AF 495 Case 1
October 20, 2011
Case Analysis: The Body Shop
Since its inception in the 1970s, The Body Shop has experienced phenomenal growth. Specifically, revenue was growing at a rate of more than 20% per year. In the 1990s, the previously experienced revenue growth began to decline rapidly. There were numerous reasons for the steady decline in revenue growth. The two most important of these were a loss of brand image and severe competition from other skin and hair-care companies. The Body Shop expanded too quickly to maintain its previous level of profitability and traditionally recognized brand image. Even after Roddick, the founder and chief executive officer stepped down in 1998 The Body Shop continued to have problems. While revenue began to grow, pretax profit was declining and a new strategy emerged. “The strategy consisted of three principal objectives: to enhance The Body Shop Brand through a focused product strategy and increased investment in stores; to achieve operational efficiencies in our supply chain by reducing product and inventory costs; and to reinforce our stakeholder culture” (Shank and Vaccaro 120). A forecast was produced to evaluate the success of this strategy.
How was the forecast derived? Why were the base case assumptions chosen?
The forecast to evaluate the success of Gournay’s proposed strategy was derived by using the same percentage of sales growth from the 2001 period to extrapolate the next three years of data. By using a percentage of sales growth method I was able to focus on growing each account that is directly related to sales by the same percentage as sales increased. I did not, however, use this method for all of the accounts. Gournay’s strategy hinges upon achieving operational efficiency by reducing product and inventory costs. The primary accounts affected by this strategy are Cost of Goods Sold and Operating Expenses. This forecasting method was chosen because it is equally important to account for past historical performance and the current prevailing situation the company faces. This method will give an accurate assessment of the standing of the company with its newly implemented strategy so that decision can be made as to how to proceed further.
The base assumptions used to create this forecast are derived directly from the company itself with special attention paid to the strategy proposed by Patrick Gournay. The percentage growth was taken from the last recorded year of earnings. This 13% yearly increase is deemed to be an appropriate estimate because the company has seen a decline in its revenue growth rate and it is unlikely due to current market conditions (increased competition) that it will achieve revenue growth rates in excess of 20% which was the case during the company’s prime. It is also important to figure in the impact that a successful implementation of Gournay’s strategy will have. If the plan in implement in 2002, it is expected that the result will not be immediate. Best case scenario, the impact will begin to show in 2003 but the full impact may not be visible until 2004 or later.
Based on the pro forma projections, how much additional financing will The Body Shop need during this period?
The company will need approximately GBP 2,700,000 to assist in the new strategy. This will be used primarily to invest in stores and the established product line. Because the company is experiencing financial trouble in the form of decreases in profits, it will be difficult to convince investors to fund this endeavor with equity so The Body Shop will need to finance it with debt. If the company can implement changes quickly enough to increase the dividend payment to shareholders so as to restore some of their confidence, it may be enough to fund some of the expense with equity but not all. The company has to focus on decreasing or eliminating costs in the COGS and operating expenses categories to reduce the amount of...
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