The Body Shop Canada “You’re not the kind of franchise applicant we usually get,” said Harry Robertson, company lawyer for the Body Shop anada, as he opened his meeting with potential franchisee Richard !aul" “# suppose we’ll find out whether that’s an ad$antage or disad$antage,” replied %r" %r" !aul" %r" Robertson’s comment had taken %r" !aul by surprise, and though he was pleased with his response, the comment had produced a sinking feeling in the pit of his stomach" Richard Paul
%r" !aul, age &', was in his final semester of the %"B"(" program at the #$ey School of Business, )estern )estern *ni$ersity" !rior to starting the %B(, his his employment background included a stint as a high+school business education teacher and se$en years of retail management" He had managed independent stores and also had managed for one of anada’s national department store chains" He had in$estigated a number of ob possibilities, but had recei$ed no offers and was still unclear about the direction he wished to follow" His strengths appeared to lie in the marketing and human resources resources area" He had little interest in oining a maor retail company- “#’$e been on that treadmill before,” he said" He felt that whate$er his e$entual career choice would be, he wanted to do “something that will make some differences to me and to others"” .he idea of working for himself was appealing- “(t least #’d be sweating to put money in my own pocket"” )hile perusing the ob ad$ertisements in the Globe and Mail , he came across one placed by the Body Shop anada" anada" .he notice stated that the company had a number of operating stores a$ailable for franchise, including locations in Sarnia, /ntario and 0ondon, /ntario" %r" !aul was aware of the company’s enormous international success and was surprised to disco$er that franchises might be a$ailable" 1urthermore, he had ne$er known the Body Shop anada to ad$ertise for franchisees" The Body Shop
The Body Shop was the brainchild of Anita Roddick, a forward thinking Briton with a strong commitment to an ideal. The company offered conventional consumer products with a twist: 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 holistic health, environmental
2
responsibility, charitable acts, Third World development, women’s issues and other causes. It generated considerable publicity for itself by these means. means. #n the 23 years since its founding, one little store had grown into a chain of o$er 345 stores located in &6 countries worldwide" #n anada there were 67 shops 8 4' franchised and 2' corporate owned" .he Body Shop anada stores, a$eraging about 255 s9uare meters, were in prime retail locations, either on main shopping arteries or in mall" Stores sold only proprietary products, always at “list prices"” .here were no sales and there was no discounting" .he line consisted of nearly 355 items that could be purchased at e$ery store or ordered from stores through the mail" (ll stores were of similar similar appearance: they were decorated in identical colour schemes, with displays, fi;tures, and e$en window displays standardi
%r" !aul was well aware of the success record of franchise operations, and of this one in particular" particular" #n fact, he had ust attended a conference where a maor national retailer had spoken of the Body Shop anada in glowing terms= Howe$er, he had ne$er gi$en any serious consideration to purchasing a franchise" He thought that for someone with imagination and good business sense, a franchise would be far too restricti$e" Howe$er, with a “what ha$e # got got to lose>” mentality, he wrote to the address listed in the ad$ertisement and asked for more information" )ithin a week he recei$ed a reply, reply, on recycled paper" Franchise Information
.he package that arri$ed in the mail contained &4 pages of information about the company and its operations" .he presentation seemed almost amateur, with much of the material ob$iously photocopied" ?onetheless, %r" !aul took a night off off from analy
Company background
8 pages
Environmental issues
Information on the franchise agreement
3 pages
Financial data
6 pages
List of current franchises
3 pages
15 pages
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.he 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 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 carry on business as prescribed by the franchise agreement; and No royalty fees would be paid except a monthly administration fee of $200, and a promotion and publicity fee of 2 percent pe rcent of gross sales.
ost to start a new franchise were estimated asFranchise fee Fixtures Design Fee /pening in$entory 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-$257,900
@ !ote !otent ntia iall fran franch chis isee eess must must att atten end d a se$e se$en+ n+we week ek tra train inin ing g prog progra ram m in .or .oron onto to at at thei theirr own own e;pense" (t the end of the course they must pass an e;am before being awarded a franchise"
&
**
This This fee fee would would depend depend on whethe whetherr the the Body Body Shop Shop had an exist existing ing store store in the market market..
*** The Body Body Shop Shop Cana Canada da was was phasi phasing ng out out its its manag manageme ement nt apti aptitud tudee test. test. At the the time time of this this case the test was used only to choose between two applicants applicants who were otherwise tied.
Mr. Paul estimated that he could come up with about $125,000 himself through a combination of savings and a personal personal line of credit from from his bank. He would have to finance the inventory and part of the fixtures through a bank loan. Given the excellent track record of the Body Shop Canada and his experience and qualification, Mr. Paul believed he would have no trouble borrowing the necessary capital from from a bank. Using the company’s sales and operating projections, he created pro forma financial statements for the first two years of a single new franchise. franchise. Exhibit 1 shows the statements. 2 Mr. Paul thought that the numbers looked promising and that it was worth devoting dev oting time, even at the expense of preparing cases, to find out more about the Body Shop Canada. Mr. Paul’s Plan
#f buying a franchise for the Body Shop anada made sense, then why not try to buy two> %r" !aul’s education and personality combined to make him ambitious" He had e;amined the list of franchisees and reali
)ould he be able to secure competent management to operate on a broader scale> Both problems seemed resol$ed after discussions with two close friends" His two friends, both women, were tremendously enthusiastic about the possibility of becoming in$ol$ed with the Body Body Shop anada" Both said they would 9uit their current obs at a moment’s notice and would want to purchase a minority e9uity position, probably 25 to 24 percent of the store they managed" %r" !aul was certain the two women would be ideal managers and business partners" .heir e9uity holdings would pro$ide him with additional capital and them with a strong incenti$e to work hard" #f worse came to worst, he would be in a strong position to buy them out in the future" %r" !aul thought that the best organi
hold one store" He re$ised his pro forma statements to account for two new franchises see A;hibit 7C" %r" !aul was thrilled with the proected results" He belie$ed that he had used a conser$ati$e set of assumptions and that e$en under these conditions he could e;pect to eliminate all debt within three years" A$en if there were
The Option of Buyin !"istin Franchises
#n the course of his in$estigations, %r" !aul had been able to disco$er more about the two e;isting e;isting locations a$ailable for franchise" .he store located in Sarnia, /ntario was already a franchise operation" .he current owner had been e;periencing personal problems and was keen to sell the business" .he store was small, only 35 s9uare meters, but was fa$orably located in the best mall in the Sarnia" %any people described the location as the only good good retail location in the city" ( friend who li$ed in Sarnia e;pressed some concern that the store had not always been well managed, sometimes appearing to be poorly staffed and inade9uately stocked" .he 0ondon store was corporately owned and was being offered as part of a plan by the parent company to di$est itself of all corporate stores e;cept for some in Eancou$er and .orontoC" .orontoC" #t was one of three outlets in 0ondon and was located in one of the newest malls in an area surrounded by up+scale housing and e;tensi$e de$elopment" ( maor uni$ersity )esternC was less than fi$e km away and plans were under way to e;pand the mall by some 65 stores within two years" .he Body Shop anada had recently been mo$ed to a better location within the mall and almost doubled in si
4
financial information" #f the company wanted to meet him, he must be an acceptable candidate" /n a beautiful spring day day he pulled into the parking lot of the Body Shop anada head office, full of e;citement at the prospect of what was about to unfold" The Meetin
%r" Robertson described the typical Body Shop anada franchisee- “female &4 to 34, married with school ageadolescent children, limited formal education, and cra
'
The #ecision
)hen %r" !aul returned home from .oronto his immediate instinct was to rush to his computer to create new pro forma statements, but before doing so he thought it would be helpful to note down his options and his concerns" %r" !aul knew knew he had a tough problem on his hands" He decided to produce pro forma statements along the lines of his first proections" He had fairly accurate percentage cost data that %r" %r" Robertson had pro$ided for the e;isting stores" He wanted to compare performance for each of the e;isting operations to a start+up, assuming each was operated as a single entity by a sole proprietor" proprietor" A;hibit & contains the statements" %r" !aul had some important 9uestions to consider beyond the financial analysis" ould he see himself inside an F5+s9uare+metre store for the ne;t 25 years> ould %r" %r" Robertson be persuaded to to compromise> (fter all, how many people could fit his ideal profile of someone with the right balance of spiritual de$otion to the Body Shop anada’s philosophy, business acumen, and access to the re9uired capital of around D745,555> (lso, what was he able to afford> )as there anything %r" !aul had missed in his analysis> Somehow this was going to be a lot more difficult than doing a case study" study" .his was his life=
Notes: 1.
For For a hist histor ory y of of the the Body Body Shop Shop,, see see Ms. Ms. Rod Roddi dick ck’s ’s book book Body and Soul (London: Ebury Press, 1991).
2.
The compan company y made made no provis provision ion for profit profit shari sharing ng among among non-m non-mana anagem gement ent level level emplo employee yees. s. 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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!"hi$it % Pro Forma Statements for a Sinle &!' Franchise
Capital Costs
Minimum
Maximum
Franchise Fee Fixtures Design Fee Legal Documentation Site Selection Management Test 1 TOTAL
$ 15,000 100,000 5,000 5,000 6,000 900 $ 131,900
$ 15,000 120,000 5,000 5,000 6,000 900 $ 151,900
ONE TIME COSTS Public Relations Fee Last Month’s Rent Training Costs Opening Inventory 2 Legal & Incorporation TOTAL
0 2,500 2,500 60,000 2,000 $ 67,000
3,000 3,500 5,000 60,000 2,000 $ 73,500
CAPITAL REQUIRED
$ 198,900
$ 225,400
EQUITY (Mr. Paul)
$ 125,000
$ 125,000
$ 73,900
$ 100,400
LOAN
Year 1
Year 2
$ 475,000 247,000 $ 228,000
$ 617,500 321,100 $ 296,400
Rent Salaries Common Area Publicity & Advertising Insurance Business Taxes Telephone Travel Service Charge
42,000 65,000 9,600 9,500 1,200 1,200 900 1,500 2,400
49,400 68,250 10,080 9,975 1,260 1,260 945 1,575 2,520
OPERATING PROFIT
$ 94,700
$ 151,135
9,470 13,073 22,000
15,114 13,073 17,600
One-time costs Income Tax NET PROFIT
$ 50,157 10,250 19,156 $ 20,751
$105,348 0 50,568 $ 54,780
CASH FLOW
$ 42,751
$ 72,380
Sales Cost of Goods Sold GROSS PROFIT
Profit Share Debt Charge Depreciation INCOME BEFORE TAX
Assumptions: Loan @ 15% Income tax @ 48% Inflation @ 5% Sales growth @ 30% /perator%anager’s /perator%anager’s base salary D73,555 No debt re-payment
1.
The Body Body Shop Shop Cana Canada da was phasin phasing g out out its its manage managemen mentt apti aptitud tudee test test.. At the time time of of this this case case the the test test was was used only to choose between two applicants who where otherwise tied.
2.
$60,00 $60,000 0 of the openin opening g inve invento ntory ry had to be paid paid for for C.O. C.O.D. D. The balanc balancee and and futu future re shipme shipments nts were were Net Net 30.
F
!"hi$it ( Pro Forma Statements for Two Two &!' Franchises
Capital Costs
Minimum
Maximum
Franchise Fee Fixtures Design Fee Legal Documentation Site Selection Management Test 1 TOTAL
$ 30,000 200,000 10,000 5,000 12,000 900 $ 257,900
30,000 240,000 10,000 5,000 12,000 900 $ 297,900
ONE TIME COSTS Public Relations Fee Last Month’s Rent Training Costs Opening Inventory 2 Legal & Incorporation TOTAL
3,000 5,000 5,000 120,000 2,000 $ 135,000
6,000 7,500 10,000 120,000 2,000 $ 145,000
CAPITAL REQUIRED
$ 392,900
$ 442,900
EQUITY (Mr. Paul)
$ 125,000
$ 125,000
EQUITY (Partners)
$
$
LOAN
40,000
$ 227,900
$
40,000
$ 277,900
Year 1 Sales Cost of Goods Sold GROSS PROFIT
Year 2
$ 950,000 494,000 $ 456,000
$ 1,235,000 642,200 $ 592,800
Rent Salaries Common Area Publicity & Advertising Insurance Business Taxes Telephone Travel Service Charge
84,000 130,000 19,200 19,000 2,400 2,400 1,800 1,500 4,800
98,800 136,500 20,160 19,950 2,520 2,520 1,890 1,575 5,040
OPERATING PROFIT
$ 190,900
Profit Share Debt Charge Depreciation
$
303,845
19,090 37,935 44,000
30,385 37,935 35,200 $ 200,325 0 96,156 $ 104,169 $ 139,369
INCOME BEFORE TAX
$
One-time costs Income Tax NET PROFIT
$
89,875 20,000 33,540 36,335
CASH FLOW
$
80,335
Assumptions: Loan @ 15% Income tax @ 48% Inflation @ 5% Sales growth @ 30% /perator%anager’s /perator%anager’s base salary D73,555 No debt re-payment
1.
The Body Shop Shop Canada was phasing phasing out its its managemen managementt aptitude aptitude test. test. At the time time of this this case the the test was was used only to choose between two applicants who where otherwise tied.
2.
$60,000 of of the opening opening inventory inventory had to be paid paid for C.O.D. C.O.D. ‘ the balance balance and and future shipme shipments nts were Net Net 30.
I
!"hi$it ) Pro Forma Statements for !"istin Operations
Capital Costs Franchise Fee Fixtures Goodwill Legal Documentation Management Test 1 TOTAL
Sarnia $
Sarnia Year 11
London Year 11
$ 600,000 312,000 $ 228,000
$ 750,000 390,000 $ 360,000
Rent Salaries Publicity & Advertising Insurance Business Taxes Telephone Travel Service Charge
48,000 90,000 12,000 1,200 1,200 2,000 1,800 2,400
60,000 112,500 15,000 1,200 1,200 1,800 1,500 2,400
OPERATING PROFIT
$ 129,400
$ 164,400
12,940 26,807 12,000
16,440 54,710 24,000
One-time costs Income Tax NET PROFIT
$ 77,653 9,817 32,561 $ 35,275
$ 69,250 10,833 28,040 $ 30,377
CASH FLOW
$ 47,275
$ 54,377
London
15,000 60,000 125,000 3,000 900 $ 203,900
$
15,000 120,000 250,000 3,000 900 $ 388,900
ONE TIME COSTS Inventory 3 Last Month’s Rent Training Costs Legal & Incorporation TOTAL
$
90,000 4,067 3,750 2,000 99,817
90,000 5,083 3,750 2,000 $ 100,833
CAPITAL REQUIRED
$ 303,717
$ 489,733
AVAILABLE
$ 125,000
$ 125,000
LOAN
$ 178,717
$ 364,733
Sales Cost of Goods Sold GROSS PROFIT
Profit Share Debt Charge Depreciation INCOME BEFORE TAX
Assumptions: Loan @ 15% Income tax @ 48% Inflation @ 5% Sales growth @ 30% /perator%anager’s /perator%anager’s base salary D73,555 No debt re-payment
1.
Base Base on curr curren entt sal sales es..
2.
The Body Shop Shop Canada was phasing phasing out its its managemen managementt aptitude aptitude test. test. At the time time of this this case the the test was was used only to choose between two applicants who where otherwise tied.
3.
The enti entire re stor storee invent inventory ory must must be be paid paid for for up front front..
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!"hi$it ) – Continued Sarnia Year 2
London Year 2
Sarnia Year 2
London Year 2
Sarnia Year 2
London Year 2
Pessimistic '55,555
Pessimistic 750,000
Expected 690,000
Expected 862,500
Optimistic 798,000
Optimistic 997,500
C.O.G.S.
&27,555
390,000
358,800
448,500
414,960
518,700
Gross profit
7FF,555
360,000
331,200
414,000
383,040
478,800
Rent
3F,555
60,000
55,200
69,000
63,840
79,800
Salaries
I5,555
112,500
90,000
112,500
90,000
112,500
Pub. & Adv.
27,555
15,000
13,800
17,250
15,960
19,950
2,755
1,200
1,200
1,200
1,200
1,200
1,200
1,200
1,200
1,200
1,200
1,800
2,000
1,800
2,000
1,800
1,500
1,800
1,500
1,800
1,500
2,400
2,400
2,400
2,400
2,400
12,940
164,400 16,440
163,600 16,360
207,150 20,715
204,640 20,464
258,450 25,845
Debt charge
26,807
54,710
26,807
54,710
26,807
54,710
Depreciation
8,160
19,200
8,160
19,200
8,160
19,200
81,493
74,050
112,273
112,525
149,209
158,695
0
0
0
0
0
0
Income tax
39,116
35,544
53,891
54,012
71,620
76,174
NET PROFIT CASH FLOW
42,377 50,537
38,506 57,706
58,382 66,542
58,513 77,713
77,589 85,749
85,521 101,721
Sales
Insurance Business Taxes Telephone Travel Service Charge OP. PROFIT Profit share
Inc. Before Tax One-time costs
2,755 7,555 2,F55 7,355 27I,355
22
Student uidelines
Situation *nalysis
Jo the strengths+weaknesses analysis of Richard !aul as a prospecti$e Body Shop franchisee" Secondly do a full S)/. Body Shop as a business" .he 4 1orces analysis should consider the Body Shop’s industry" .here is no historical financial analysis"
*+T!R&*TI,!S You are to de$elop fi$e 4C alternati$e courses of action for %r" !aul, and recommend one of these" #f you recommend an alternati$e that might not be accepted by the Body Shop, you must recommend a second choice as a fallback position"
Note:
.he ma;imum amount that %r" !aul may borrow regarding any of the franchise is as follows
F5K of the $alue of the fi;tures plus 45K of the $alue of the in$entory"
Use this information in your analysis. BodyShopCase
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