Ups and downs of street credibility: Once unassailable, Body Shop's shares have beenstung by a fall in sales and the emergence of copycat products

THE UNTHINKABLE happened twice on Wednesday. Share dealers had hardly had time to absorb the profits warning from Body Shop International before they were caught up in the maelstrom in the currency and money markets, writes Patrick Hosking.

Body Shop's warning - that profits this autumn would be well below City expectations - was in one sense the more stunning of the two events. Sterling crises come along with almost tedious frequency; Body Shop has defied gravity for 16 years.

The shares plunged 108p to 158p as Anita Roddick, the founder of the eco-friendly toiletries chain, admitted that sales in the UK had been disappointing. Same-store sales were about 5 per cent down in June, July and August.

Was this, wondered panicky investors, the beginning of the end? Would Body Shop go the way of other glamour stocks such as Ratners and Sock Shop? Had British shoppers finally tired of the peppermint foot gel and parsley and mint face-mask?

No, insisted Mrs Roddick and her husband Gordon, Body Shop's chairman, who had pounds 56m wiped from their personal fortune: the hysterical City had over-reacted. 'We are not a Ratners,' Mr Roddick said.

The UK decline was partly because of a dispute with a large franchisee, which had temporarily closed six stores. Moreover, the blip was confined to the UK. Overseas franchises, which now account for 40 per cent of sales, were still performing well and would continue to take a larger share of the market as the company proceeded apace with its programme of opening new stores.

But the bearish whispers have not been silenced. UK sales have taken a pounding as rivals produce copycat products. Boots has its Natural Collection range. Superdrug, part of the Kingfisher group, and Lloyds Chemists are also developing eco-lotions. Body Shop products look expensive beside them.

The company takes great pains to keep customers interested by launching new products. Coming soon: satsuma hair and body bubbles, marmalade scrub and 'sugaring' - an alternative to leg-waxing. It is equally keen on political campaigning. Next step: a campaign supporting the UN Year of Indigenous Peoples.

But critics say that if British shoppers are tiring of the Body Shop formula today, in spite of the company's efforts, their continental and American counterparts will start to feel the same way tomorrow.

Hilary Monk, senior analyst with the retail consultants Verdict Research, does not believe that will happen: 'It's a strong international brand and, managed carefully, it will continue to prosper. But some people would draw parallels between Anita Roddick at Body Shop and Next when George Davies was in charge. There is the danger that creative considerations will cloud financial judgement.'

There is also the fear that the group will upset its UK franchisees by continuing to open new stores despite the growing cannibalisation. Benetton, the Italian clothing chain, has met similar problems in Britain.

Body Shop is a manufacturer and wholesaler, not a retailer - it has few shops of its own. It is operationally geared: a small rise in sales gives a large boost to profits; a modest sales slip could savage the bottom line.

Mr Roddick is now considering diversifying the product range. 'We have a huge footfall of customers through our stores. Why not try and sell them something else as well as toiletries?' He will not be drawn on what new product ranges might be sold with the Body Shop label. 'We're toying around with all sorts of ideas.'

Traditional Body Shop energy and enthusiasm applied to a new product area might provide the fillip the group needs if it is to reassure its fans.

But the City, already suspicious, may interpret diversification as a sign of increasing desperation at Body Shop's Littlehampton headquarters.

(Photographs and graph omitted)