The Body Shop Canada Youre not the kind of franchise applicant we usually get, said Richard Peddie, company lawyer for the Body Shop Canada, as he opened his meeting with potential franchisee Paul Kingston. Kingston. Paul Kingston School of Business, Western University in London, Ontario. MBA, his employment background included a stint as a high-school business education teacher and seven years of retail management. He had managed independent stores and also had managed for one of Canadas national department store chains. Body Shop Canada. The notice stated that the company had a number of operating stores available for franchise, including locations in London, Ontario and Sarnia, a smaller city about 100km away. Kingston was aware of the companys enormous international success and was surprised to discover that franchises might be available. Furthermore, he had never known the Body Shop Canada to advertise for franchisees. The Body Shop was the brainchild of Anita Roddick, a forward thinking Briton with a strong commitment to an ideal. The Body Shop1 The company positioned itself as a champion of social responsibility and activism. It promoted holistic health, environmental responsibility, charitable acts, Third World development, womens issues and other causes. In Canada there were 72 shops 56 franchised and 16 corporate owned. The Body Shop Canada stores, averaging about 100 square meters , were in prime retail locations, either on main shopping arteries or in mall. Stores sold only proprietary products, always at list prices. There were no sales and there was no discounting. Customers tended to be loyal, even fanatical, in their support of the company. Franchise Information The package that arrived contained 35 pages of information about the company and its operations. At the end of the course, they must pass before being awarded a franchise. The Body Shop Canada was phasing out its management aptitude test. Kingston estimated that he could come up with a maximum of $125,000 himself through a combination of savings and a personal line of credit from his bank. Given the excellent track record of the Body Shop Canada and his experience and qualification, Mr. Kingston believed he would have no trouble borrowing the necessary capital from a bank. Using the companys sales and operating projections, he created pro forma financial statements for the first two years of a single new franchise. Exhibit 1 shows the statements. Kingston reasoned that there would be economies of scale for a multi-store operation because some of the start-up costs and operating expenses would be higher than for a single store operation. Both said they would quit their current jobs at a moments notice and would want to purchase a minority equity position, probably 10 to 15 percent of the store they managed . Kingston was certain the two women would be ideal managers and business partners. Kingston thought that the best organizational structure would be to create a holding company with him as a sole owner, and for the company to enter into separate partnership agreements with each of the women. He revised his pro forma statements to account for two new franchises . Kingston was thrilled with the projected results. Even if there were zero sales growth after the second year he could expect after-tax earnings in the area of $150,000. The Company made no provision for profit sharing among non-management level employees. Pauls decision to allocate 10 percent of store gross profit for this purpose was consistent with his business philosophy. The Option of Buying Existing Franchises Kingston had been able to discover more about the two existing locations available for franchise. The store located in Sarnia, Ontario was already a franchise operation. The Body Shop had recently been moved to a better location within the mall and almost doubled in size to about 80 square meters. Kingston felt certain that sales in these stores would be well above the levels projected for start-up operations, but had no way to determine by how much. One of his two potential partners also lived there, and the other had recently moved to Sarnia, near the United States border. The Body Shops Canadian operation had the right to expand into the virgin territory of several United States Border States, including the one nearest to Sarnia. About 10 days after completing the franchise application, Mr. Peddie. Kingston felt he had already passed a major hurdle because the franchise application had required extensive personal and financial information. If the company wanted to meet him, he must be an acceptable candidate. On a beautiful spring day he pulled into the parking lot of the Body Shop Canada head office, full of excitement at the prospect of what was about to unfold. The Meeting Anyway, none of our franchisees have MBAs Mr. Kingston realized he had a fight on his hands. The franchisee must personally work in the store full-time. If the company did acquiesce, it would want absolute discretion over the content of the agreement. Goodwill charges would be about $125,000 for Sarnia and. Sarnia sales were up 33 percent over the previous year. Kingston promising to let Mr. Peddie know within two weeks whether he was interested in proceeding. The Body Shop Canada would not award the franchise until after training had been completed. However, even at this stage, the franchisor could still reject the potential franchisee and leave him or her without recourse. The Decision Kingston returned home from Toronto his immediate instinct was to rush to his computer to create new pro forma statements, but before doing so he thought it would be helpful to note down his options and his concerns. He decided to produce pro forma statements along the lines of his first projections. Exhibit 3 contains the statements.

Use the case above and answer the following questions, specific details, and long explanations:

Key Events / Case synopsis

1. Maximum of six (6) sentences here. Provide a brief history of the company, industry, key players, and relevant issues up to the time of the decision / problem

Situation Analysis

1. Write about Porters Five Forces ONLY these three parts and explain each in details ( The 3 Forces analysis should consider the Body Shops industry from the perspective of a franchisee)

Threat of Potential Entrants

Threat of Substitute Products

Bargaining Power of Suppliers