responsibility, charitable acts, Third World development, women$$s issues and

other causes. It generated considerable publicity for itself by these means.

In the $34$ years since its founding, one little store had grown into a chain of over

$950$ stores located in $37$ countries worldwide. In Canada there were $72$ shops $56$

franchised and $16$ that were corporate owned.

The Body Shop Canada stores, averaging about $100$ square meters $(1100$ square

feet$),$ 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. The line consisted of nearly $400$ items that could

be purchased at every store or ordered at stores and delivered through the mail.

All stores were of similar appearance; they were decorated in identical colour

schemes, with displays, fixtures, and even window displays standardized from

store to store across the country. Customers tended to be loyal, even fanatical, in

their support of the company. Once someone became a customer, he or she would

probably not purchase a competitor$$s product again.

The Initial Contact

Mr$.$ Keilar was well aware of the success record of franchise operations, and of

this one in particular. In fact, he had just attended a conference where a major

national retailer had spoken of the Body Shop Canada in glowing terms.

However, he had never given any serious consideration to purchasing a franchise.

He thought that for someone with imagination and good business sense, a

franchise would be far too restrictive. However, with a $$what have I got to lose?$$

mentality, he emailed the address listed in the advertisement and asked for more

information. Within a week he received a reply, on recycled paper.

Franchise Information

The package that arrived in the mail contained $35$ pages of information about the

company and its operations. The presentation seemed almost amateur, with much

of the material obviously photocopied. Nonetheless, Mr$.$ Keilar took a night off

from analyzing cases to study the documents. The material consisted of:

$$ Company background $8$ pages

$$ Environmental issues $15$ pages

$$ Information on the franchise agreement $3$ pages

$$ Financial data $6$ pages

$$ List of current franchises $3$ pages

$2$

The synopsis of the franchise agreement outlined the standard elements of a

franchise agreement and included the following, additional facts:

$$ The Body Shop Canada would lease the premises and sublet it to the

franchisee;

$$ The franchisee must operate the business and be in the store at least $40$

hours per week;

$$ The franchisee must purchase the complete product line from the

franchisor $($The Body Shop$)$;

$$ The franchisee must retain effective ownership and control;

$$ Any sale of the franchise to a new franchisee must be approved by the

franchisor;

$$ The franchisor may terminate the franchise if the franchisee fails to

operate within the law or fails to carry on business as prescribed by the

franchise agreement; and

$$ No royalty fees would be paid except a monthly administration fee of

$$200,$ and a promotion and publicity fee of $2$ percent of gross sales.

Cost to start a new franchise were estimated as:

Franchise fee

Fixtures

Design Fee

Opening inventory

Legal Fees

First and last month$$s rent

Training accommodation costs$*$

Site selection

Public relations$**$

Management aptitude test$***$

Total

$$15,000$

$100,000120,000$

$5,000$

$60,000$

$5,000$

$5,000-6,000$

$0-5,000$

$6,000$

$0-3,000$

$900$

$ $198,900-$$$225,400$

$*$ Potential franchisees must attend a training program in Toronto at their own expense. At

the end of the course they must pass an exam before being awarded a franchise.

$**$ This fee would depend on whether the Body Shop had an existing store in the market.

$***$ The Body Shop Canada was phasing out its management aptitude test. At the time of this

case the test was used only to choose between two applicants who were otherwise tied.

$3$

Mr$.$ Keilar 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. He

would have to finance the inventory and part of the fixtures through a bank loan.

Given the excellent track record of the Body Shop Canada and his experience and

qualification, Mr$.$ Keilar believed he would have no trouble borrowing the

necessary capital from a bank. Using the company$$s 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. $2$ Mr$.$ Keilar thought that

the numbers looked promising and that it was worth devoting time, even at the

expense of preparing cases, to find out more about the Body Shop Canada.

Mr$.$ Keilar$$s Plan

If buying a franchise for the Body Shop made sense, then why not try to buy two?

Mr$.$ Keilar$$s education and personality combined to make him ambitious. He had

examined the list of fra