In Vain

Fosun's Fruitless Beauty Search

There's a reason why L'Oreal is selling The Body Shop -- it's a business in decline.
Photographer: Chris Ratcliffe/Bloomberg

Fosun International Ltd. is looking for beauty in the wrong place.

The Chinese conglomerate has joined the $900 million auction for The Body Shop, the British skincare chain owned by L'Oreal SA, according to The Financial Times

It's a sign that Fosun, which generated $11 billion in revenue last year from steelmaking to circus troupes, is feeling better about pursuing international deals after hitting the pause button on an acquisition spree that saw it scoop up more than 20 firms in two years.

The pullback came after a government clampdown on outbound investment, as well as the detaining of Guo Guangchang, Fosun's founder and chairman, by Chinese authorities for questioning. Fosun's stock has been heading south since touching a record high in May 2015 of HK$19.98, but is up 17 percent this year.

Comeback Kid

Shares in Chinese conglomerate Fosun took a beating in 2015, but are up 17 percent year to date

Source: Bloomberg

The question, though, is what does Fosun see in a decaying European store chain?

There's a reason why global beauty giant L'Oreal is getting rid of The Body Shop, which makes up 4 percent of its total sales. For one, L'Oreal probably sees little future in an operation dependent on some 3,000 brick and mortar locations at a time when physical retailers in the U.S. and Europe -- and the shopping malls that house them -- are struggling. L'Oreal doesn't want to stick around for the ride, and neither should anyone else.

It is true that beauty is a standout among an otherwise dour retail sector. But it's not like The Body Shop is a high-profile luxury name akin to Gucci or LVMH, sought after by brand-conscious Chinese consumers. It's a mass market, middle-of-the-road mall chain that long ago lost any cachet it had for being one of the only places shoppers could buy chemical-free beauty products or fair-trade cosmetics.

The terms that The Body Shop popularized, such as all-natural beauty, now seem trite and common. What's more, European and North American beauty companies are generally falling out of favor with Chinese consumers who are shifting to South Korean brands, even if that trend has been briefly interrupted by political spats.

K-Beauty Gets Glam

Korean skincare maker Amorepacific is gaining market share in Asia, while Shiseido and P&G are losing ground

Source: Euromonitor International

The Body Shop's numbers don't look pretty, either. Revenue fell by 4.8 percent in 2016 as L'Oreal's overall top line grew 3.8 percent. Operating margins at The Body Shop fell to 3.7 percent in 2016, from as high as 9.1 percent in 2012.

Sales Blemish

It's been an ugly year for The Body Shop, which saw revenue declines accelerate in 2016

Source: Bloomberg

Plus, it's not like The Body Shop is going cheap. At $900 million, or about 1.1 times revenue, the price tag is in line with the historical average for specialty retailer takeovers. Fosun is pitting itself against a slew of private equity firms, including one that's teamed up with the investment vehicle of Alibaba Group Holding Ltd. founder Jack Ma. That could drive up the price if a bidding war ensues.

Fosun should bow out of this pageant gracefully, and search for a better-looking deal elsewhere.

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