Consumer

Andrea Felsted is a Bloomberg Gadfly columnist covering the consumer and retail industries. She previously worked at the Financial Times.

The seventies revival didn't catch on in fashion. It's hard to see it appealing in cosmetics either.

L'Oreal SA is exploring a sale of The Body Shop for 1 billion euros ($1.1 billion), according to the Financial Times. But it might be difficult for the business, founded in 1976, to find many modern saviors. It has potential for millennial appeal, but would need serious reconstructive surgery to work. 

L'Oreal has good reason to want to rid itself of the struggling retailer.

Operating profit has been falling for the past three years. Organic growth has slowed, while operating margins are much skinnier than those at L'Oreal's other divisions.

Body Flop
The Body Shop hasn't produced a remarkable run of growth despite its trendy natural focus
Source: Bloomberg Intelligence

With the global make-up market booming -- thanks to all those selfies -- the group would be better off exiting the division and investing in premium cosmetics and skincare brands, where growth and margins are much higher.

Superficially, The Body Shop could be an attractive acquisition target for a big consumer company looking to expand its green credentials. Many of its ethical and environmental values chime with those of the millennial customers that they are so desperate to attract.

After all, Unilever NV has made a foray into green products, buying Seventh Generation, which sells natural and eco-friendly cleaning products. It also looked at Jessica Alba's Honest Company last year, although a deal never came to fruition.

But there are some pretty hefty hurdles to Unilever, or a rival trade buyer, adding The Body Shop's White Musk perfume or shea body butter to its stable, not least the mooted price tag.

Little Bother
The Body Shop's tiny operating margins, relative to parent L'Oreal's bigger divisions, highlight its drag on its parent
Source: Bloomberg

The Body Shop brand is neither new nor premium -- the hallmark of recent consumer M&A targets. The format is tired and faces competition from a host of rivals from Honest to Britain's Lush. So it is unlikely to appeal to a consumer goods giant wanting to turbo charge sales by adding newly acquired products to its global distribution network.

True, a new multinational owner could ramp up innovation, creating skincare products that are not just natural, but offer dermatological benefits. However, the investment needed to reinvent The Body Shop as an ethical yet chichi choice would be substantial.

In contrast to the expensive M&A that has seen Unilever add Dollar Shave Club and Danone SA buy dairy alternative maker WhiteWave, this is a case where rather than paying up, incumbents would be better off developing their own green alternatives, especially with a 1 billion-euro budget.

One area where L'Oreal could find a more willing buyer is private equity, flush with cash and short on targets. A buyout firm might be willing to take more of a punt on The Body Shop, although it too might balk at the price tag.

Any acquirer would need to do some heavy lifting, such as closing much of the retail network, investing in online and social media and giving The Body Shop a millennial-friendly makeover. But amid a shortage of conventional targets, a tricky restructuring opportunity might appeal.

If it can cut a good deal, a canny private equity group could find there is a market for upcycled chic after all.

--With assistance from Gadfly's Chris Hughes

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Andrea Felsted in London at afelsted@bloomberg.net

To contact the editor responsible for this story:
Jennifer Ryan at jryan13@bloomberg.net