also involved in direct selling through The Body Shop at Home.

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Company Spotlight MarketWatch: Global Round-up

Table 14: Key Facts

Address Watersmead Products and Services

Littlehampton Bath and shower products
West Sussex Body care products
BN17 6LS Skincare
GBR
Website www.thebodyshopinternational.com
Telephone 44 1903 731 500
Fax 44 1903 726 250
Employees 7,050
Financial
Year End February
Turnover GBP485.8million

Source: Datamonitor D A T A M O N I T O R

SWOT Analysis

The Body Shop International is famous for creating a niche market for naturally inspired skin and hair care
products. Though the company's concept was copied by other competitors in the years following its
establishment, the company has retained high brand recognition levels and leveraged its first mover advantage.
However, the recent acquisition of Body Shop by L'Oreal could present problems due to differences in the
corporate images of these two companies.

Table 15: SWOT Analysis

Strengths Weaknesses

Niche positioning Declining profitability

Low cost sourcing Weak performance in the UK and Republic of Ireland
Diversified geographic presence
Strong revenue growth

Opportunities Threats

The Body Shop at Home Clashing ideology

Agreement with MH Alshaya Intense competition
Male grooming products Counterfeits
Entry into new markets
Increasing online sales

Source: Datamonitor D A T A M O N I T O R

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Company Spotlight MarketWatch: Global Round-up

Strengths

Niche positioning

The Body Shop is famous for creating a niche market sector for naturally inspired skin and hair care products.
The group has been instrumental in introducing a generation of consumers to the benefits of a wide range of
natural products, through its product lines, including Vitamin E Moisture Cream to the Tea Tree Oil range and
Banana Shampoo. Body Shop brought the benefits of natural ingredients like aloe vera, jojoba oil, rhassoul mud,
cocoa butter and many more to personal care products. The company also revolutionized the ethical stance of
the cosmetic industry by not testing cosmetics and other personal care products on animals. Though the
company's concept was copied by other competitors in the years to come, the company has retained high brand
recognition and the first mover advantage.

Low cost sourcing

Community Trade is Body Shop's own fair trade program, through which it purchases natural ingredients and
accessories from disadvantaged communities around the world. For instance, the company purchases
ingredients such as blue corn from the Pueblo Indians in New Mexico and Brazil nut oil from the Kayapo Indians
of the Amazon River Basin. In all, Body Shop trades with over 35 suppliers from some 25 countries. It provides
the company with access to low cost raw materials for its products. In addition, it reinforces Body Shop's image
as an ethical company.

Diversified geographic presence

The company operates in over 50 countries worldwide through 2,133 stores. The company's operations are
classified into four regions: Americas, the UK and Republic of Ireland, Europe, Middle East and Africa and Asia
Pacific. Americas accounted for 33.1%; the UK and Republic of Ireland accounted for 29.7%; Europe, Middle
East & Africa accounted for 19.4%, and Asia Pacific accounted for 17.7% of the total revenues in fiscal 2006.
The company's diversified geographic presence reduces its exposure to market risks in any single geographic
region and increases growth opportunities.

Strong revenue growth

Body Shop recorded strong revenue growth during 2003-2006. Its revenues grew at a CAGR of 8.7% during this
period. During fiscal 2006, Body Shop's revenues at £485.8 million grew by 15.9%, above the industry average
of 15.7%. Moreover, the growth was realized across key markets. The growth was driven by Europe (26.6%)
and Asia Pacific (33.7%). The Americas region also recorded double digit growth of about 13.1%. Strong
revenue growth indicates that the company has been able to increase its market share.

Weaknesses

Declining profitability

Body Shop's operating margin declined from 9.4% in fiscal 2005 to 8.5% in fiscal 2006. Moreover, it is lower
than the industry average of 16.4%. The company's operating profit from its largest market, the Americas,
declined by 20% in fiscal 2006. This was driven in part by lower traffic levels in the shopping malls, compounded
by inefficient inventory management that led to some out-of-stock situation. Also, the company's operating
margin does not compare well with its competitors, Estee Lauder (11.4%) and Kao Corporation (12.4%) in the

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Company Spotlight MarketWatch: Global Round-up

last reported fiscal year. Lower operating margins might indicate inefficiencies in the company's operating cost
structure.

Weak performance in the UK and Republic of Ireland

Though the company's overall revenue growth strong in fiscal 2006, its performance in the UK and Republic of
Ireland was weak. The company's revenues from the UK and Republic of Ireland grew by only 4.8%.
Comparable store sales declined by 1% in the Republic of Ireland during the same period. Weak performance in
geographically important market undermines may indicate loss of market share.

Opportunities

The Body Shop at Home

The Body Shop at Home (products delivered to customers' homes) continues to show impressive growth in the
UK, the US and Australia. The Body Shop at Home grew 14% in fiscal 2006. Strong support systems and
efficient networking have also yielded operational efficiencies in this area. As the company's customer base
increases, it is able to offer more home parties, hence growing customer base, creating opportunities to offer the
brand to a wider audience.

The Body Shop at Home in the US has grown significantly and has now been rolled out to 48 states. In the UK,
it has been through a period of transition as its infrastructure and systems have been integrated with the UK
retail business. In Australia, there has been rapid growth and it has successfully extended the brand to more
remote areas. Its success in these markets has prompted Body Shop to launch The Body Shop At Home in
Germany in fiscal 2007. Moreover, customers are likely to increase their individual spending when shopping
from the comfort of their friends/own home. This represents further opportunities for growth in other countries.

Agreement with MH Alshaya

Body Shop signed an agreement in February 2006, with MH Alshaya Company, a leading retailer in the Middle
East, in a move to expand its franchise operations in this region. The cosmetic and toiletry (C&T) market in the
Middle East is currently growing at 12% per annum and is valued at $1.7 billion. The value of C&T market in this
region is expected to reach $2.1 billion by the end of 2006. Gulf States in particular has the largest per capita
cosmetics expenditure in this region and also one of the highest in the world at approximately $334 per person.
As part of the agreement, the company plans to open three new stores in Cyprus in 2006. This agreement would
provide a strong base for the company to expand its operations in this region with immense growth potential.

Male grooming products

There is a high growth potential for male grooming products in the UK, the US and Europe. French men spend
the maximum on grooming products followed by the Germans, then by the Dutch and the Americans. Men in the
UK spend a total of £920 million a year on personal hygiene products, £278 million a year on hair care products,
£88 million on fragrances and £65 million on skincare products. The UK market for male grooming products is
likely to grow to £1.5 billion by 2008.

A trend toward greater usage of personal care items among young men has also seized the US. Young men
between the ages of 8 to 18 are an important and growing sector of the health and beauty care industry,
representing a potential market of $2.8 billion by 2008. Body Shop has a line of products for men which includes

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exfoliating and conditioning face scrubs and a range of naturally-inspired fragrances. This high growth potential
of male grooming products would boost the sales of the company's range of men's products.

Entry into new markets

Body Shop has expanded into new markets, with store openings taking place in both Russia and Jordan during
fiscal 2006. In Russia, it opened six stores, with another 11 openings planned for fiscal 2007. The company
plans to open its first store in India, Pakistan and Poland in 2006. The sales of cosmetics and toiletries rose by
6% in value terms in India in 2005. This growth in Indian cosmetics and toiletries in the future is expected to be
driven by rising hygiene and beauty consciousness due to changing demographics and lifestyles, increasing
disposable incomes, rising media exposure, and greater product choice. The company's entry into these high
growth markets augurs well for its growth.

Increasing online sales

The company launched its e-commerce site in the US in 2004. Sales on this site more than doubled in fiscal
2006, making a contribution to profit in its first full year of operation. The company expects to launch an e-
commerce site in the UK during the fiscal 2007, in time for the key Christmas trading period. Worldwide online
consumer spending is forecast to rise from $136.6 billion in 2004 to $228 billion in 2007. Significant growth in
online sales is forecast for all categories of consumer goods. The online market is the fastest growing sector of
UK retail at present, accounting for almost half the cash growth in retail spending in 2005. The company's
increasing online presence in the backdrop of rising online sales should increase its margins by reducing its
operating costs.

Threats

Clashing ideology

L'Oreal acquired Body Shop in a deal worth £652 million in March 2006. Though the takeover is expected to be
beneficial to both the company's by increasing their growth opportunities, there are few concerns regarding the
stark difference in the corporate images of these two companies. Body Shop has built its image as an ethical
company which is against all animal testing. Moreover, it is known for the use of natural ingredients in its
products. L'Oreal on the other hand has been criticized for testing its products on animals in the past. It has even
been boycotted by the animal welfare group, Naturewatch. Consequently, the takeover could have an adverse
effect on Body Shop's corporate image.

Intense competition

The global cosmetics business is intensely competitive, with a few big corporations and a large number of small
companies vying for market share. The company competes against global companies such as Revlon, Estee
Lauder and Procter & Gamble in addition to a number of smaller companies. Of late, the bigger companies have
sharpened focus on beauty and personal care products market in the US as well as emerging markets.
Increased competition could result in price reductions, reduced profit margins and loss of market share.
Counterfeits

The proliferation of counterfeit goods and accessories is adversely affecting the sales of branded cosmetics and
accessories. According to Global Congress on Combating Counterfeiting, 9% of all world trade comprises fake
goods. In 2005, more than 5,024 incidents of counterfeiting and piracy activities worldwide were recorded by
Gieschen Consultancy, an organization that tracks counterfeit activity across the globe.

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Company Spotlight MarketWatch: Global Round-up

Increasing sales of counterfeit products negatively impact the company's sales. Low quality counterfeits also
reduce consumer confidence in the products of a company. More importantly, what differentiates the products of
companies such as Body Shop from competitors is exclusivity. Widespread counterfeits reduce the
exclusiveness of the company's brands. Counterfeits not only deprive the company of revenues, but also dilutes
its brand image.

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