Mice in the Body Shop: With a top global name and net-savvy customers, the soaps-and-lotions retailer was a natural for online selling. But such a step was fraught because franchisees could be panicked by any diversion of sales. Matthew Lynn reveals how t

Mice in the Body Shop: With a top global name and net-savvy customers, the soaps-and-lotions retailer was a natural for online selling. But such a step was fraught because franchisees could be panicked by any diversion of sales. Matthew Lynn reveals how t

by MATTHEW LYN
Last Updated: 31 Aug 2010

Gordon Roddick is not a naturally eloquent man. He speaks with a slight stutter and often struggles to find the words that match the concepts in his mind. Switch him on to the subject of Body Shop's new digital venture, however, and he suddenly takes flight. 'The new economy can be pretty frightening and there is a big element of risk,' he says. 'As businesses grow, they can easily lose a lot of their edge. We had been in danger of losing it. But this has given us new energy. It takes us back to our roots.'

The new venture he is talking about is Body Shop Digital, a collaboration between Softbank Venture Capital, one of the biggest and most aggressive internet finance houses, and the chain of shops most famous for its tulip-scented foot balms. By the time it was announced earlier this year, the start-up had already struggled through a tapestry of dramas, traumas and excitements, all of them illustrative of the issues faced when established companies try to take a slice of the emerging digital economy.

When Body Shop Digital launches early next year, accompanied by the fanfare of advertising and marketing hoopla that usually heralds new web ventures, it will leave in its wake a number of battered egos. The tale of how it was summoned into being is an essay in what happens when the new economy meets the old.

Body Shop has never been any kind of Establishment organisation. It was created out of a late-60s/early-70s mix of feminist politics, environmental concern and self-indulgence. 'Help save the planet while massaging your feet' was its message. Hippy capitalism had no finer practitioners. It was a brilliantly successful mix - a piece of inspired and entirely natural marketing that helped to make Body Shop one of the biggest brands in the world. Walk through any high street anywhere and, along with a pair of golden arches, it is one of the few familiar facades that immediately strikes you. In 49 countries it has 1,700 shops, and it consistently ranks among the world's 30 most recognised brand names.

By the turn of this decade, however, some of that youthful vigour had begun to ebb. The company had been through a series of financial setbacks and had come under pressure from investors as its share price slid towards oblivion. From pounds 2 in 1996, it fell below 80p and it has only just clawed its way back to 120p. Body Shop had struggled to transform itself from an entrepreneurial venture controlled by Anita and Gordon Roddick into a professionally managed organisation. Crucially, it had watched its core audience move on. The environmental and political concerns that had animated the teenagers and 20-somethings who make up the bulk of its customers had been supplanted by a different obsession - the internet.

'Our natural market loves the internet,' observes Gordon Roddick. 'They are up for any kind of innovation.' Like most businesses, Body Shop had splashed up a web site on a server. This detailed the products it sold and told people where the shops were, but it was little more than a corporate brochure made from silicon and pixels rather than ink and paper. It was hardly likely to excite the net-savvy teenagers who make up Body Shop's core audience.

Roddick was able to address the problem. 'I am not deeply involved in running the business any more, so I can get out and about a bit and talk to a lot of people about what we should be doing.'

He is also on the board of a small new media company called FreePlay Radio, through which he had started to network with internet movers and shakers. The chief executive told Roddick that if he wanted to do anything on the web, he needed to talk to Brad Feld, MD of the venture capital firm Softbank. 'I set up a meeting with Feld in New York,' recalls Roddick.

'He told me that if we tried to do something by ourselves on the net we would certainly fail.'

Softbank is among the leaders of the American technology industry. Its portfolio of investments includes companies such as E-Loan, GeoCities, Net2Phone and TheStreet.com. Feld argued that, by itself, Body Shop could never get hold of the technology, capital or expertise to be anything other than a two-bit play in the emerging digital economy. By partnering with a company that already had that expertise it had the potential to become a leader.

It also had to move faster than it might manage on its own. Its natural franchise - young, style-conscious, socially aware - was also a natural internet audience and, if Body Shop did not serve it on the web, plenty of other companies would. Thinknatural.com was one British start-up looking to tap that market with a range of natural beauty products; Clickmango.com was another. Big medical sites were also targeting the health-conscious, beauty-conscious young consumer.

Roddick made the initial contact, then left it to his deputy chairman, Stuart Rose, to follow through. 'I first met up with Brad in Paris,' recalls Rose. 'We had been so focused on restructuring the business, nobody was talking about the internet. The way I saw it, we had no chance of managing an internet company - we didn't know anything about it.'

Rose talked with Feld, then set about preparing a report for the board.

The proposal from Softbank was a radical one: instead of setting up an internet division within Body Shop, it wanted to start a new company in which Body Shop would not even necessarily be the majority shareholder.

In October last year, Rose travelled to San Francisco, the hub of the American venture capital sector, to see Feld again and to meet his partners at Softbank. 'It was a seminal moment for me,' says Rose, 'seeing the regard in which they are held.'

Feld had already tapped a potential chief executive for the project, Andy Sack, who was then operating as Softbank's 'entrepreneur in residence'. Sack had significant credibility in the US internet industry.

In 1996 he had founded Abuzz, a web-based expertise network sold to The New York Times Digital last year.

He had been involved with a raft of other new internet businesses, including m-Value, Lease Forum, Digital Shares and Kind.com.

He was also tuned into the ethical and social issues that have always animated Body Shop: as a founder of the Students for Responsible Business pressure group and an associate of the Social Venture Network and the Investors Circle, he had the credentials to be entrusted with the brand.

From its own resources, Softbank gave Sack dollars 500,000 (pounds 330,000) to start putting together a business plan and assembling a management team.

Softbank was holding a party in San Francisco. With a band of Beatles lookalikes playing in the background, Rose and Feld slipped out into the car park to hammer out the framework of a deal. The principles, so far as Rose saw them, were quite straightforward: Body Shop did not want to put any of its own money into the venture and it wanted to be insulated from any losses, but it would invest its brand and goodwill. For Feld, that was enough. He could find the right technological expertise there on the West Coast, but it would be hard to find another brand name that, in its own market niche, carried the clout and recognition of the Body Shop.

Rose secured provisional agreement from his board for the deal he had outlined with Feld. The difficulties - as they so often do - lay in the detail. Sack flew over to Britain with the management team he was starting to assemble for the digital venture, to begin working through the practicalities of the new company.

'The size and complexity of the business took them aback, I think,' says Rose. 'It isn't like running a small internet start-up. I'm surprised the deal didn't fall apart at that stage. There was a lot of crying and screaming going on.'

For Rose, much of the tension arose from a difference in language. The Softbank people spoke the blue-sky talk of West Coast venture capitalists, whereas the Body Shop people spoke the more earthed language of a British retailer. 'They talked internet language while we talked normal business language,' he says.

Throughout the negotiations, Body Shop needed to be persuaded that it made sense to set up a separate company rather than manage its own web site. It accepted that it did not have the technological resources to manage a digital company by itself, but was wary of entrusting its brand to a group it had only just met.

Softbank has lots of different investments, of which this was just one.

The Body Shop, by contrast, had only one brand, which it had spent a quarter of a century creating. Damage it and the company would be left with very little. The only way through that issue was to draw up a complex series of legal agreements governing what the new digital company could do. In the end, after months of tense negotiations, it was agreed that Softbank would provide the first dollars 15 million of capital, for which it would get 24% of the new company. Body Shop would put in its name and goodwill and expertise, for which it would get 59%. Another 15% would be reserved for the staff of Body Shop Digital, to provide the IPO millions that dot.com workers expect, and 2% would be set aside for the franchisees.

That settled the first-round funding. Whether Body Shop remains the main shareholder depends on whether it decides to put in money when its digital arm needs to raise more cash.

The sensitivities of the franchisees also had to be considered. The launch of a web business might not be welcomed by the thousands of small businesses that run Body Shop outlets round the world. Sales generated through the web site were likely to be sales lost by the shops. Worse, if the web site sold at a discount, as web sites usually do, it could lure customers away from the shops.

Ground rules were established throughout the course of the negotiations.

An important principle was that the web site would not be a discounter.

It would sell the Body Shop range at the same prices or even at higher prices than those available in the shops. That, the team reckoned, should reassure the franchisees that their lunch was not about to be eaten by the web site.

There were also opportunities to wire up the franchise network. One idea was to put a web terminal in every shop, turning them into mini cyber cafes, but this was eventually dismissed as too expensive. Instead, it was decided that every shop should have its own space on the site, and that the site would try to draw people into the shops as well as selling online.

In addition to selling the range of goods that can be found in a typical store, Body Shop Digital will act as a portal, feeding customers through to a variety of complementary goods and services. It is not designed to be just an electronic shop. That, after all, would have been easy enough for Body Shop to set up for itself.

Says Feld: 'It is part our mission to help create the next generation of retailing giants through launching or relaunching big brands in the new online economy. This partnership pairs the Body Shop's unparalleled global brand strength, worldwide retail presence and commitment to community with our fund's extensive experience in creating leading internet companies and working with market leaders. We intend to help make Body Shop Digital a major force in the internet retail economy.'

To sweeten the deal for the shop owners, they were cut into a share of it with the 2% of the new company that has been set aside to be jointly owned by the franchisees. They will also benefit - as will the whole company - from the huge sums that Body Shop Digital will be able to spend on promoting itself. For the Body Shop executives involved in putting the new venture together, one of the strangest aspects of the experience has been the fact that, by partnering with Softbank and starting a new internet company, they can now access far more capital than they could ever have raised as a traditional company with thousands of shops and millions of customers around the world.

'There is a marketing spend involved in Body Shop Digital that no terrestrial business could hope to match,' observes Rose. 'It is weird that we can spend all this money on a digital company that we could not spend on a terrestrial company.'

That capital comes at a price, however, and that is volatility. The deal was almost pulled at the last moment. The papers were ready to be signed and the press releases written when the Microsoft court ruling in the US in April triggered a big fall in the value of technology shares.

That made it a bad week to launch a digital venture. At the last moment, the announcement was postponed.

Within a few weeks, however, Nasdaq steadied itself and the world was ready to start listening once more to grand digital plans. It has caused little damage beyond delaying the launch. Yet it was a lesson to the Body Shop team in the riskiness of the venture they had undertaken. Like fireworks, internet companies can soar into the sky in a blaze of sparks, only to fizzle into nothing.

For Body Shop, a digital partner gives it a chance to reinvent itself for a different era. In retailing, it expanded rapidly round the world, but in recent years has found growth difficult to achieve. The internet gives it fresh territory to conquer. 'Body Shop Digital should have the potential to be at least as big as Body Shop,' enthuses Rose. 'Perhaps even bigger.'

More significantly, it might allow its founders to recapture some of the energy and passion that enabled them to start the business in the first place. 'I love it because it is like a return to the early days,' says Roddick, his words becoming animated. 'It is all about speed and risk. We are good at being rude about things, and the internet is a lot about being rude. There is a kind of anarchy there - and we like that.'

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