The Disenfranchised Owning a Body Shop store seemed like the perfect business, with great products and earth-friendly management. So why are some franchisees now suing the company?
(FORTUNE Magazine) – Don Rakey was feeling anything but love on Valentine's Day last year. The co-owner of two Body Shop franchises in St. Louis, Rakey had been running a big Valentine's Day promotion, but his stores lacked what was expected to be one of the holiday's best-selling products: sensual massage oil. It wasn't the first time a hot-selling seasonal item hadn't arrived from the company, however, and Rakey knew it wouldn't be the last.
To make up for out-of-stock items in the past, Rakey's employees had tried creative substitution. When they were out of Cocoa Butter lotion, they sold Nut Butter. No vitamin E face cream? Sell the vitamin C version. For the Valentine's Day promotion, Rakey's manager tried adding drops of fragrance into unscented oil--creating a homemade version so that at least a few customers wouldn't go away mad. Still, tricks like that didn't always work. Customers were losing patience, and Rakey was losing sales.
Worse, he found out that other franchisees had the same complaint. At 68, Rakey was older than most of the others--he had opened the first Body Shop franchise in the U.S., back in 1990--and he'd taken on an almost parental role as an organizer and sympathizer for franchisees around the country. Those people started calling him, and a disturbing picture began to emerge. More than a dozen franchisees told him they weren't receiving an average of more than 25% of the products they ordered each week. In 2000, they estimated, the inventory problem had cost them over 10% of sales. Sherri Weeks, a franchisee in Pensacola, Fla., lost a local customer who tired of waiting weeks for Pumice Foot Scrub. Mindy Foley in Lexington, Ky., waited eight weeks for her shipment of Tea Tree Oil Blemish Sticks.
As it turned out, nonfranchised stores (those owned by the Body Shop itself and run by company employees rather than franchisees) seemed to have no problem getting products. Why? Some franchisees claim the company was on a campaign to buy back franchised locations. That would let the company claim a bigger slice of the stores' profits. In locations that reverted to company ownership, the shelves were stocked with products. Just weeks after Heidi Espey sold her Birmingham, Ala., store back to the company, the shelves were filled with Hemp Lip Conditioner--a best-selling product she'd been out of for months.
Rakey and some of the others started to suspect that they were being squeezed out. The buyout prices the company was offering didn't seem fair, but many franchisees grew tired of the struggle and sold at a loss. Rakey, however, still liked the business. After repeated efforts to figure out why he couldn't get the products he needed, he took the only step it seemed he had left: He called a lawyer.
That a franchisee might have legal issues with a parent corporation is nothing new. There are more than 300,000 franchises in the U.S., and many of them--in all businesses--quickly realize they're at the mercy of a big company's whims far more than they might have imagined. But with the Body Shop, Rakey and others had reason to believe things would be different. After all, the Body Shop had a reputation for corporate integrity and progressive management. It seemed like one of the rare companies that treated employees, franchisees, suppliers, and even the environment with respect.
Now, however, eight U.S. Body Shop franchisees, who own 13 locations, accuse the company of impeding their business. In December 2000 they filed a lawsuit against the Body Shop in North Carolina district court (the U.S. division of the Body Shop is based in Wake Forest, N.C.). The franchisees are asking for damages of an undetermined amount, believed to be about $150,000 for each store, or almost $2 million total. According to court documents filed by the plaintiffs' New York attorney Michael Einbinder, the Body Shop's supply system favors company stores and the catalog division. "There is no doubt in my mind that they don't want me," says Foley, who has owned her Kentucky store since 1993. "We are being systematically wiped out--plucked off one by one."
It's all my fault," says Jean Rakey, Don's daughter. After all, it was Jean, now 45, who first discovered the Body Shop. On a trip to visit friends in Britain in the early 1980s, Jean ran out of shampoo and found a tiny bath-products store in town. Forty-five minutes flew by as she wandered around the store, reading handwritten labels that described the calming effects of chamomile and how jojoba oil would bring out her hair's natural shine. Back in America, she told friends that she dreamed of running her own Body Shop. "Wouldn't it be awesome to be my own boss and do community stuff?"
It wasn't just the products Jean Rakey loved, but also the philosophy behind them. Like many who got involved early on, she became enamored of Body Shop founder Anita Roddick and the company's "principle before profit" mantra. As legend has it, Roddick started the Body Shop in 1976 in Brighton, England, by mixing natural elixirs and pouring them into urine-sample bottles, which were all she could afford at the time. The stores quickly caught on, and Roddick became the "It" entrepreneur, famous for espousing a new way of doing business. She promoted buying from indigenous people and refused to let her products be tested on animals. The world watched her trade nut oil with Indians in the Brazilian rain forest and receive an honor from the Queen of England.
On April Fool's Day 1990, only months before the Body Shop started franchising in the U.S., Don Rakey took an early-retirement package from IBM, where he'd worked as a marketing manager. He was looking for something to do between golf outings when his daughter approached him. "Dad, with my brains and your money, we can start this," Jean said. The elder Rakey agreed. He was, he recalls, "fortunate enough to have the time and crazy enough to do it." In fact, the Rakeys felt lucky to even be considered. The company had thousands of franchise applications to choose from, and the selection process was decidedly informal. Anita Roddick admitted that she sold the first franchise to a woman in Canada "for no other reason than that she was not wearing a bra." The application itself asked curious questions such as "If you lied about anything, what would you lie about?" and "If you were a car, what car would you be and why?" Jean Rakey hoped no one would tell Anita Roddick that both she and her father had MBAs.
The Rakeys ultimately received a location, and then got two others in the St. Louis area. Each store came with a steep price tag: $250,000 for the store fixtures, $40,000 for the franchise fee, and $75,000 for inventory. But as more and more people signed on, it was clear there was something special about the company. The other franchisees were teams of mothers and daughters, brothers and sisters, and happy couples. And then there was Mother Earth incarnate, "Anita." (All franchisees call her by her first name.) Many people involved with the Body Shop in its early years thought of it more as a family--albeit a dysfunctional one--than as a company. American franchisees were invited to spend a week at the Roddicks' estate in Scotland. At one holiday bash in the U.S., a Body Shop loyalist came dressed in drag--as Oprah Winfrey, no less--and some of the earthier employees once got naked at a California pool party.
Most important, business was good. "You needed a shoehorn to get into the store," says Rakey. Sales at the shop in the St. Louis Galleria mall reached $950,000 after just three years. Wannabe franchisees were referred to Rakey. He told them the Body Shop was a "good deal" and "honorable." Sure, there were problems. Systems weren't computerized, ordering was done via 30-page faxes, and an early invoice showed up on plain paper--no letterhead. But those were minor glitches, and as Rakey says, "We were fat, dumb, and happy."
Unfortunately, those glory days didn't last. When the Body Shop landed on American shores in 1988, it was the only retailer of its kind. But the idea of natural beauty products isn't proprietary--nobody holds a patent on jojoba oil--and other chains quickly started chiseling away at the company's market share. The biggest threat was U.S.-based Bath & Body Works, owned by Intimate Brands, the same retail-savvy division of the Limited that owns Victoria's Secret. In 1990, Bath & Body Works had 27 stores in the U.S.; it has more than 1,400 today, all company-owned. Then there are smaller players, like Aveda and Crabtree & Evelyn, and even the big-box stores like Wal-Mart and Kmart.
By the late 1990s, Body Shop's growth had stagnated. Worldwide operating profits for the overall company were down 5% in 1997, to $54 million. The company considered closing its U.S. locations and retreating to England, but instead decided to hire a turnaround specialist, Adrian Bellamy. Bellamy had been a nonexecutive director of the Body Shop since 1997 and also is on the boards of Williams-Sonoma, Gap, and Gucci Group NV, where he is chairman. According to Bellamy's contract, he wouldn't be merely the top U.S. guy at the Body Shop--he'd also have the chance to become an owner. In a joint venture agreement, he paid a nonrefundable $1 million for the option to buy 51% of the cosmetic company's stock. (The Body Shop has been public since 1984 and trades on the London Stock Exchange.) But Bellamy's stock deal hinged on whether the company could hit profit targets. Those targets required swift action, given that the U.S. division had never made money.
One practice the Body Shop had been trying--even before Bellamy--was to convert its franchised locations into company-owned stores, not unusual at big multinational chains with a lot of franchisees. Early on, as a company is getting started, it makes sense to share the costs and risks with individual entrepreneurs. But once the stores are successful, companies try to buy those entrepreneurs out, replacing them with salaried employees and capturing 100% of the profits.
Bellamy denies there's any systematic plot to buy back stores. "In no way are we abandoning the franchise strategy," he says. However, the numbers raise questions. In 1993 there were 125 stores in the country, 75% of which were franchised. In 1999 it had 283 stores, and only 19% of them were franchised. This past summer, only 28 of the country's 278 stores, or 10%, were owned by franchisees.
That trend would be alarming enough, many franchisees say, if the people who sold out got prices they considered fair. Instead, dozens have sold and lost money on their investment. One former franchisee spent $300,000 for a store in the early 1990s, and $40,000 for the franchise fee. Six years later, the Body Shop bought the store back for just $60,000, of which more than $25,000 was for inventory. Peggy and John Cobb, the former owners of four stores in San Diego County, would not disclose how much the Body Shop paid for three of their stores in 1999, but Peggy says, "It was very frustrating. We sold just to get out." Disillusioned, she gave up retail and went back to a career as a corporate attorney. "I would have been a much richer person if I had not taken that Body Shop U-turn."
Other franchisees, despite hitting hard times, refused to sell. And for them the inventory problems only seemed to worsen. Last December, Weeks, the Pensacola franchisee, called customer service in Wake Forest to see whether she could get any more Oceanus gift baskets for Christmas. She was told they were in the warehouse but allocated for company stores exclusively. She asked them to overnight the lotion and bath gel so that she could make her own baskets. The reply: Those items were on hold to make gift baskets in the spring. The same baskets later appeared in the summer 2001 catalog, marked down to half price.
The shortages got so bad that some franchisees took to sneaking in products like nail files, moisture gloves, and oatmeal soap just so that they had something to sell. Mark Yeeles--who staged a desperate but futile effort to stay solvent and keep his San Diego store, even selling his house and his car--bought products at a local, company-owned Body Shop a few miles away to sell in his store. Why could company stores get products that the franchisees couldn't? "Isn't it obvious?" says Espey, the ex-franchisee in Alabama. "They send valuable products to the company stores because that's where they make a profit."
The American franchisees are not the first to file a lawsuit against the Body Shop for those practices. In 1999 the head franchisee in Austria sued the company when he couldn't get grapefruit bath oil, jojoba face cream, and nettle soap from the company before Christmas. He claimed that the chronic out-of-stock problem was a ploy to force him to sell back at a pittance. The lawsuit was settled out of court. A spokesman for the company declined to comment, and the settlement is confidential.
Bellamy contends that the U.S. division bought back only locations owned by people who asked to sell. "Categorically, it is not our policy to squeeze out franchisees," he says. Roddick, through a spokesman, declined to comment. But while it's true that franchisees haven't specifically been asked to sell, Bellamy nonetheless took steps to strengthen the business and shore up the balance sheet that came at the expense--intentionally or not--of franchisees. Take health care. Until 1999 the Body Shop offered the same insurance package to both employees and franchisees. But in March 1999 the franchisees got a letter with bad news: Their medical, vision, and dental premiums would increase by 86.7%. The premiums for Body Shop employees increased by a much lower percentage; Bellamy says it was somewhere in the low teens. He adds that although he would have liked to continue with the same insurance plan, controlling costs became too difficult.
Bellamy also closed a warehouse on the West Coast, leaving just the North Carolina site for the entire country. That meant higher freight costs for all franchised locations outside the Southeast. More significant, he cut the franchisees' profit margins, giving a bigger slice of income to the overall company. Rakey estimates that the move caused a 2% to 3% reduction in gross profits. "The inside joke with the Body Shop is that if the franchisees were aborigines, they'd be treated better," says Susan P. Kezios, the founder and president of the Chicago-based American Franchisee Association. In fact, in a 1998 company-sponsored survey, franchisees were asked whether they thought doing business with the Body Shop was a positive experience. Of the 75% who responded, not a single person said yes.
In Bellamy's defense, some franchisees say he put the company on the right track. Under his leadership sales improved by 5% in 2000, and the U.S. division is now profitable for the first time ever. Teri Butler Jones, who franchises stores in Kansas City, Mo., and Overland Park, Kan., says she's pleased with the new management. "He's the best thing that could happen to my business. This was the first time I was up in three years."
Unfortunately, not all franchisees share that opinion, and those involved in the lawsuit now find themselves facing increasingly steep hurdles. The Body Shop is threatening to charge them a 5% royalty fee on all gross sales. It has always had the contractual right to charge such fees, but for years the company refrained from doing so. One of the issues the court will have to decide--the case is scheduled to go to trial in summer 2002--is whether management can charge royalties to some franchisees but not others.
Perhaps because franchisees still believe in the compassionate culture of the company--however aggrieved they've become--they echo the same sentiment: "Anita did not mean for this to happen." Most agree the changes were a reaction to the marketplace. However, that realization doesn't make it any easier for people like the Rakeys. Jean and Don have already taken significant cuts in salary. They moved from a rented office to Jean's basement, and on business trips they now share a hotel room. Jean is back to working full-time as a business-planning analyst at Anheuser-Busch. All her savings and retirement money was invested in the stores, she explains. "I was afraid I'd be living in a mobile home if things didn't change."
At press time changes were pending at the Body Shop. Although Bellamy reached his profit target to buy a majority stake, the company, in an about-face, bought him out instead and regained control of the U.S. division. He'll stay on as a consultant for the next two years. In another twist, the Body Shop has recently explored selling out to a third party. Many franchisees now wonder what life will be like under British rule.
Don Rakey, for one, is tired of speculating. "I've had it," he says. For the first time Rakey, who sold soap door to door before Anita Roddick was born, is ready to retire. He wants to drive cross-country in a mobile home with Shirley, his wife of 48 years, and Casey, his golden retriever. Still, he refuses to be forced out just yet. "Anita says you gotta fight for what's right," Rakey says. "That's what we're doing."
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