Natura's back-to-nature success

Brazil's leading cosmetics firm is a champion of good causes and that has hit the mark with both investors and consumers, writes Ian Fraser.

by World Business
Last Updated: 23 Jul 2013

Antonio Luiz da Cunha Seabra, founder of Natura Cosmeticos, is a man with a mission. He believes the cosmetics company he founded from a garage in Sao Paulo in 1969 can make people more at ease with themselves and, by extension, the company can make the world a better place and even stop wars. The 64-year-old Brazilian recently told French language webzine Afrik.com how at the age of 16 he was struck by a saying of Plato's: "Man is part of everything; everything is part of man." Seabra said: "That was a revelation for me. Ever since, this notion of being part of a whole has never left me."

He added: "For Natura Cosmeticos, sustainable development is second nature. It's just like a person thinking of their skin. Cosmetics enable people to become more intimate with their own bodies. And once that's happened, people no longer have any desire to make war. Being at peace with our bodies and with our time changes our hearts and our consciences."

This may sound dangerously like psychobabble, but the company appears to practise what it preaches. And its unusual approach - similar to that of Anita Roddick at the Body Shop - certainly appears to push the right buttons with Brazilian consumers. Latin America's largest economy is not noted for being at the cutting edge of enviromental concerns or social justice, but Natura's commitment to both has enabled it to become market leader in Brazil's $13.8 billion market for cosmetics and personal care products. With a 20% market share, it is head and shoulders above stalwarts such as Procter & Gamble, Unilever, L'Oreal and Beiersdorf. However, these companies were barred from Brazil until it opened its market in 1990.

Most analysts describe Natura's championing of good causes as critical to its success. For example, the company's sustainable approach to the sourcing of the active ingredients in its Ekos range of skincare, launched in 2000 - and particularly the way in which it seeks to support remote Amazonian communities through procurement policies that go beyond Fair Trade - has proved crucial to its sales figures.

In 2005, Natura boosted its sales by 28% to R$3.24 billion ($1.42 billion) and net income surged by 32.2% to R$397 million. Robert Ford, a Latin America analyst with Merrill Lynch, predicts sales will soar to R$4 billion with net income of R$689 million by 2008. He expects cashflow - a key strength of Natura given its low distribution costs - will rise from its current level of R$512 million to R$761 million over the same period.

The formula has also worked well for investors. Since the company was floated on the Sao Paulo stock exchange's Novo Mercado in May 2004, its shares have tripled in value. This has permitted Seabra and his co-chairman Guilherme Peirao Leal to enter the Forbes rich list with personal fortunes of $1.4 billion each - which, to some, may jar with their stated desire to create a more egalitarian society. Despite recent market turbulence, the company has a market capitalisation of R$10.5 billion.

However, Natura's strong commitment to social and environmental responsibility was not always so prominent. In their 2005 book Success Against the Odds: what Brazilian champions teach us about thriving in unpredictable markets, London Business School professor Donald N Sull and Brazilian management consultant Martin Escobari reveal that Natura fully embraced 'transparency' only in the 1990s.

The authors explain how in the 1980s Natura had been divided into five separate businesses, each focused on a different Brazilian region. But the model misfired after the economic crisis of 1989 and the opening of the Brazilian economy the next year. It was not helped by internecine feuding between the five fiefdoms; they struggled to agree on product positioning, investment priorities or business strategy, making long-term planning impossible. Leal, who joined Natura in 1979, recalled: "The energy created by the five companies that had helped us grow became negative at this point."

Seabra and Leal decided to take Natura back to its core values. They claim that the company's mission had always been to develop and sell products that promoted harmonious relationships, but they hit on a new secret ingredient - 'transparency'. Seabra says transparency was part of the broader geopolitical backdrop of the time: "The world was waking up to the need for greater ethics and transparency. We decided to anchor the transformation around these values."

Seven offices were consolidated into one new head office. According to Sull and Escobari's book, Seabra, Leal and a third partner bought out those shareholders who did not support their vision, and hired executives from P&G, Unilever and Johnson & Johnson to bring discipline to the group.

In 1991, Natura opted to anchor its entire marketing campaign around the concept of transparency and to adopt the motto 'truth in cosmetics'. Its advertising campaign for its Chronos range of anti-wrinkle cream, launched in 1992, used real consumers over the age of 30 rather than models. Leal says: "We were committed to our customers and would not lie to them by claiming they would look like Claudia Schiffer if they bought our products."

However, there are two other reasons for Natura's success: innovation and distribution. In 2005 the company spent R$67.1 billion ($29 billion) on R&D, the equivalent of just 2.9% of its net income, yet it still managed to launch 213 new products into its traditional cosmetics and personal care categories. The company appears to get a disproportionate bang for its buck, claiming that 69% of 2005 sales were derived from products launched in the past couple of years.

How does Natura achieve this? Rather than seek to create new technologies from scratch, the company's R&D arm tends to focus on products and has a magpie-like approach to tracking patents and buying technology from universities and research centres across the world. Philippe Pommez, Natura's director of R&D, has argued that the approach is sustainable in that most of the technology is already in existence. "The hard part is to know what you are looking for."

Merrill Lynch's Ford thinks Natura's strong capacity for innovation will enable it to extend its brand into additional product categories, such as slimming foods, dietary supplements and teas. He says: "We believe that a wealth of opportunities exist for Natura within Brazil's rich biodiversity and history of folk and Indian herbal medicine."

The company has also played the Brazilian card to get new ranges off the ground; for example, it challenged Johnson & Johnson's dominance of the 'mother and baby' segment of Brazil's personal care market through the launch of its Mamae e Bebe range for infants in 1994. Natura sought to link the products with shantala massage - a technique that is thought to enable mothers to forge stronger bonds with their babies by gently massaging them when applying skin creams and lotions. As a result, Mamae e Bebe captures a significant market share.

London Business School's Sull believes Natura's success in the domestic arena, particularly with ranges such as Mamae e Bebe, proves that globalisation need not be a one-way street. He says: "Managers in developing countries sometimes despair of closing the gap with larger and better-funded multinationals. Natura has proven there is hope for companies anywhere in the world to win through innovation and creativity."

The other critical reason for Natura's success is that it sells through an army of largely female direct sellers, rather than through traditional retail outlets. Although not on the payroll, these 'consultants' are fiercely loyal to the company, in part because they are attracted by the company's commitment to 'truth in cosmetics' and its broader social causes. The approach is similar to that used by other network marketing organisations such as Avon, Tupperware and Amway, and can bring in significant revenue for the 520,000 part-time consultants: last year the average earnings of a consultant were $1,100. The average annual wage in Brazil's four largest cities is just $4,000.

Ford says the approach is ideally suited to the Brazilian market partly because "poor job prospects, particularly for women, result in a large supply of motivated and capable resellers eager for supplemental income opportunities", and because of the virtual absence of any traditional department stores in Brazil. "It doesn't really have a retail infrastructure. In Brazil, most of the department stores have gone bankrupt over the past few years."

He adds: "Natura boasts the highest sell-through rates and lowest turnover for comparable networks in the world: 96% of its salesforce are women and among those who also sell for Avon, Natura outsells Avon by 70%."

The direct sales approach has also enabled Natura to ride out the highs and lows of the Brazilian economy - which tend to be more extreme than in other economies. In the event of the economy cooling and sales slowing, Natura's overheads can be easily contained, as consultants are paid only when they make a sale.

But another big question is whether its distinctive direct sales approach will catch on outside the Brazilian market. It is rolling out its direct sales model into a further nine Latin American countries and opened a flagship store in Paris - La Maison Natura - in April 2005. The company already has small-scale operations in Argentina, Chile and Peru, and recently extended these into Mexico and Venezuela.

While the company's international operations are still loss-making and accounted for only 3% of total sales last year, Natura chief executive Alessandro Carlucci believes the company has what it takes to become a global player in its own right. "In the next 10 years, we plan to grow considerably abroad so that Natura is seen as a multinational company," he says. The company also plans to invest some of the proceeds of its flotation in launching its products into Colombia, Ecuador, Uruguay and Costa Rica by 2007.

However, Frank MacDermot, Latin America expert with the Economist Intelligence Unit, doubts whether Natura can pull this off. "Brazilian retailers and consumer product companies do not find it easy to internationalise within Latin America because of cultural and linguistic differences. Natura is quintessentially touchy-feely Brazilian in many ways - great at making its resellers feel they belong and motivating them. But this might be hard to repeat in other Latin American markets."

Unibanco analyst Tania Sztamfater agrees: "The main growth opportunity for the company continues to lie in the still under-exploited domestic market." Certainly, the Brazilian cosmetics and toiletries market is showing little sign of maturity. Last year it grew 34.2% to reach a total value of $13.8 billion, leapfrogging Germany and the UK to become the world's third largest market, according to Euromonitor International. And given the demographics of the country's 184 million population, rapid growth is set to continue. Another analyst does not believe that international sales will account for more than 40% of Natura's overall sales "even in the medium to long term".

Another question is whether Natura can survive with its idealism intact once the three co-chairmen take their hands off the corporate tiller, or should the company succumb to a takeover by one of its multinational rivals, as some predict. The succession issue was partly allayed by the IPO two years ago, which enabled the chairmen to partially unwind their equity stakes, and by the fact that Pedro Luiz Barreiros Passos (who joined the company in 1983) stepped down as chief executive to become the third co-chairman in February 2005. Passos was succeeded by Carlucci, Natura's former head of international operations.

However, Merrill Lynch's Ford warns that the company's very success, and particularly the strength of its distribution network, will eventually make it an attractive takeover target for a more mature multinational rival. He says: "I believe Natura could prove to be an attractive acquisition candidate for a multinational seeking to grow its Brazilian presence."

Evidence from the recent sale of Body Shop International to French cosmetics giant L'Oreal for £652 million ($1.18 billion) earlier this year suggests such a deal could severely dent Natura's image. In the case of the UK firm, co-founders Gordon and Anita Roddick were widely accused of having 'sold out', and the 2,200-branch retail chain faced a boycott owing to the presence of Swiss foods giant Nestle on L'Oreal's share register.

At the very least, a takeover of Natura by the likes of L'Oreal or P&G would create the impression that its commitment to making the world a better place was only skin deep. However, one analyst says: "There's definitely a risk of that. But any purchaser would be likely to work extremely hard to nurture both the attributes of the Natura brand and its distribution network. If not, they'd find that they were just buying thin air."

NATURA'S CORPORATE GOVERNANCE

Unibanco analyst Tania Sztamfater points out that Natura's determination to treat its customers and staff fairly also extends to open and transparent behaviour with shareholders and other stakeholders. "Natura is one of the undisputed models of corporate governance in Brazil," she says. "When the company floated two years ago, it listed its shares on Bovespa's (the Sao Paulo stock exchange) Novo Mercado. This stock market is specifically for companies that are committed to offering investors above-average levels of transparency and disclosure, and which have also made a commitment to a fuller set of corporate governance practices."

But she insists the company's commitment to good practices goes beyond just where it is listed. "They are an integral part of the company's strategy and, consequently, of its management conduct." Natura is the only Latin American company to have signed up to the Global Reporting Initiative, where companies report on the social and environmental impacts of their activities against a set of targets. At least 30 pages of its 2005 annual report are given over to the GRI, which precisely delineates Natura's usage of water and energy, as well as evaluating any pollution spillages from its state-of-the-art manufacturing plant near Sao Paulo.

 

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