Individual Case Analysis Natura: Exporting Brazilian Beauty

Prepared for: Prof. Bruce McKern

GMGT522E New World Global Business

Prepared by: Simon Choe (102015)

Submitted Date: October 11th, 2011

This is to certify that this work is entirely and exclusively my/our own, except for those cited and noted.

China Europe International Business School

Executive Summary Natura needs to continue its international growth in order to best spread its beliefs regarding natural products and sustainable business practices. Potential roadblocks to this growth include a possible global recession and competition from many strong firms in the Cosmetics, Fragrance and Toiletries (CF&T) market. After analyzing international growth options in the United States, China and India against the strengths, short term goals and long term goals for Natura, it was concluded that among a number of other recommendations, Naturas next venture in international growth should be in India. Introduction We are at a point where we have a lot of fantastic challenges ahead of us. Specifically, that is the challenge of expanding our business to even more countries around the world. The most obvious places we could expand to include the United States, China or India. Each market has its own challenges and potential benefits which must be fully considered and compared against Naturas current strengths, as well as the long term and short term goals of Natura. Because they will be the criteria on which we judge each market, it is most important to first reiterate what these strengths are and what the goals should be. Strengths Direct marketing Our expertise in direct marketing allows us to grow rapidly and also deters acquisition by traditional CF&T companies as they would be less willing to pay for those sales assets. Clear corporate identity having a clearly defined culture and value system makes retention of personnel easier and enhances our image to our customers. Foundation in emerging world a possible situation for a global recession is that growth in the emerging world will continue while the developed world flounders. In this stuation we would be able to move ahead while our developed-market dependent competitors fall behind. Proven but flexible internationalization process our ability to adapt to succeed in new markets will continue to facilitate faster internationalization than our competitors. Short-Term Strategic Goals

Prepare for the recession though the future of the global economy is uncertain, the stark possibility of a global recession is one which we must be well prepared for. The typical way to do this would be to build up a large reserve of cash which we could use to sustain ourselves should revenues fall significantly. Rebuild profitability Over the last 3 years, our EBITDA margin has fallen from 24.7% to 22.8% despite significant growth in revenue. This slide in profitability must be stopped if not reversed. Long-Term Strategic Goals If our long term goal is to spread appreciation for natural products and sustainable business as quickly as possible, then we must remain an independent company in order to best guarantee that outcome. To do this we must continuously stay beyond the reach of acquisition by our competitors. Because of our heavy bias towards direct marketing, companies such as Amway and Avon will naturally want to try and acquire us. Traditional CF&T players may have an interest in purchasing our product portfolio and R&D capabilities. It may be possible to keep both at bay by being too big for the likes of Amway and Avon to buy and too much extra expense for the larger traditional CF&T players. Continue growth success in this should be defined as exceeding the revenue growth rate of both the global CF&T Industry and of the CF&T Industry in the countries we operate in. Establish leadership in both natural and sustainable CF&T In each of the countries we operate in we must strive to become the revenue market share leader in sustainable and/or natural CF&T. (e.g. The Body Shop, O Boticario, etc..). Doing so will ensure that no one company in this category becomes bigger than us and so is unable to purchase us. Establish global market leadership amongst direct marketing companies market leadership by revenue in global direct marketing will ensure we can actively stay ahead of all direct marketing companies, whether they already have CF&T products and want to expand their product portfolio and/or reach, or if they want to buy their way into the CF&T industry. Higher-end mass market positioning to cover the additional cost of developing and using sustainable business practices we will likely need additional revenue relative to our non-natural/sustainable peers. Targeting the capture of mass-market appeal is best way to quickly spread the ideas of sustainability and natural products. Expansion Options

China Avons successful experience in the long-term in introducing direct marketing to China further enhances the attractiveness of the Chinese market as a potential location for expansion. Being a fellow developing economy means it has many of the same societal pressures which helped Natura make direct marketing a success in Brazil and through Latin America. Many people are looking for meaningful employment and are highly open to new ideas and philosophies. Furthermore, the pollution in major urban areas and development of first world health problems, such as diabetes and heart disease, can spur the appreciation of natural products and of sustainable business in the society. Our foundation on these principals could potentially make it easier for us to attract and retain human resources in China than for Avon. However, there is a major roadblock to introduction to China. Because the testing of cosmetic products on humans is illegal, we would be required to prove the safety and efficacy of our products by testing them on animals. This regulation has kept companies such as The Body Shop out of the market until this time. Animal testing is firmly against our corporate values and so, until those regulations change, we must stay out of China for fear of damaging our global image. India Similarly to China, Indias status as a developing economy makes it a great match with direct marketing. Dabur is a local company which has a similar conviction to natural products; their success in India is good indication that the Indian market could appreciate Naturas products. Major concerns with expansion into India are around localization. Will we need special formulations to meet local tastes? Will the Indian market recognize and value the natural Brazilian ingredients? To best ensure we can offer the right products to the Indian market, the establishment of an R&D center will be required. United States Appreciation for natural products and sustainable business has been growing in the United States. This is not only supported by public opinion surveys, but also by the development of other business founded on such principals. For example, in New York City, a number of boutique hotels, such as The Crosby Street Hotel and Greenhouse 25, and restaurants, such as Savoy, Backforty and Blue Hill, are being developed or have already opened with sustainability as a major pillar of their image and business practices. Just as we hope to do with our presence in France, consumers could be more easily convinced to try our products if they know discerning customers in major developed markets trust us. So, if we position ourselves correctly, our operations in other countries could greatly benefit from our presence in the United States.

The possible global recession is one of two major concerns with the United States. If a recession were to occur, the United States is sure to suffer, and so the spending power of its citizens would be reduced. Furthermore, direct marketing is not favorably looked upon by the market and so trying to sell higher end products through this channel would be challenging if not impossible. Finally, the United States has a fully developed CF&T market. Entering it in full force in either the direct marketing or traditional retail channels would be challenging our competitors on their home territory. Recommendation Short term recommendations First, we scale back or stop altogether our shareholder dividend distributions. In the last 3 years we have distributed over R$ 1 billion to our shareholders. While this would be totally appropriate for companies with limited growth opportunities, we are in a situation with more opportunities than we can deal with and so need to be reinvesting as much money as possible back into our business. Second, we create a team within the New Markets Division to focus on the development of the retail channel in France. Their ultimate goal should be to create a scalable and efficient retail business which we can export to other developed markets such as the rest of Western Europe, the United States and Japan whenever the economic outlook of those countries becomes favorable. Third, we enter the United States with a limited scale low-cost partnership strategy to increase our brand awareness. This will be done by partnering with hotels and beauty spas which also promote sustainability and natural products. In this way, our products will be introduced to customers who are already willing to pay for such values and our distribution costs will be limited. Finally, we preliminarily enter India with the establishment of an R&D center to begin product development and customization for Indian tastes. Long term recommendations As soon as it appears that India will avoid or emerge from a recession, we enter the market with our existing internationalization practices at full scale. If India specific products are not ready by this time, then we should begin with the introduction of our basic Ekos line of products. If a recession hits the United States and at some point it becomes possible to secure low rent in a good location in New York City, Miami, and/or Los Angeles, we should immediately secure a long term lease

and open a flagship store in each of those cities. This will enhance both our global brand image and our budding image in the United States. Match between new markets and Naturas strengths
Strength Direct Sales Clear Corporate Identity Emerging Market Foundation Internationalization Process X X United States India X X X China X Conflicts with regulations X

Alignment of recommendations with Naturas Strategic Goals

Strategic Goals Reduce Dividends Prepare for Recession Increase Profitability Lead CF&T growth Biggest Share of Natural & Sustainable CF&T Direct marketing share leadership Higher end positioning X X X X X X X X X X X X Retail Team Limited U.S. Entry India R&D Full India Entry U.S. Flagships