The Multichannel Challenge at Natura in Beauty and Personal

Care
The business of Natura, Brazil’s largest direct-selling company with roughly
1.5 million independent door- to-door sales consultants (ISCs), had
started to change in recent years.

On August 19, 2014, the company had announced that board member Roberto
Lima would replace Alessandro Carlucci as CEO.

Carlucci had worked at Natura for 25 years and had held the role of CEO
since 2005. This CEO transition occurred when Natura’s position in the
cosmetics, fragrance, and toiletries (CF&T) market was being challenged by
other, nondirect- selling companies.

It also expanded and repositioned Natura’s product line to attract

demographics such as males and millennials in these channels.

Some within the industry saw this multichannel strategy as contradicting the
core tenets of a direct selling–based model that consisted of:

 (a) face- to-face sales away from a retail location, and

 b) the relationship orientation between Natura and its ISCs.

Two years after the new management implemented its multichannel

orientation, Brazil was in the middle of the largest economic recession ever
recorded.

The company had reported a sharp net income drop in the third
quarter of 2016, down 44.6% from the same quarter in the previous
year.

Natura’s direct-selling operation only achieved a brand household

penetration of 37.13% in the second quarter of 2016, which
represented a decrease of 8.5% over the same period in 2015.

In the face of these results and just two years into his role as CEO of Natura,
Lima resigned. On October 25, 2016, the company’s board accepted Lima’s
resignation.
According to a company statement, “during his tenure as CEO of the
Company, Lima formed a solid Executive Committee and delivered important
projects that included the digitalization of the business,

he board appointed its commercial vice president, João Paulo Brotto

Gonçalves Ferreira, as the new CEO. Ferreira was tasked with revitalizing
Natura’s direct- sales business as part of the company’s growth strategy in the
face of opposing points of view within the company and in the industry about
how and how quickly the multichannel transition should take place.

Specifically, Ferreira was challenged with creating a balance between

ISCs and other channels to market the brand while enabling Natura to
thrive in the face of intense multichannel competition in Brazil’s
beauty and personal care market.

The Brazilian Beauty and Personal Care Market and Natura’s Position

Despite Natura’s success following its 2004 IPO, since 2012, the company had
started to struggle.

Its market share decreased and its stock price declined, but the company was
not alone: its main competitor in the door-to-door channel had also faced
difficulties in the same period.

Avon did not achieve its targeted results even though in the past Brazil had
been one of the company’s most profitable markets, and represented its
largest operation in the world with more than 1.5 million ISCs.

Most competitors that used traditional retail channels grew sales during the
same period. In 2014, Unilever took the lead and Natura fell to second
position in the CF&T market in Brazil

One Brazilian company, Botica Comercial Farmacêutica, known as Boticário,

outperformed others from 2008 to 2015 and was the fastest growing company
in the beauty and personal care market.

Until 2008, Boticário had a single channel. The company operated a

franchising system of physical stores selling its products, with over 900
franchisees and 3,700 stores in more than 1,500 Brazilian cities.

The growth of Boticário suggested that the reason Natura and Avon had
achieved such unfavorable results was not due to an overall market decline

In fact, the market size for beauty and personal care in Brazil had more than
doubled from 2008 to 2015, although an economic slowdown in the country
led to a small decline after 2015.

What factors were driving these results? What changes were needed to their
business models and channel strategies to succeed?
Natura: Company Background

Natura’s vision statement

Natura, through its corporate conduct, through the quality relationships it

establishes, and through its products and services, will be a globally
significant brand, identified with the community of people committed to
building a better world by means of a better relationship with themselves,
with others, with the nature they are part of, with the whole.

 Natura, a 100% Brazilian-owned company founded in 1969 by Antonio

Luiz da Cunha Seabra, employed 7,000 people.

 The company’s revenue grew from BRL5.5billion (USD1.52billion) in

2011 to BRL7.8billion (USD2.16 billion) in 2015.

 Despite experiencing approximately 30% ISC turnover per year, the

number of ISCs had grown from 1 million to almost 1.5 million in the
same period.

 High turnover was inherent to the direct-selling business model, which

was traditionally driven by acquiring new ISCs rather them retaining
them.

Besides the number of ISCs, an important metric for direct-selling companies

was productivity,13 represented by the average gross margin per consultant.

Between 2011 and 2016, although the number of ISCs had increased by 0.5
million, productivity had actually declined by 0.6%.

Unit productivity had also gone down from 21.6 items per Natura consultant
in 2011 to 15.3 items in 2016. The reasons behind that decline were unclear.

Natura had over 3,000 products spanning multiple product categories:

 body care

 bath

 hair care (

 facial care

 fragrances

 cosmetics and makeup

  and beard care (beard oil, shaving foam and cream, post shave balm
and gel)

The company’s strongest categories were fragrances, cosmetics, and

skin (body and facial) care.

Natura marketed its large product line under several sub-brands. For
example, Ekos was a range of unique body care products and perfumes
inspired by Brazil’s ancestral traditions and was developed sustainably by
working together with local communities;

 Chronos skincare combined the best of biodiversity and high-tech

research in its products;

 Aquarela;

 Faces was a line of cosmetics and toiletries designed to suit the pace of
life of the modern young woman;

 Homem was a complete line of fragrances, beard, face, and body care
designed for men;

 Kaiak

 Mamãe e Bebe was a line of safe and gentle baby care products
formulated with minimum ingredients.

In 2012, Natura acquired a major stake in the Australian cosmetics

manufacturer Aesop, which operated stand-alone stores and department store
counters in more than 10 countries

Natura was motivated to become a global multibrand and multichannel

company with products for different types of customers and markets. Some
main characteristics of Natura had stood out to the market over the years.

New products

Innovation was key, and Natura had invested in innovation and new product
development and used Brazilian biodiversity as one of the main drivers of
innovation

The company launched a considerable number of products every year based

on Brazilian regional plants. In 2016, Natura invested 2.4% of its net revenue
in innovation, corresponding to BRL187 million (USD51.9 million) and
launched 255 products.14 By the end of 2016, sales of products launched
within the last two years represented 54.3% of the total gross revenue for that
year.

Sustainability

Corporate branding was important to the company, and it had been highly
committed to social and environmental goals

According to the 2016 annual report, since 2011, the company had spent
BRL972 million (USD270 million) in the Amazon region purchasing natural
inputs and investing in local communities’ development, education, and
projects for offsetting carbon emission, generating income for more than
2,000 families in the region.

Marketing push and pull

Natura had targeted marketing efforts not only to ISCs (marketing push) but
also to end consumers (marketing pull) through considerable spending in
mass media advertising such as TV, online, and out-of-home campaigns.
Natura believed its spending on marketing to the end consumer had been key
to strengthening the value proposition of the brand. The company had also
invested in sponsorships to fund cultural projects to support the Brazilian
music and fashion events,

Natura had been recognized as the most valuable cosmetics brand in Brazil.
According to Brand Finance, in 2015, Natura was ranked as the 14th most
valuable beauty brand in the world with an estimated value of USD3.2 billion,
up from the 17th position in the previous year.

Natura. In fact, the company rounded off 2014 by becoming the largest (and
first publicly traded) company to attain B Corp sustainability certification.

Another characteristic that stood out for Natura was its business model and
strong relationship with ISCs. Natura had a network of more than 1.5
million ISCs in Brazil to support and implement its vision of marketing,
innovation, and sustainability. The channel traditionally worked as follows:

 Natura consultants were independent resellers who purchased products

directly from Natura for resale to their own network of clients. The
consultants, who typically started as consumers of Natura’s products
before beginning to sell them, were not employees of Natura and were
not required to sign exclusivity contracts.
 Natura consultant advisers were consultants who—in addition to selling
products—recruited new consultants.

 The sales cycle began with the publication of a Natura magazine

(catalog) every 21 days. The catalog contained the portfolio of products
as well as the suggested prices the ISCs should charge their customers.
 The catalog was an important marketing tool that Natura used to
transmit its beliefs and values in addition to presenting its product line.

 The consumer placed an order with their ISC. ISCs, once they met
Natura’s minimum order, placed their orders through the company’s
website or over the phone. ISCs had between 21 to 60 days to pay
Natura once the order had been fulfilled. They had a line of credit that
increased with the length of time they had worked as consultants and
based on their payment history.
 Natura had a strong relationship with its consultants. ISCs were invited
to meetings where the promotions and product launches contained in
new Natura catalogs were reviewed. The company also offered training
on products and categories, which helped boost the ISCs’ business.

Brand performance;

1. Although the company had started to provide its consultants with a

variety of tools such as new technology, additional payment methods,
and many delivery options to enable them to sell to their customers
better, the company was facing major challenges.
2. revealed a 67% decline in Natura’s brand value, down to USD1.05
billion, due in part to the combined effects of recession, inflation, and
the depreciation of the Brazilian real against the US dollar.
3. Frequency of purchase had also decreased by 12.1%. Unilever
outperformed Natura in those two performance measures, and Boticário
had increased its brand penetration during the same period

Boticário: Natura’s Fastest-Growing Competitor;

Boticário was founded in 1977 in south Brazil. In 2009, the company created a
business unit (BU), which was headed by a former Natura executive and
charged with designing new channel strategies and brands. One year later,
the company launched a cosmetics retail chain called Eudora and started a
door-to-door operation linked to it. At the same time, it expanded the direct-
selling channel to the Boticário network of franchised stores. At the beginning
of this operation, it had avoided conflict with the store-based channel by
encouraging store clerks that worked for the franchisees to sell Boticário’s
products through catalogs away from the store’s physical location.

As a reference point, Natura and Avon had fewer than 10 distribution centers
apiece to serve the whole Brazilian market.

By the second quarter of 2016, Boticário had 37.8% brand penetration overall
and had reached 16.07% brand penetration in the direct-selling channel, an
increase of 4% in the previous 12 months. The direct-sales channel was
already estimated to account for roughly 30% of the company’s sales. It also
ran an e-commerce operation that had become stronger over the years and
was invested in by the company mainly after 2011.

Besides the multichannel strategy, as of 2012, Boticário had launched two new
retail chains:

1. Quem Disse Berenice? sold women’s cosmetics products that were

exclusive to the chain and e-commerce, most of which were
manufactured by Boticário

2. The Beauty Box, on the other hand, resold well-known third-party CF&T
brands targeted to both women and men.

In 2015, direct selling represented 25.2% of the total CF&T market in

Brazil

Despite the importance of direct selling for CF&T in Brazil, in response to

competitive pressures, Natura and Avon had started to consider using
different distribution channels for selling their products (

Grocery retailers remained the most important channel for this industry even
though their share had declined from 2008 to 2015.

Direct Selling

In Brazil, two large direct-selling companies had coexisted in the CF&T

market: Natura (local) and Avon (multinational)

Direct selling was often important where socioeconomic development was

low,19 which was one of the reasons why it was still important in Brazil

The most likely consumers of the direct-selling channel were older people in
the less-developed regions that do not have access to large stores and well-
known brands.

Industry experts believed that if Natura hadn’t started its operations in 1969
with a single door-to-door channel strategy (which until 2014 was its unique
channel), direct selling would not have flourished in the CF&T market.
Additional characteristics of the direct-selling model in Brazil included:

 Direct-selling companies had large salesforces made up of independent

salespeople.
 Avon and Natura were pioneers of this model in Brazil and
introduced brands and products that had achieved a high level of
preference among consumers.
Although direct selling was still important in Brazil, its importance had
decreased over the years.

1. Further, from research conducted in Brazil and accessed by Natura, the

higher the Municipal Human Development Index (MHDI) in a particular
city, the more retailers were important (physical stores), whereas the
lower the MHDI, the more important door-to-door sales were. 20
Brazilian cities had become more developed, and as a result, direct
selling was expected to become less important.
2. As of 2016, both frequency of purchase and market penetration of
direct selling in Brazil had decreased. However, Mary Kay (650,000 new
households) and Boticário (525,000 new households) had increased
their brand penetration within this channel.

Online Channels

As of late 2014, direct-selling companies Avon, Natura, and Mary Kay had
initiated e-commerce as a new direct-to-consumer channel. 21 Each company
operated in this new channel in a different way.

When shopping through the company’s online store, consumers did not have
to pick a consultant.22 The prices were usually higher on Avon’s online store
than in its catalogs, and promotion was not as intense in this channel as for
door-to-door sales.

In contrast with Avon, Mary Kay operated in Brazil with an online store where
consumers had to pick an independent consultant according to their location
(i.e., zip code), who then received a percentage of the sale. 23 This alternative
avoided conflict with Mary Kay’s independent beauty consultants.

Natura had analyzed different possibilities before it launched its e-commerce

operation, including the models that had been adopted by Avon and Mary Kay.
Natura’s executives considered several factors before launching its e-
commerce website, such as:

(a) What role would it play in the control of the brand (i.e., price and
communication)?;

(b) How could it best avoid potential conflict with traditional ISCs that sold
products only through catalogs?;

(c) What was the best way to establish a relationship with consultants as part
of the website’s strategy?;

(d) What were the potential profitability and revenue streams?

In 2014, Natura created Rede Natura (translated as “Natura Network”) in

which an ISC (or any other person) could become a digital consultant.
It first experimented in two cities within São Paulo State, Campinas and São
José dos Campos. Based on the results from the experiment, Rede Natura was

introduced throughout the entire country. It worked as follows: each

Natura digital consultant received a personalized Rede Natura URL
that could be used to promote a personal web page to this person’s
own network through email, Facebook, or any other touchpoint.

Importantly, when consumers accessed this website, they perceived it as the

company’s own e-commerce website.

In the traditional door-to-door commercial mode, ISCs bought the product,

delivered it, and charged the consumer.

In the new digital franchise model, Natura took responsibility for payment and
delivery. Thus the digital consultant’s role was to promote the products,
generate the lead to the website, help consumers go through the shopping
process, and close the sale.

As a consequence, the digital consultant’s commission was lower than

the direct-sales’ commission.

In terms of price and margin composition for the two channels,

traditional ISCs purchased products from Natura with a 30% discount to resell
to end consumers.

The suggested price was published in the catalog they used to show the
products to their customers and make the sale.

Traditionally, ISCs had not been allowed to carry inventory and Natura would
remove them from the network if they did so.

As part of the multichannel transition, ISCs, especially high-performing ones,

could form their own inventory by buying certain products when Natura ran
promotions and offer them for sale later when the products’ suggested prices
rose

As for the digital consultant model (Rede Natura), the price was set by
Natura, but the digital consultants could use specific coupon codes to run
price promotions with consumers. However, this affected their standard
20% online sales commissions.

In this business model the Natura Digital Consultants (CND) uses the Natura
Network, that allows the Natura Consultants to create their own website
through which to relate with customers and sell Natura products,
In April 2016, Natura launched its own company website and started to sell
Rede Natura directly to consumers as well as through consultants.
Consumers were no longer obligated to select a digital consultant to
purchase the company’s products. After six months, the sales through
their own website represented roughly 30% of Natura’s total online
sales. Sales through Natura digital consultants’ personalized websites made
up the rest.

Natura’s promotional intensity through the online channel was higher than its
direct competitor Avon on their online store, and the prices on Natura’s
website were sometimes lower than the price of products sold through
catalogs

In fact, a few of Natura’s ISCs observed that once in a while the price of a
product was cheaper if they bought from Natura’s own website through the
same process as a consumer rather than through the traditional buying
process where sales consultants purchased products through the catalog at a
discount.

As a consequence, approximately 8% of Natura’s own website sales

were attributable to Natura consultants and not to end consumers.
Thus this channel, even though it was not intended to act as a wholesale
distribution method, provided consultants with an opportunity to occasionally
find better offers online than through the catalogs.

The products’ lower online prices made it difficult to avoid conflicts

with the ISCs even though the initial idea was that the e-commerce
channel would balance the interests of consumers and sales consultant

What is not fair is to apply the same commercial conditions on their direct
website and in the online channel of the consultants. The direct online store
would be better if it worked with full price and not with the whole portfolio.

Regardless of any potential damage to other channels, Natura had achieved

positive results through the two types of e-commerce operations:

  Over 70,000 digital consultants and more than 500,000 consumers

registered during the first year of operation (2015).
  Natura opened the possibility for people to become “digital
entrepreneurs” through the digital franchisee model.
 in contrast to the profile of the traditional door-to-door Natura
consultant (e.g., older, less digital, female). Half of the digital
consultants were purely digital and were not selling through traditional
door-to-door methods.
  The new online model helped the company gain more customers from
the higher income A and B social classes as opposed to the door-to-door
channel, which mainly had customers from middle- class C. 26
  Due to greater shopping convenience, sales increased in product
categories that were previously below potential (e.g., daily-use products
like shampoo). Natura developed what is known as a long tail business
 model in relation to e-commerce. New product launches were part of
Natura’s culture, but the space to promote all the existing and new
products in the printed catalog was limited.
 E-commerce was a way that Natura continued to offer some
potential products that were no longer being displayed in the
catalogs.

In response to any negative effects the online channel had on its relationship
with the ISCs, Natura started to focus on the internet as a tool to help ISCs
boost sales using data analytics from the company’s customer relationship
management (CRM) team.

1. While Natura as a whole was still figuring out the wide range of website
functions beyond sales, the CRM team had realized that datasets from
the new interactions between the brand, consultants, and end
consumers could provide valuable insights to strengthen the
relationships among them
2. The analytics team also provided recommendations to improve traffic,
conversion rates, and profitability.

Physical stores: Beauty specialists and drugstores

1. The traditional business model of Natura and Avon in Brazil did not
support sales to other companies (i.e., retailers), but only to individuals
2. Many different retail formats had been tested by direct-selling
companies in the beauty and personal care market.

1. Drugstores. In 2015, Natura started to sell one product line, Sou,

which consisted of moisturizers and shampoos, through the
drugstore channel at one of the country’s largest drugstore
chains, Droga Raia.

2. Flagship stores. Before adopting the multichannel orientation,

Natura had opened a small number (less than 10) of temporary
flagship stores as a way to have direct access to consumers and
to learn how to operate physical stores.

3. Natura-branded retail stores. In 2016, Natura opened five stores

at mall locations in São Paulo to target consumers from A and B
social classes and to offer a more premium portfolio (e.g., Ekos,
Chronos, and Una brands) with a focus on makeup and skin care.
Natura planned to add more than 300 stores in the next three
years.

4. Vending machines. Natura activated vending machines carrying

the Sou line at malls, airports, train stations, and other high-
traffic locations.
 5. Emergent retail channels—ISCs that became beauty specialist
retailers. In general, ISCs sold multiple brands.

6. Some ISCs (approximately 1,000) opened multibrand beauty

retail stores selling Natura, Avon, and other CF&T brands such
as Boticário, L’Oréal, and Unilever. They carried inventory and
had shelves to display the products to consumers. These ISCs
were no longer operating in the traditional door-to-door sales
model (i.e., away from a fixed location and without carrying
inventory).

In effect, these ISCs were becoming beauty specialist retailers. They operated
as retail companies or corporations, which led industry observers to conclude
that the ISCs that operated in this store format were part of an informal (i.e.,
emerging, unstructured, and “unauthorized”) channel for Natura and Avon.

The main issue with respect to this operation was that the ISCs purchased the
product from Natura and Avon as individuals (i.e., sales representative or
ISC).

Other beauty and personal care companies, such as Boticário and L’Oréal, also
monitored the emerging channel as a potential opportunity for selling their
own brands.

Before Natura’s multichannel orientation, the company did not allow the
existence of this channel as it contradicted the fundamentals of direct selling.

To help the high-performing ISCs who had started to open stores, Natura
began to offer visual standardization of the stores’ interior and exterior and
encouraged them to experiment with product offerings and different payment
methods.

The company had activated more than 105 of these emergent channel stores
since December 2014 and saw a 15% gain in productivity and 4.4% gain in
market share at those stores.

Other retail formats. Executives in the direct-selling industry also saw hair
salons as an opportunity to be further explored. Hair salons were a very
fragmented retail type to serve, and costs to distribute through this channel
were quite high for massive consumer goods companies such as Unilever and
P&G.

Natura’s Multichannel Challenge

Traditionally, direct-selling companies like Natura had not developed

capabilities to operate in retailing and compete with Boticário, Unilever, and
P&G. They had not worked through distribution channels that required
different approaches in terms of service level, assortment composition,
promotion, price, merchandising, and incentives to sell their products to end
consumers

Instead, their core capability was to manage the relationship between the
company and ISCs, where traditionally there were no shelves and not even a
complete assortment or immediate availability of products for consumers.

Despite their shortcomings, direct-selling companies acknowledged the

changes in shopping behavior, demographics, and psychographics in Brazil
(e.g., women working outside of the house), and other environmental events
would shape new business models in this industry.

When Ferreira became Natura’s CEO at the end of 2016, the company
faced a challenging situation.

The previous management’s foray into multichannel distribution had caused a

deteriorating relationship with the ISCs because they were no longer the
exclusive sales channel.

some consultants argued they did not know what their role would be in the
future and if they would become less important to Natura.

At the same time, Natura’s new management recognized that there was no
stepping back from a multichannel orientation for the brand.

How should Ferreira approach the transition from a single-channel to a

multichannel company?