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Discuss the Ways in Which a Large Supermarket May React in a Recession Caused by High Interest Rates

Autor:   •  November 9, 2011  •  Essay  •  563 Words (3 Pages)  •  978 Views

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Discuss the ways in which a large supermarket may react in a recession caused by high interest rates.

Recession: A period of 6 months or more of declining Gross Domestic Product

A large supermarket may react in a number of ways

Expansion projects may be put on hold. As interest rates are high a large sum of money will have to be paid on top of that borrowed. In a time of recession, when people are not spending as much, there will be less revenue for the business to cover these costs. This may cause them to have insufficient financing to fund any external growth, for example taking over a competitor, as it could possibly cause cash flow problems within the business. However instead of expanding externally the may keep their retained profits, if financing is sufficient. They could pump existing capital back into the business in order to maintain business and try to profitably grow in comparison to competitors. This could take away the fear of later cash flow problems as they may have a surplus of capital to cover these costs.

They may drop their prices in order to gain more sales. During a recession people are worried about their spending, as their wages may have dropped or they are ultimately receiving less income. This may cause them to cut back on luxuries and change from the normal loyal brands to cheaper alternatives. For example, instead of buying Pepsi people may change to store brand cola in order to save. As people are buying cheaper products the overall revenue may be less for the supermarket. Most are only spending on necessities instead of any more expensive items. However if the prices in the supermarket are good enough their sales may increase. Customers may be more reluctant to search of the cheapest goods in order to save the most money. If this supermarket offers to best value for money then they may increased

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