Takeovers of ethical companies

Last updated: Jul 2006

 

With The Body Shop's acquisition by L'Oréal, the rate of takeovers of smaller ethical companies by multinational corporations is increasing. Rob Harrison asks whether we should be alarmed or jubilant?

 

 

Ethical companies are key players in the campaign to get big business to take ethical issues seriously. They demonstrate that alternative ways of doing business are possible, and they can feel like allies ranged against less enlightened mainstream producers.

To ethical consumers it can feel like betrayal to wake up one day and discover that a former ally has been bought up by the opposition.

This was all thrown into particularly stark contrast recently with the announcement that The Body Shop – one of the most outspoken campaigners – had agreed a sale to L'Oréal/Nestlé – one of the most vilified of multinational companies.

In our rating system of the Body Shop we have already answered to the question as to whether we should continue to buy their products. And the answer will be that, most of the time, a more ethical option will be available.

But what else should we make of it? Should it be celebrated or condemned? Because not all takeovers are alike, here we try to understand these takeovers in the context of broader changes going on.

 

Ethical mainstreaming

Business commentators tend to see these acquisitions as part of a general trend by multinationals to move in on the ethical sector. [1] The sales growth of ethical products is now so significant that the risk of being involved seems lower than the risk of not being involved. Big companies have begun to understand that corporate responsibility is a really important issue, and at the same time that it is a potentially very profitable trend. [2]

According to Ethical Corporation magazine, there are three main ways that multinationals are moving in:

(a) Launching new ethical products

This would include Nestlé’s controversial Fairtrade coffee and Kenco’s Sustainable Coffee labelling, both launched in 2005. Wal-Mart also announced a ‘huge expansion into organic food' in May this year. [4]

(b) Buying ethical brands

According to ethical business specialist Craig Smith, "My guess is that they’re hedging their bets at relatively low cost. It can be extremely expensive to create brands like these." [2] Others compare this practice with that of big pharmaceutical companies which are increasingly buying risk-taking innovative companies rather than doing their own research and development. [1]  It's also worth noting that it can be difficult for a big brand with a tarnished reputation to launch its own ethical products, and that buying a new brand is one way of trying to get round this problem.

(c) Other routes

These would include 're-engaging with their consumers' like Marks & Spencer has, having worked on minimising supply chain risks over a few years. Also mentioned in this context is new-style cause-related marketing such as Bono's Project Red which includes American Express and Gap among its partners. [1]

 

Win win or lose lose?

Another view of all this acquisition and ethical mainstreaming is that campaigners for social change should be celebrating. Roger Cowe, a financial commentator states: "If you want to change what people consume on a grand scale, you have to penetrate mass markets. And you can’t do that if you're a small specialist brand stuck in the organic or wholefood niche, even if that means you are on supermarket shelves.  It is a familiar dilemma: stay pure and have a big impact on a small scale, or compromise and have a small impact on a grand scale." [2]

Both Craig Sams from Green and Black’s and Anita Roddick from The Body Shop are on record as saying that they believe that an acquired ethical company can influence its new parent to improve its corporate behaviour. This remains possible although does not appear to be demonstrated in the case of Ben & Jerry's.

 

Downside

Others are not so positive about this turn of events. Judy Wickes from the Social Venture Network in the USA describes corporate takeovers of socially responsible businesses as "a threat to democracy when wealth and power are concentrated into a few hands." [3]  And David Korten, in his book 'When Corporations Rule the World' explained how sustainable business "should be human scale - not necessarily tiny firms, but preferably not more than 500 people – always with a bias to smaller is better." [3]

It is also important to be wary of the potential impact of big multinationals on the ethical standards bodies themselves. There is no doubt that manufacturers generally like to try to influence regulatory standards. When the organic movement rejected any trace of GM ingredients in its labelled produce, pressure in the US to review its decision was intense.  Although the organic and Fairtrade labels have held firm to date, perhaps things might be different in ten years' time when multinational suppliers – more focussed on the bottom line – dominate both markets?

In addition, we cannot be certain that the only way to penetrate mass markets is via transnational corporations. Both Ben & Jerry’s and Green & Black’s were enjoying explosive growth just prior to being taken over. Who is to say that this kind of growth might not have continued without the assistance of the new partners?

Finally, we should be wary of multinational corporations acquiring smaller ethical companies as a route to new ethical markets which saves them from having to address core issues across the rest of their business. Ethical Consumers ranking system of course remains designed to highlight this kind of inconsistency for consumers.

 

Mission loss?

Perhaps the most compelling case in favour of a certain wariness toward the trend to acquisition by multinationals is the loss of 'vision' that can occur.  For ethical products to remain exciting, they need to be constantly re-inventing and innovating their approach to the issues as well as the quality of the product itself.  With the scientific management style, focussed on quarterly profit forecasts so characteristic of most corporations, it is difficult for this kind of innovation to flourish. [5]

In a worst case scenario, a big company might buy up and deliberately 'neuter' an ethical competitor to take the pressure off its own less-than-ethical products and practices.  And while we don’t yet have good evidence of this occurring, it is clear that inside most multinationals "it’s a struggle...[between those]...who want to try to be more socially responsible, and those that don’t." [5]  A boardroom victory for the wrong side might sideline a previously successful ethical brand.

In the USA, where acquisition of small ethical companies is more common, social entrepreneurs are getting together to try to find ways to protect the vision when a purchase occurs.  They call this process ‘institutionalising social mission’ and research is more advanced than over here. [6]

According to the US publication Business Ethics, "If social mission is to endure in companies – if we are to create an abiding socially oriented economic sector, instead of tasty morsels to be devoured by multinationals – a similar evolution must occur.  Social concerns must be woven not only into management processes, but into ownership structures as well."

 

A super-ethical niche?

At Ethical Consumer one of our goals is to help bring about markets where the majority of goods traded meet minimum ethical standards.  In the global economy, such a market has never been seen before, and we do not have a map which shows us the best route to get there. 

Ethical products produced by multinational corporations may get us there, or they may not. Small locally-focussed democratic enterprises may get us there too, or they may not.  We simply do not know, as neither route has been tried and tested.  On the face of it, it would seem that the multinational route would certainly get us there quicker.  And we do know that some of the global problems facing us do require an urgent response.  But for some of the reasons discussed above, this route is clearly risky.

Mark Palmer, marketing director for Green & Blacks, has suggested the eventual evolution of a kind of two tier moral market.  "Ethical trading will be a requisite. But there will be some blurring and confusion. In ten years time, there will be the super-ethical niche brands, and bigger brands that carry the spirit into the mainstream."

For Ethical Consumer readers, the super ethical niche products will continue to appear from a new generation of social entrepreneurs.  For each Body Shop or Green & Black’s that joins the mainstream there is a Lush or a Divine bubbling up underneath.

It remains to be seen whether niche or mainstream ethical products will deliver the greatest change. Both types of product do not of course exist in isolation and will continue to influence each other.  Although there are specific issues of concern around each particular takeover, and there is a case for improving the structures that 'institutionalise social mission', it is difficult to see why the mainstreaming of ethical products should not be seen as anything other than a triumph for those campaigning for change.

 

The Body Shop

  • Founded: 1970
  • Products: Cosmetics and toiletries
  • Purchaser: L’Oréal
  • L’Oréal turnover: £9.8 billion
  • Date of purchase: March 2006
  • Price paid: £652 million
  • ‘Before’ Ethiscore: 11
  • ‘After’ Ethiscore: 3.5

 

The Body Shop, and its founders the Roddicks, have developed a reputation as 'campaigning traders'.  Going beyond the development of ethical products, they used the company’s high street position to campaign vocally 'against animal testing' as well as on other issues like Shell in Nigeria and multinationals generally.  This has made their acquisition, by one of the most vilified multinational groupings in the world (L’Oréal/Nestlé), particularly hard for some former supporters. 

To some degree the unique voice of The Body Shop had already been stifled following its stock-market floatation in 1999.[3]  In addition, pre-takeover reports had identified Body Shop as struggling financially, and in need of a partner to  prosper.

According to the Economist, "L’Oréal says The Body Shop will be able to operate as an independent unit, which sounds sensible. But will L’Oréal really be able to resist slipping its ethically-challenged wrinkle cream onto the shelves next to the bracing and naturally-inspired body scrubs offered by The Body Shop?" [13]

 

Green & Blacks

  • Founded: 1991
  • Products: Chocolate
  • Purchaser: Cadbury Schweppes
  • Cadbury turnover: £4.7 billion
  • Date of purchase: May 2005
  • Price paid: £20 million
  • ‘Before’ Ethiscore: 16
  • ‘After’ Ethiscore: 8.5

 

This takeover has already been the subject of an extended debate in the letters page of Ethical Consumer. Cadbury Schweppes, although no stranger to controversy over workers’ rights in its chocolate supply chains and other issues, has not attracted the same levels of criticism as other chocolate multinationals.  According to William Kendell, Green & Blacks’ chief executive, "we would never have sold...the company...if we had not been convinced of their complete commitment to our values.  We know that they will help us bring the benefits of organic farming and ethical trading to more people than we have been able to do". [11]

Neil Makin from Cadbury Schweppes is also on record as saying: "We wouldn’t want to buy these companies if we were going to destroy their brand.  With our Bournville Quaker forefathers we have something of a social and ethical heritage already." [12]

 

Ben & Jerry’s

  • Founded: 1978
  • Products: Ice Cream
  • Purchaser: Unilever
  • Unilever turnover: £28 billion&
  • Date of purchase: April 2000
  • Price paid: $100 million
  • ‘Before’ Ethiscore: n/a
  • ‘After’ Ethiscore: 3.5

 

This takeover was the most high-profile takeover of a socially responsible business in its day. What lessons does it hold for the bout of more recent acquisitions? Firstly, sales are good.In 2003 it had already become the top selling ‘premium’ ice cream in the USA with sales of $212m – a 70% increase over 1997. [3]

However, the ethical culture of the organisation is widely recognised not to have fared so well. Its latest social audit found that only 45% of employees thought that the company was taking its social mission seriously. [13] 20% of Ben & Jerry’s employees were fired in the first 3 years after acquisition and Unilever no longer donates 7.5% of Ben & Jerry’s pre-tax profits to charity. [3] Although it is fair to say that disclosing this kind of data in its own social audit shows that some serious commitment remains.

In one way, the Ben & Jerry’s takeover was unusual. It was a ‘hostile’ takeover of a publicly quoted company and, as such, left one founder, Ben Cohen, less than ecstatic. He is on record as saying, "I think that most of what had been the soul of Ben & Jerry’s is not gonna be around anymore". He also offers this advice to other social entrepreneurs considering selling to a large organisation: "Don’t do it! Stay independent". [3]

 

Tom’s of Maine

  • Founded: 1970
  • Products: Toothpaste
  • Purchaser: Colgate Palmolive
  • Colgate turnover: £5.5 billion
  • Date of purchase: March 2006
  • Price paid: $100 million
  • ‘Before’ Ethiscore: 16
  • ‘After’ ethiscore: 10.5

 

Tom’s of Maine was America’s top selling ‘natural’ toothpaste brand and it had ECRA’s highest rating for environmental reporting, animal testing policy and for paraben-free products.  Colgate Palmolive currently has ECRA’s worst rating in these categories as well as criticisms for involvement in Oppressive Regimes and Political Activity.

According to founder Tom Chappel, maintaining ethical standards such as bio-degradibility of ingredients and staying in Maine were ‘deal breakers going into the process’. [10]

 

Other similar takeovers

Small ethical companies being taken over by larger players don’t always make it into the press.  There has been a clear trend for some time in the USA and it is now beginning to be felt here.

 

USA

  • Samantha and Odwalla (premium juice) by Coca Cola
  • Natural Boca Burger (veggie burger) by Kraft/Philip Morris
  • Cascadian Farm (organic) by General Mills
  • Stonyfield Farm (organic yoghurt) by Danone
  • Seeds of Change (pasta) by Mars UK/Europe
  • Rachels Organic (dairy) by Dean Foods (USA)
  • Kallo Foods (wholefoods) by Koninklijke Wessanen
  • PJ Smoothies (drinks) by Pepsi

 

Not quite the same thing, but the Pret-a-Manger sandwich chain sold 33% of the company to McDonalds in 2001.

 

References:
1 Ethical Corporation: March 2006. Ethical Product Marketing, Saha and Webb.
2 Ethical Corporation: May 2005.  Buying responsibly – Roger Cowe.
3 Mother Jones: Jan/Feb 2003. Culture Change: David Goodman
4 Wal-Mart plans huge move into organic food: Guardian May 13th 2006
5 See the Comments by Ben Cohen in Mother Jones op cit 3 above.
6 Business Ethics: Summer 2003.  Why social mission gets squeezed out of firms.
7 BrandRepublic.com.  Ethical brands: Moral minority 3rd August 2005
10 USA Today 21/3/06.  Big companies buy small brands with big values. Theresa Howard.
11 Green & Blacks website: viewed 26/4/06
12 Sustainability RADAR Aug/Sept 2005 Reprinted on www.greenbiz.com
13 The Economist March 23rd 2006 The body Beautiful: Mixing Money and Morals

 

From Ethical Consumer, Issue 101, July/August 2006