Economic Case Study

A supermarket chain faces a combination of a recession, inflation and a falling exchange rate. Given the circumstances as described, to what extent would you agree that a fall in the supermarket's profit is inevitable?

Recession

• Unemployment up, spending down on normal goods, up on inferior (ΔED)

• Short termism, profits up

• Lower wages for low paid staff

• Higher motivation (low job security), better efficiency

Inflation

• Lower margins, profits on normal goods

• Increased costs, prices (incremental), lower sales & profit on price elastic goods

• Repayment of loans, better cash flow, profits

Falling exchange rate

• Depreciation increases cost of imports, lower margins

• Exporters of UK goods profit

Depends on scale (importers/exporters) target demographic (normal/inferior)

Largely, a recession combined with inflation and a falling exchange rates would result in a fall in profit for a UK supermarket. However, to an extent, this is dependent on the scale of the company and its target demographic.

A recession can have an unpredictable effect on the economy, but a downturn is likely to increase unemployment rates. This will reduce the sale of normal goods, having a negative effect on the profits of supermarkets that appeal to middle to high pay brackets. This is especially pertinent for products with a high income elasticity of demand. Inferior goods, on the other hand, are likely to become more popular, as they are lower cost alternatives that become more affordable in a recession with less disposable income. Furthermore, recession promotes short termism, as a decrease in profits displeases shareholders, and companies look to avoid this. This can be bad in the long run for all Supermarkets, as they will become less responsive to social and technological changes due to a lack of investment into research and development. This will ultimately decrease profits for the business, though the effect may be more neutral in the short term.

From a human resources perspective, recessions are likely to improve efficiency for supermarkets. Since they hold a surplus of low paid positions, and often have a high staff turnover, a recession will allow for lower wages for staff to be paid without a decrease in demand…