Financial Strategy for Lush Ltd - Example

Introduction

Lush Ltd is a UK company that concentrates on retailing cosmetics. The company is based in Poole, Dorset in the United Kingdom (UK). The organisation was initiated by Liz Weir and Mark Constantine, who were a beauty therapist and a trichologist respectively. The two founders met in Poole England, in a hair and beauty salon. A few years later after they had their first meeting, the two decided to start a business together which grew over the years. Currently, Lush the business enterprise is owned privately, although the company is listed in the LSE (London Stock Exchange) though purchases of the company’s stocks are only made privately, buyers being able to execute their buy/sell options on an invitation basis only. The organisation is structured in a limited partnership model (Tan 2008).

Lush also owns other cosmetic brands, which are listed under the company’s subsidiary shareholding, for instance, the organisation owned the “The B Never too Busy to be Beautiful” company (Berube & Brown 2013), an organisation that had multiple stores across UK. With its current business strategy of geographical market capture and expansion, the company aims at increasing its stores nationally, regionally and internationally for profit maximisation.

One aspect that sells the company in the crowded cosmetic market is the nature of their products. Lush has made it their policy to make their products unique by ensuring they are 100% vegetarian (Perrott 2011). At times, their products are made with fruit extracts as well as vegetables and coconut, fresh papaya, rosemary oil, avocado oil, avocado butter, vanilla beans, and grapefruit juice. Nonetheless, a number of products contain beeswax, honey, eggs, milk and lalolin. Nearly all the products for the company are developed in various factories in different locations in the world including Canada, Vancouver, Germany, Dusseldorf, Canada, Toronto, Dorset and Poole.

Financial Analysis

Pauwels and Rogiers (2004) note that in the recent past, the cosmetics world market has overly experienced much competition. The company has therefore been losing significant market share gradually every year, both in the domestic market and in online selling of its products. This has greatly affected the company’s growth momentum that it had experienced domestically and partly internationally. The channel change to convenience and online presented both good opportunities and challenges, although the main element after all this is that Lush Ltd had stopped developing and growing.

Because of lack of sufficient growth in the past few years, the company experienced significant internal problems. The organisations commercial revenues that were identified in November in the previous year were a fundamental blow and had led to an official Serious Fraud Office (SFO) supervisory inquiry (Polizzi 2015). The company has always been committed to working with the regulatory authorities as the company gears up for the fundamental changes in Lush, as the organisation intends on preventing future occurrences of such nature.

In addition to these challenges is the deeper issue of trust (Raj, Jose, Sumod & Sabitha 2012). For clients to make that choice to buy their products from the company’s various outlets there is need for them to be fully confident that they will get value for their money, thus subsequently trusting the company to deliver products of the highest calibre. This trust is spread across board, i.e. trusting the brand, trusting the services offered the quality of the products and the prices appended on each item. However, in the recent past, the company has witnessed a gradual erosion of that trust once existent in previous years for various reasons. Getting that trust back is significantly fundamental to Lush. The company ought to approach this from a long-term perspective and not a quick-fix short-term undertaking. These challenges have resulted in a gradual decline of the organisations financial capacity and performance in the last five years.

Lush is not reacting fast enough to the constantly changing consumer purchasing habits, customer values and changing markets. As a result, the company has failed to nurture its brand effectively. Although the company has structured its personal sales networks, given the current market conditions, it cannot adapt to the changes with this mechanism only. This is the case for the reason that Lush’s organisation and business structure is divided vertically. In addition, this is the case for Lush as a separate business entity has not been developing individuals that are able to formulate new value at a regional level.

Lush Ltd.’s financial performance as noted earlier has been affected by the unstable conditions in the market in the recent past. Although the company’s total revenue has increased in the past one year by about 5.5%, like for like sales reduced 0.7% in the financial year ended 2015. In addition, there was an overall reduction in after-tax profits by approximately 35% between 2010 and 2011 as a result of a combination of two factors: increased administration expenses (3.4%) and an overall increased cost of sales (8.1%). Observably, the company’s cost of sales increased at a faster rate than total sales, a factor that reduced the company’s gross margin to 44.8% in the year 2014. The company’s biggest competitor in the UK market “The Body Shop” recorded a higher gross margin, a level higher than what Lush Ltd. Recorded in the year 2014. Putting into consideration the harsh market conditions and increased competition in the cosmetics industry, this difference poses a huge threat to Lush Ltd as “The Body Shop’s” services and products can be said to be more competitive, consequently increasing the company’s running the risk of client switching (Appendix 1).

Therefore, making changes to Lush Ltd.’s production segment through the development of its product range and improving quality of some of its products is a matter of priority. Additionally, the company’s last averaged percentage changes affect its profit margins, which reduced to 3.3 in the year 2013. Considering that “The Body Shop’s” profit margin was 11% in the same year only increases the threat of strong competition to Lush Ltd. As it can be perceived less lucrative than its rivals, who again needs innovation to remain competitive in the market. Furthermore, the profit margin difference points to the fact that Lush’s unproductive cost framework wherefore cost control actions or actions to enhance cost effectiveness need to be targeted.

Undoubtedly, the notable difference can additionally be traced back to irregular company’s pricing methods. Nonetheless, the necessity for cost improvement is additionally demonstrated by Lush’s per employee ratios. Whereas the organizational turnover for every employee increased by about 4%, Lush’s profit per staff reduced significantly by about 35%. However, the major competitor has n its part showed signs – although less critical – like Lush Ltd.’s with increasing turnover for every employee of about 8% and reducing profit per staff employee of about 3.4%. These numbers are resultant of increasing average wages (Appendix 1). To manage the threats associated with reduced profits per every employee as a result of increasing costs and for purposes of remaining competitive in the market, Lush Ltd needs to implement cost reduction measures with regard to redundancy. Conversely, optimizing the present human capital is another alternative that needs to be considered.

Financial Strategies

Product Development Strategy

New product development initiatives are intended to increase the overall company competitiveness. This is the most appropriate and most preferred long-term strategy for Lush Ltd. Research indicates that approximately 70% of individuals engaged on this survey support the notion of investing in different varieties of Lush Ltd.’s new products. The research additionally sought to establish the popularity indexes of various products and found that some natural products developed from fruits were popular among young users. Nonetheless, as the organization is already providing these products similar to what the rivals are doing, there is need to invest in the second option of the research, with regard to anti-aging natural products developed from herbs. This was popular among older users.

Issues Analysis

Pauwels and Rogiers (2004) note that in the recent past, the cosmetics world market has overly experienced much competition. The company has therefore been losing significant market share gradually every year, both in the domestic market and in online selling of its products. This has greatly affected the company’s growth momentum that it had experienced domestically and partly internationally. The channel change to convenience and online presented both good opportunities and challenges, although the main element after all this is that Lush Ltd had stopped developing and growing.

Because of lack of sufficient growth in the past few years, the company experienced significant internal problems. The organisations commercial revenues that were identified in November in the previous year were a fundamental blow and had led to an official Serious Fraud Office (SFO) supervisory inquiry (Polizzi 2015). The company has always been committed to working with the regulatory authorities as the company gears up for the fundamental changes in Lush, as the organisation intends on preventing future occurrences of such nature.

In addition to these challenges is the deeper issue of trust (Raj, Jose, Sumod & Sabitha 2012). For clients to make that choice to buy their products from the company’s various outlets there is need for them to be fully confident that they will get value for their money, thus subsequently trusting the company to deliver products of the highest calibre. This trust is spread across board, i.e. trusting the brand, trusting the services offered the quality of the products and the prices appended on each item. However, in the recent past, the company has witnessed a gradual erosion of that trust once existent in previous years for various reasons. Getting that trust back is significantly fundamental to Lush. The company ought to approach this from a long-term perspective and not a quick-fix short-term undertaking. These challenges have resulted in a gradual decline of the organisations financial capacity and performance in the last five years.

Ethical Issues

The many ethical issues facing the company are industry related. Over the past ten years, the cosmetics industry has endured sustained exposure to massive claims associated with the supposedly risky effects of chemicals considered to contain toxins, particularly in the glues, hardeners, solvents as well as polishes. According to the article “Ethics in Cosmetics,” these chemicals are said to have a potentially adverse effect on the individuals handling them on a day-to-day basis.

The current issues in the market that seem to aggravate this issue is the intensified focus by the mainstream media on this particular subject, relating to safety standards in the workplace in addition to claims related to product liabilities. Invigorated interests by the regulatory bodies and increased media focus tend to support each other (Hancocks 2011). For purposes of certainty, currently, there are sufficient reported complaints from OSHA (Occupational Safety and Health Association) representatives to indicate that the cosmetics sector is in for an expensive, bumpy and long ride.

In addition to these fears, the industry is at risk of facing increased individual and corporate lawsuits as well as class action claims. Some of the main product sold by cosmetic companies such as Lush and others within the market are reportedly hazardous. For instance, nail polish and other related products are allegedly associated to cancer, skin diseases, birth defects and miscarriages in addition to other risks. Reports indicate that out of all 20 core products used in the manufacture of nail polish, 17 of them are laden with harmful elements that are said to affect a human beings respiratory system (Hancock 2005). The most harmful elements in these products, which are dubbed as the “toxic trio”, are formaldehyde, toluene and dibutyl phthalate.

Similar to other industries that reportedly endure the same challenges, cosmetics focus groups and lobbies have long challenged legislation and the new regulations enacted directed to industry regulation. From the perspective of a business case, the biggest challenge comprises the contentious elements contained in most of these products, which unfortunately are the most appealing because of their shiny qualities, quick-drying qualities as well as durability. At the moment, the cosmetics sector can still continue to operate in the current market state, while pending the many research studies involving medical side effects.

Recommendations

The Organisations Funding Matrix

Core Financing

General Fundraising

Medium to Long-term (4-5 years). Relatively unrestricted – Loans from Financial institutions,

Short to Medium term – between 6 months and three years. Relatively unrestricted – internal company financing, short-term company financial papers

Investment Funding

Project Funding

Long-Term – from 5 years and above. Company Shares in the LSE market, long term loans from financial institutions, Asset financing.

Short-term to medium-term (between 1 year and 3 years) – relatively restricted. Board approvals of extended shares splits or short term loans from financial institutions.

Financial Sustainability

Lush seeks to achieve financial sustainability through:

• The generation of modest company surpluses by general fundraising for maintaining and developing a reserve for general contingency planning and unanticipated costs
• The organisation seeks to maintain a diversified funding mix, supported by a robust block of project funding and core financing to facilitate the execution of the company’s main production services.

Liquidity and Financing Management

It will be therefore important for Lush to generate stable OCF (Operating Cash Flow) as well as ensuring an extensive variety of funding methods as indicated in the matrix, with the intention of getting enough funds (capital) for the maintenance of sufficient liquidity ratios and for financing operating activities with a strong financial base (Behance.net). Therefore, the organisation will be required to fund the loans, investments, capital expenditures and most importantly the working capital through supplementing operating cash flow and cash in hand with bond issuance and bank borrowing as indicated. One of the organisational targets with regards to short-term financing to improve Lush’s liquidity will be to have cash at hand level of about 2 months of consolidated gross sales.

Lush additionally needs to strengthen and protect its financial position so as to be able to maintain the necessary company flexibility ratios in order to be able to invest in a more enhanced shopping trip for clients interested in the cosmetics products. Currently, Lush has a lot of debt financing with an estimated total leverage of £ 1.6 bn (fashionbi.com 2016). There is therefore need to reduce that significantly to free up cash to invest more in production and to deliver sufficient value to the company shareholders.

The organisation also needs to have a stronger financial self-control with matters pertaining to capital spending. In the current financial year, it is important to reduce capital expenditure to £500 million. With regards to pension fund, the organisation should start to have consultations so as to make replacements to the current defined benefit pension scheme for all associates and colleagues working with the company. The company needs to ensure that it protects earned by the employees, as well as to continue providing a competitive pension structure to all individuals working for the company.

Lush Ltd Debt Ratio

The company’s current debt ratio is too high to sustain any meaningful development in the middle term to long-term. In the 12 month reporting period that ended 30th June 2015, the company had a turnover of £326,456,000. Attached is the analysis of the company’s debt ratios in the past five years. The financing drive is expected to increase the company’s debt ratio, but reduce it gradually with effective financial management in the next five years. The debt ratio is calculated as a financial ratio that assesses the extent of an organization’s or client’s leverage.

Debt Ratio = Total Debt/Total Assets

From the data submitted, it is evident that the debt ratio is currently at 36.6%, and the trend indicates that the debt ratio has been increasing every year as indicated in the graph below.

The idea is to revert this upward trend, and reverse the increasing debt ratio to either remain stagnant or reduce over time.

Conclusion

Lush Ltd is a UK company that concentrates on retailing cosmetics. The company is based in Poole, Dorset in the United Kingdom (UK). The organisation was initiated by Liz Weir and Mark Constantine, who were a beauty therapist and a trichologist respectively. One aspect that sells the company in the crowded cosmetic market is the nature of their products. Lush has made it their policy to make their products unique by ensuring they are 100% vegetarian. In the recent past, the cosmetics world market has overly experienced much competition. The company has therefore been losing significant market share gradually every year, both in the domestic market and in online selling of its products. This has greatly affected the company’s growth momentum that it had experienced domestically and partly internationally. It will be therefore important for Lush to generate stable OCF (Operating Cash Flow) as well as ensuring an extensive variety of funding methods as indicated in the matrix, with the intention of getting enough funds (capital) for the maintenance of sufficient liquidity ratios and for financing operating activities with a strong financial base.