Body Shopped Out
This week’s Retail Note analyses the administration of The Body Shop and potential buy-out of Superdry.
10 minutes to read
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Key Messages
- The Body Shop appoints FRP as administrators
- Only around half the 198-store UK estate to be retained
- Seven stores closed with immediate effect
- Business only acquired by PE house Aurelius last Nov
- Mismanaged and under-invested in by a series of owners
- Superdry confirms it is in talks to take the business private
- But negotiations are only at a preliminary stage
- Buy-out, CVA, pre-pack all remain possibilities
- Some degree of restructuring likely regardless of outcome
- A victim largely of brand drift and over-expansion
- Both Body Shop and Superdry likely to remain high street fixtures.
Ownership. Successions thereof, limitations therein. The crux of The Body Shop’s fall into administration.
Over-expansion with a brand that drifted out of fashion. A very different story at Superdry, the other major high street operator currently under scrutiny of possible fall-out.
Analysis of retail failure tends to be very glib and broad-brush. But juxtaposing the backstories of The Body Shop and Superdry underlines the intricacies of distress and the fact that more often than not, the issues are particular to that operator and often there are few common denominators.
The facts
After months of speculation, The Body Shop finally appointed FRP Advisory as administrators of the UK business this week. The administration process includes the retailer’s UK business only and will not affect its global head franchise partners. FRP stated that it will “accelerate restructuring of the UK business” and some clarity on this has already been forthcoming. Around 40% of head office roles are to be axed and only “more than half” of its 198 UK stores will be retained. Seven stores were already closed on 20 February, “with additional closures to follow”.
The situation at Superdry, at time of writing, is more nuanced. Having issued a profits warning pre-Christmas, the business subsequently appointed PwC to advise on its finances and review debt options. Founder and CEO Julian Dunkerton is now understood to be assembling an offer for a US private investor to take the brand private. According to Sky News, Davidson Kempner, which has backed a number of UK retailers including Oak Furnitureland and Jojo Maman Bébé, is in talks about an offer for Superdry. Discussions are understood to be at a preliminary stage and there’s no guarantee an agreement will be reached.
In a statement published on the London Stock Exchange, Superdry confirmed that Dunkerton is “considering options in respect of the company”, which may include a cash offer. Superdry said in a statement: “There can be no certainty that an offer will be made, nor as to the terms on which any such offer might be made.” It added that Dunkerton must announce his intention either way by 1 March 1 2024.
A straight buy-out, a CVA, an administration, a pre-pack. Or a combination of any of the above, all are possibilities. But a restructuring and retrenchment in some shape or form further down the line seems an inevitability.
The fiction
As with any retail failure, the wise-after-the-event armchair analysts have been out in force. In a nutshell, Body Shop supposedly went into administration on the back of a poor performance over Christmas, products were too expensive in the face of a cost-of-living crisis, its stores were terrible and under-invested in and all its competitors (especially Lush) did a much better job and it was essentially a has-been brand. Barely a grain of truth in any of these proclamations.
To debunk the weak consumer demand argument first. Whatever is happening in the macro-economy and however deep the cost-of-living crisis is, cosmetics and toiletries sales have been absolutely flying. For 2023 as a whole, cosmetics spend soared +9.5% in value terms. Even stripping out inflation, volume sales were also well into positive territory (+1.1%) in stark contrast to most other retailing categories. Taking Christmas in isolation from the rest of the year, demand continued to hold up exceptionally well (values +7.8%, volumes +2.2%). Against this backdrop, it’s highly unlikely that Body Shop experienced an abrupt downturn in trading performance.
Products too expensive? Not really, Body Shop is not cheap and never has been, but consumers have always been prepared to pay a slight premium because of the quality of the product and its ethical credentials. But it is not exactly at the high end of the cosmetics market and its price points are generally low-ticket and affordable.
Those critical of its stores probably haven’t been in one lately – or maybe they have just been to ones that I haven’t. There are admittedly some question marks over the level of investment (as I will come onto), but this is not necessarily reflected in store standards. Most are fresh, well fitted-out and definitely fit-for-purpose. Maybe not as all-singing, all-dancing as some of the flagship Lush stores, but perfectly serviceable and shoppable nonetheless.
Out-thought and out-maneuvered by the competition? Body Shop was undoubtedly a pioneer and trailblazer in the ethical and sustainable space and for many years ‘owned’ that part of the market. But obviously, the ethical cosmetics space is infinitely more crowded these days, with a whole host of new specialist formats and H&B generalists such as Boots and Superdrug (and even the major supermarkets) all making a concerted play for the ethical market. Body Shop no longer has the market to itself, but it still holds a significant space within it.
The notion of Lush completely stealing Body Shop’s thunder is likewise a bit fanciful. They both trade in the same market and so are, in effect, competitors, but both offer entirely own-brand product, so there is absolutely no direct product overlap. Consumers can (and do) shop both.
Body Shop - ownership merry-go-round
As already alluded to, the root of The Body Shop’s failure is its checkered ownership history. In essence, since the mid 2000s it hasn’t been run as a retailer, by a retailer, with the requisite skill, vision, investment and love a retailer must have if it is to thrive.
Which is ironic as it was the epitome of all these things when it was founded by Dame Anita Roddick in the mid 1970s. A case study in everything that a retailer should be – innovative, trailblazing, visionary, ethical, customer-centric. Whatever has happened of late, The Body Shop’s elevation from a cottage industry to a global brand remains one of the great stories of UK retailing. Even when the business went public in 1984, it retained its credentials and remained true to its founding principles, with the Roddicks still effectively pulling the strings.
Any rot only really started to set in when they sold out to L’Oréal in 2006 for £652m. Any synergy between the two businesses was actually very limited or superficial. Although both are synonymous with cosmetics and toiletries, L’Oréal is a manufacturer, The Body Shop is a retailer. Very different disciplines and modus operandi, especially as L’Oréal products were not sold in Body Shop stores, nor Body Shop products disseminated across L’Oréal’s global distribution network. Obviously a relative minnow within the wider L’Oréal empire, Body Shop effectively drifted under its decade of ownership under L’Oréal.
As, indeed, it did under its next owner, the Brazilian operator Natura, who paid £880m for the business in 2017. Similar situation with L’Oréal, a global health & beauty business with little understanding of a UK-based retail chain. In November 2023, after six years of owning the company, Natura sold the Body Shop to Aurelius, a German-based private equity group, for just £207m.
A switch to private equity ownership in November, a collapse into administration within three months. Need I say more? The same old story, private equity seeing an opportunity to make a fast buck out of UK retail. Nothing more, nothing less. Not something that we haven’t seen many times in the past, though thankfully not for a while.
Superdry – much more fundamental
Very different dynamics at Superdry, but there are some parallels with The Body Shop in terms of the origins of the business. Essentially the vision of two men (Julian Dunkerton and Ian Hibbs) the genesis of the business (under the name of Cult Clothing) was a single market stall in Cheltenham, which opened in 1985. The Superdry brand was launched in 2003. Cue another cottage industry on a stratospheric path to global brand status.
The business floated in 2010 with a value of £395m. It then became both a high street and stock market darling and a rapid period of expansion ensued, landlords largely falling over themselves to secure what was seen as a must-have occupier. In January 2018, the business hit a stock market high, its value topping out at £1.6bn.
The fall from grace has been rapid. Trading has faltered badly in recent years and despite the return of Julian Dunkerton to the helm in 2019 (having stepped down in 2014), the business has laboured badly. The pre-Christmas profit warning saw share slump to an all time low, with the business value dipping below £40m. So, from £1.6bn to <£40m in less than six years.
Where did it all go wrong for Superdry? Essentially just two factors, but both huge in their own right. The brand simply slipped out of fashion. And the business over-expanded. Massively destabilizing factors in isolation, in combination, almost fatal.
By its very nature, fashion retailing is notoriously fickle. A brand can fall in and out of favour almost overnight. Superdry is neither the first to fall victim to the fads and vagaries of consumer demand, nor will it be the last. But obviously, any shortfall in brand equity is magnified and multiplied the larger the store estate is and there is little doubt that Superdry over-expanded during its heyday years. And it is very hard to row back from this double-whammy.
Unlike the Body Shop, Superdry can indeed point to weak consumer demand for any current woes. Clothing spend generally held up better than expected in the first half of 2023, but fell off a cliff in September on the back of unseasonable weather. And has not really recovered since. In Q4 2023, clothing sales values increased by just +0.9% - stripping out inflation, volumes were down by -5.0%. And with a deteriorating monthly trend, with no arrest to this downward spiral in December or January. Consumer demand in cosmetics extremely buoyant, in fashion anything but.
Whatever the outcome of current restructuring / refinancing negotiations, a rationalization of the store estate seems inevitable. There are ca. 740 Superdry branded stores in 61 countries. Of these ca. 500 are franchised / licenced, with ca. 240 company-owned stores across the UK, Republic of Ireland, mainland Europe and the US. It’s anyone’s guess as to what the ‘optimum’ number of stores going forward will be (and only those will full access to the full estate P&Ls will have any informed view on this), but it seems fair to say that it will be lower than 240. We can but speculate at this stage.
The future
Do The Body Shop and Superdry have a future on the high street? Most definitely, yes. Despite their respective issues, both remain strong brands with unique propositions. They may struggle to recreate historic highs, but they both still have a place. But any restructuring is likely to be painful, particularly for the property community. Closures, voids and aggressive rent / lease negotiations will be a reality for many landlords.
My hope is that a leaner The Body Shop is ultimately acquired by a retail-led 3rd party, with the necessary vision, experience (and cash) to take the business forward – something that has been lacking for too long. By the same token, that if Superdry is taken over, it is by an outfit that has an appreciation of retail, rather than a faceless slash and burn merchant.
There is one final common denominator between The Body Shop and Superdry. Both embody and are living examples of the ‘Structural Failings in Retail’ that we have identified in our more detailed thought leadership research. ‘Historic Over-expansion’ and ‘Brand Devaluation’ lie at the heart of Superdry’s plight, while The Body Shop’s non-retail / PE ownership (indirectly under the wider monicker of ‘Over-geared Balance Sheets’) also has the by-product of ‘Under-investment’.
In our Retail Renaissance report, we analyse in detail the level of progress that has been made against our 10 Identified ‘Retail Structural Failings’ over the last five years. In general terms, the direction of travel is positive. But the plights of The Body Shop and Superdry serve as a sobering reminder that many legacy issues remain.