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Oriflame: Will It Be Able to Shine Again?

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Beginnings

af JochnicksOriflame ’s story begins in 1967 in a small office in Stockholm, Sweden. Three partners, Jonas and Robert af Jochnick brothers and Bengt Hellsten give a start by selling cosmetics through the direct sales method.

Company’s name originates from a royal banner of medieval France that was opened only on Oriflame First Logothe battlefield. The original word  is “Oriflamme” and means “golden flame”. The first company logo is shown on the right.

The business grows in time, expands into some of the Western European countries and even goes public on the London Stock Exchange. Until late 1980s, Oriflame registers no major international success, though.

Post-Eastern Bloc Era

Towards the end of 1980s, the af Jochnick brothers see a huge opportunity in the democratization of the Eastern Bloc countries. Oriflame establishes a “daughter company” by the name of Oriflame Eastern Europe S.A. (or short, ORESA) based in Brussels.

Oriflame logoThe older brother Jonas af Jochnick leads this operation as a very different entity from the parent company in many ways. First of all, the whole strategy was based on a very aggressive international expansion. The aim was to open as many ex-Eastern Bloc countries as possible and establish solid presences there before the major competitors do, especially Avon and Amway . To do this, it had to be practical in many aspects and also aggressive on the field. Amway’s compensation plan served both purposes and it was implemented almost unchanged in this operation.

Between 1990 and 1996, many new markets were opened under ORESA, like the Czech Republic, Poland, Hungary, Russia, Latvia, Ukraine, Slovakia, Bulgaria, Lithuania, and Romania. With this wind, Turkey, Greece and India were opened, too. This major shift in strategy brought a huge success to Oriflame. So, in 1999 Industry Kapital (now called, IK Investment Partners), a leading European private equity company bought 45% of Oriflame’s shares, delisting the company from the London Stock Exchange. With this transaction, Oriflame was valued at €450 million at that time.

Oriflame Goes Public Again

In line with the initial plans, the management listed the company on the Stockholm Stock Exchange through an IPO (“Initial Public Offering”) in March 2004. Following this, Industri Kapital started selling its shares on the stock exchange and exited by selling its remaining 4.5% stake in August 2006.

Oriflame’s sales growth during its first year on the Stockholm Stock Exchange was quite modest: There was a 3% increase as compared to previous year. However, there were problems on the profit side: Operating profit was down 16%, and net income was again, down 10%. Magnus Brannstrom

After being for 17 years with the company, CEO Sven Mattsson was fired to be replaced by Magnus Brannstrom in March 2005. The official statement said, “During its first year on the Stockholm Exchange the company has not lived up to the expectations of the Board of Directors. At the same time, the development in the markets require new leadership.” Magnus Brannstrom was Oriflame’s Regional Director in charge of CIS Countries and Asia.

General Picture and “CIS Region”

As you will see on the below chart, Oriflame’s sales growth was quite healthy until 2011. Sales volume doubles between 2005 and 2011. On the other hand, we see a diminishing profitability both in terms of operating and net income.

Oriflame Figures

If the situation with the profits had been reversed, things could have been just as good as in the old days. However, 2011-2015 period was even more troublesome for Oriflame. Within these last five years, sales growth also stopped and the trend was  downward.

What we see from the figures today is a company that has been losing sales and generating less and less profits. Speaking in numbers, last year sales was 20% less than what it was in 2010, and its net income was less than one-third of its 2010 figure.

Oriflame ranked as the 8th largest direct seller globally, in DSN Global 100 List  in 2011 revenues. It then ranked the 9th in 2012, 10th in 2013, 11th in 2014, and finally, was at 14th place in 2015 sales.

Geographically speaking, Oriflame’s CIS region is the most problematic one. Armenia, Azerbaijan, Belarus, Georgia, Kazakhstan, Kyrgyzstan, Moldova, Mongolia, Russia, and Ukraine are the markets here. Quarterly year-over-year growth has been negative every quarter for the last four years. The significance of the trend in this region stems from the fact that these countries generate a major portion of the global revenue. Due to a decrease at a pace faster than worldwide sales’, this region’s contribution to Oriflame’s business has come down to 32% in 2015 from previous year’s 43%. Looking at the statements on the financial reports, it is obvious that this issue has been taken seriously by management but so far there are no concrete results as reflected on figures.

Oriflame has been losing on the field as well. The company reported it had 3.2 million active consultants as of end-2015. Previous year’s figure was 3.5 million, and 2010 year-end figure was 3.8 million. So, we see a sales force that has decreased significantly in five years.

Wellness“Wellness”

2008 was the beginning of another new era for Oriflame. A company that had sold only beauty products and complementary accessories since 1967 was extending its product line by introducing a new category: Nutritional supplements.
Oriflame Product Categories
“Wellness” products, as they were branded by Oriflame, has so far reached its peak contribution to sales at 7% at the end of last year. Taking into account company’s overall downward sales volume trend, this increase means Wellness line has been cannibalizing the rest of the categories. Color cosmetics and personal & hair care categories seem to have been hurt the most. The question here is: If Oriflame had not introduced this line, could it have been in a more profitable position?

International Expansion

Between 2011 and 2014, Oriflame’s focus has been on the African countries. Algeria was opened in 2011; Kenya, Uganda and Tanzania in 2012; Tunisia and Nigeria in 2013. After that, company’s international expansion has halted. CEO Magnus Brannstrom very recently has announced   within a three-year period, Oriflame might be expanding into the US and Brazil. These are known to be two of the toughest markets for companies coming from abroad.  On the other hand, the company has presence in Chile, Colombia, Ecuador, Mexico and Peru. These five countries account for about 10% of global volume. Oriflame has operations in more than 60 countries now.

Company Value

At the end of the day, it is the stock exchanges where company performances are evaluated. Oriflame share closed the year 2005 at SEK 222. This peaked at SEK 455 within 2010, was SEK 197.50 at the end of 2013, and closed the year of 2015 at SEK 136. With this, market capitalization was SEK 7.4 billion, about US$ 900 million at year-end.

Note: All figures used in this discussion are from Oriflame’s financial reports as they appear here


 

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