L'Oréal's Latest Leap

Has L'Oréal, the world's No. 1 cosmetics group, just committed a beauty blunder? Its $1.1 billion acquisition of British-based retailer The Body Shop International, announced on Mar. 17, does look odd at first glance.

While Paris-based L'Oréal's (LORLY) cultivates an image of French chic, with products ranging from Garnier shampoos to Lancôme skin creams, Body Shop is known for catering to the Birkenstock set, selling natural products and supporting environmental and human-rights causes. Moreover, L'Oréal's is a manufacturer of beauty products, not a retailer.

Yet on closer inspection, this deal could make a lot of sense. Traditionally, L'Oréal's has distributed the bulk of its products through through mass-market outlets such as Wal-Mart (WMT), where manufacturers' profit margins are often slim.

With Body Shop, which has about 2,000 stores worldwide, L'Oréal's will have its own retail network. That would allow it to develop more-exclusive, higher-margin brands, and keep the profits for itself. It would also allow L'Oréal's to get in closer touch with consumers and developing trends in the beauty business.


  In fact, Body Shop isn't L'Oréal's first foray into retailing. In 2000 the company acquired Kiehl's, a New York City pharmacy that had developed its own line of premium skin and hair-care products.

Since then, L'Oréal has expanded Kiehl's into a chain of 20 U.S. stores and opened several outlets overseas. L'Oréal has done much the same thing with its Japanese-based beauty-products business Shu Uemura, which now has three stores in the U.S. along with its Tokyo flagship. Kiehl's and Shu Uemura are locally managed, and their stores stock only house brands -- no L'Oréal's products.

That's the same approach L'Oréal's is promising to take with the Body Shop. At a Mar. 17 press conference announcing the acquisition, officials of both companies said that Body Shop's management team would stay in place and that stores would continue to stock only Body Shop-branded items.

"Combining L'Oréal's expertise and knowledge of international markets with Body Shop's distinct culture and values will benefit both companies," said L'Oréal Chief Executive Lindsay Owen-Jones.


  With its deep pockets and global reach, $17.5 billion-a-year L'Oréal's could help improve Body Shop's performance with more-efficient manufacturing and marketing knowhow, says Michael Steib, a London-based analyst with Morgan Stanley (MS).

Founded 30 years ago by Anita Roddick, Body Shop has struggled financially in recent years and had long been in search of a suitor. It posted $732 million in sales during the last fiscal year. Roddick is to remain with the company as a consultant.

Blending manufacturing and retailing can be tricky, though. Just ask Paris luxury group LVMH Moët Hennessy Louis Vuitton, the maker of Dior and Guerlain perfumes and cosmetics. In 1998, LVMH acquired the Sephora beauty-products retail chain and rapidly expanded its sleek, black-and-red store network worldwide.


  After several difficult years, Sephora is performing well in the U.S. But it is still struggling in Europe, and analysts say LVMH may eventually unload stores in some countries.

L'Oréal isn't the only beauty company making a bet on retailing. Estée Lauder operates some stores for its MAC cosmetics line, and Germany's Beiersdorf, the maker of Nivea skin-care products, is opening a flagship store in Hamburg. So L'Oréal and Body Shop could turn out to be a beautiful match after all.

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