Question

Which company of each of the following pairs would you expect to be more exposed to macro risks? Pick one pair (Pair A or Pair B) and discuss. For example, if you chose Pair A, do you think it is the luxury Montreal restaurant or the established Burger Queen franchise that would be more exposed to macro risks?

A luxury Montreal restaurant or an established Burger Queen franchise?

B.A paint company that sells through small paint and hardware stores to do-it-yourselfers, or a paint company that sells in large volumes to Ford, GM, and Honda?

Answer 1

I have selected “B” and the company that will be more exposed to macro risks will be the paint company that sells in large volumes to Ford, GM, and Honda.

Let us first understand what macro risks are. Macro risks are risks that can impact all businesses that are operating within a country. This risk is usually caused by macroeconomic factors and political factors. Some of the examples of macro risks are changes in monetary policy, changes or shifts in tax regime, changes or shifts in regulatory regime, a political unrest etc.

Now the reason why the paint company that sells in large volumes to Ford, GM, and Honda will be more exposed to macro risks are because of their nature of business. The business is large and spread across the country. It has institutional buyers like car companies who use their paints in the cars manufactured by them. Any macro event shock will have a significant negative impact on the business outlook of car companies. For instance when the interest rates increases considerably then people will buy less number of cars and hence this will have a negative impact on the sales of the paint company doing business with these car companies. On the other hand the business of the paint company that sells through small paint and hardware stores to do-it-yourselfers will also be negatively impacted but the impact will be much less when compared to the paint company that sells to car companies.

We can conclude that the paint company that sells in large volumes to Ford, GM, and Honda is more vulnerable and more exposed to systematic risk elements like interest rate changes, inflation, recessions etc. than the paint company that sells through small paint and hardware stores.