HookWilko survived 93 years — then three shocks hit at once
In August 2023, Wilko — a family-owned high-street fixture since 1930, with around 400 stores and roughly 12,500 staff — collapsed into administration. There was no single villain. Inflation, which had peaked at 11.1% in October 2022 (a 41-year high), squeezed its customers' real incomes while inflating its own costs. Interest rates, raised 14 times in a row to fight that inflation, made its debts dearer. And the discounters — B&M, Home Bargains, Poundland — undercut it from out-of-town retail parks with cheaper rents and slicker supply chains. B&M later paid about £13m for up to 51 former Wilko stores; Poundland took over dozens more leases. The market Wilko served did not die. Wilko just could not afford to keep serving it.
That is the core lesson of 2.5: the external environment does not send one bill at a time. Economic influences (inflation, interest rates, exchange rates, taxation, the business cycle), legislation and the competitive environment interact — and a business controls none of them. What it controls is its exposure: its cost base, its debt level, its positioning. The exam rewards students who can trace one external change, step by step, all the way through to a named firm's revenue, costs and profit.
ModelEconomic influences — the macro dashboard
Inflation hits a business twice: input costs (materials, energy, wage demands) rise, and customers' real incomes fall, cutting demand for anything income-elastic. Firms with strong brands can pass costs on; firms in price-sensitive markets must swallow them in the margin. Interest rates are the second dial: the Bank of England raised Bank Rate from 0.1% in December 2021 to 5.25% by August 2023 — fourteen consecutive rises — which repriced every variable-rate business loan and simultaneously cooled consumer spending on credit-financed, big-ticket purchases like kitchens, cars and sofas. Taxation and government spending move the dashboard too: the main rate of corporation tax rose from 19% to 25% in April 2023 for larger profits, and changes in VAT or public spending redirect entire revenue streams.
Running underneath is the business cycle — boom, downturn, recession, recovery — which shifts demand predictably by product type: income-elastic luxuries swing violently, necessities barely move, and inferior-good sellers like discounters actually gain in the bad years. Finally, uncertainty is a force in its own right: firms postpone investment when they cannot see ahead, which is a large part of why UK business investment broadly flatlined between the 2016 referendum and 2019 while firms waited to learn the trading rules.
A furniture retailer carries a £200,000 variable-rate loan. At 2.5% interest it pays £5,000 a year; when the loan reprices at 6.5%, the bill becomes £13,000 — an extra £8,000 a year from a decision taken in Threadneedle Street, not the boardroom. To see the scale: if the retailer's net margin is 10%, it must find roughly £80,000 of extra sales just to stand still — in exactly the period when higher rates make customers less willing to finance a new sofa. One external variable, hitting costs and demand at the same time, in the same direction.
ModelExchange rates — SPICED, and who wins
The mnemonic carries the logic: Strong Pound, Imports Cheaper, Exports Dearer. A stronger pound is a gift to importers — retailers buying dollar-priced stock, manufacturers buying foreign components — and a tax on exporters, whose goods become dearer in foreign currency without them touching their price lists. A weaker pound reverses every sign.
Britain ran the experiment live in June 2016: sterling fell roughly 10% against the dollar overnight after the referendum. Within months, Unilever and Tesco were publicly at war over a roughly 10% wholesale price rise on imported-cost brands — the 'Marmite-gate' stand-off of October 2016 — while exporters enjoyed the mirror image: Scotch whisky, which sells the overwhelming bulk of its output abroad (exports reached around £6.2bn in 2022, per the Scotch Whisky Association), became more price-competitive in every foreign market. The exam point is that 'good' and 'bad' exchange-rate movements do not exist in general — only for particular firms, depending on where their costs arise and where their revenues are earned. A firm that imports materials and exports finished goods is hit on both sides at once.
The pound strengthens from £1 = $1.20 to £1 = $1.35. A Sheffield toolmaker selling a £50,000 machine to a US buyer sees the dollar price rise from $60,000 to $67,500 — 12.5% dearer overnight, with no change to its own price list; orders will fall unless it cuts the sterling price and absorbs the pain in its margin. Meanwhile a UK toy retailer importing $120,000 of stock each quarter sees its sterling cost fall from £100,000 to about £88,900 — an £11,100 saving it can bank or use to undercut rivals. Same movement, opposite fortunes: always check which side of the trade the firm in the case sits on.
MechanismLegislation — the rules of the game
Edexcel's five areas, each with a named UK anchor. Consumer protection: the Consumer Rights Act 2015 requires goods to be of satisfactory quality, fit for purpose and as described, with a 30-day right to a full refund — raising quality standards and returns costs. Employee protection: the Equality Act 2010 and minimum wage law; the National Living Wage rose 9.8% to £11.44 an hour in April 2024, a substantial cost increase for labour-heavy sectors like hospitality, retail and care. Environmental protection: from the 2015 plastic-bag charge — which cut single-use bag sales at the main supermarkets by well over 90% — to the Environment Act 2021's producer-responsibility rules. Health and safety: the Health and Safety at Work Act 1974, the foundation of workplace safety duties. Competition policy: the Competition and Markets Authority polices mergers and anti-competitive behaviour — it blocked the proposed Sainsbury's–Asda merger in April 2019 precisely because it judged the deal would raise prices for shoppers.
The one-sided answer ('legislation raises costs') caps its own marks. Legislation also levels the playing field — the ethical firm is no longer undercut by the corner-cutting one — and it creates markets: the bag charge built the bag-for-life business, and each tightening of environmental rules hands an advantage to whichever firm adapted first. Compliance is a cost; being caught not complying is usually a bigger one, in fines and in reputation.
CaseThe competitive environment — competition and market size
The spec's final pairing is deceptively short: competition and market size. More competitors means downward pressure on prices, upward pressure on marketing and quality, and thinner margins for everyone — unless a firm can differentiate its way out of the price fight. Fewer competitors means pricing power, but also regulatory attention. Market size sets how much room there is: a growing market can absorb new entrants without anyone shrinking (the UK's food-delivery and meal-kit boom of 2020–21 fed Deliveroo, Just Eat, Uber Eats and a swarm of start-ups simultaneously), while a static or shrinking market turns every rival's gain into your loss.
Wilko is the full case study. The value-retail market was actually growing — squeezed consumers were trading down — but the growth went to a different format: Aldi and Lidl pushed their combined grocery share from a few per cent in the late 2000s to roughly 18% by 2023–24, and B&M and Home Bargains applied the same out-of-town, low-rent model to general merchandise. Wilko's high-street leases and weaker buying power meant it faced the same customers with a permanently higher cost base. Competition, in other words, is not just 'how many rivals' but whose business model sets the market's cost floor. When a lower-cost model becomes the benchmark, every incumbent must either match it, differentiate hard, or exit — and administration is exit's ugliest form.
VocabularyKey terms the mark scheme pays for
TrapsMisconceptions that cost marks
ExamWhat examiners want
Almost every 2.5 question is some version of 'assess the likely impact of [external change] on [this business]' — and the mark scheme pays for the transmission chain, written out in numbered logical steps: interest rates rise → the firm's variable-rate debt costs more AND customers borrow less → cash outflow up, revenue down → margin squeezed twice. Two or three fully developed chains beat six asserted bullet points every time.
The reliable evaluation move is exposure: the impact depends on how income-elastic the product is, what share of costs is imported, how much debt the firm carries and at what rates, and how labour-intensive it is (a National Living Wage rise devastates a care-home chain and barely touches a software firm). Quote real numbers where you can — 11.1% inflation, Bank Rate at 5.25%, the NLW at £11.44 — because precise figures signal genuine application. And never discuss 'the economy' in the abstract: every sentence should end up at the revenue, costs or profit of the firm named in the case.