Question

For this case study assignment, perform the following tasks:

1. Select an American company with a worldwide presence (examples: Starbucks, McDonalds, Walmart).

2. Do research on the worldwide economic crisis of 2008 and in particular, focus on the company selected.

3. Discuss how your chosen company faired in the economic crisis of 2008.

4. Discuss the microeconomic implications of the crisis on your company.

5. Discuss whether your company was immune or not immune to the crisis

6. Discuss the performance after the crisis and the implications for the future. Write 3-5 pages using apa format

Answer 1

The 2008 financial crisis was triggered when Lehman Brothers filed for bankruptcy which ultimately led to a global financial crisis that destroyed thousands of jobs and brought down several big financial institutions. Greenspan, the chairman of Federal Reserve of the United States from 1987 to 2006, had brought about in the economy super-low interest rates. Raghuram Rajan, then a professor, warned him of an impending crisis, a couple of years before the crisis when he saw the financial health of bank deteriorating even when their debts were backed by securitization. What followed then, was massive bail-outs of financial institutions and other palliative monetary and fiscal policies to prevent a possible collapse of the world financial system. The crisis was nonetheless followed by a global economic downturn, the Great Recession.

1) Walmart

2) While the subprime crisis of 2008, brought down giant investment banks and corporations on its knees, it was a time when Walmart flourished.  It was one of the only stores to thrive during the U.S. recession. A year after the crisis, it reported sales to increase to 5.1%, above analyst expectations of 2.4%, and it also announced a raised dividend to $1.09 per share, up 14.7% from 95 cents per share earlier.

3) Given the economic headwinds of 2008, one would think that a retail outlet catering to lower-end consumers would be doubly slammed. With the onset of the crisis, people at the bottom of the income ladder were the ones struggling very hard. As for retail, sales had been sluggish and national chains were shutting down stores by the dozen. However, Wal-Mart was doing better than most of its direct competitors. Amid the market turbulence during the recession, Wal-Mart’s stock rose nicely and had pasted the Standard & Poor’s retail index. There are several reasons that can be attributed to this performance:

a) Wal-Mart sells necessities, not discretionary or luxury items. The overwhelming majority of its sales are not impulse buys. Even in a recession, most people don’t drastically reduce their spending on staple groceries, light bulbs, or diapers. This action is in line with various microeconomic theories that suggest price/income inelasticity of necessity items. Even when income falls drastically, the expenditure on necessary goods cannot fall down in proportion. Necessity goods are products and services that consumers will buy regardless of the changes in their income levels, therefore making these products less sensitive to income change. If income elasticity of demand is lower than unity, it is a necessity good. Moreover, if teh good in question is an inferior good, then it's demand actually increases when income falls. An inferior good has an Income Elasticity of Demand < 0. This means the demand for an inferior good will decrease as the consumer’s income decreases. This greatly explains the impressive performance of Walmart even on the face of one of the biggest U.S. crisis.

b) Wal-Mart’s reputation for cheap products served it really well. For much of the decade, Trading Up had been the governing retail paradigm. In an age of easy credit and expanding consumer choices, masses of consumers took to shopping for staples at cheap outlets while indulging their passions at boutiques. As credit tightened, Americans stopped trading up and started trading down that helped Wal-Mart, whose brand identity is all about saving people money. In a pinched economy, consumers embraced their inner skinflint which was welcomed by Walmart.

c) Athe U.S. economy experienced the first ripples of slowdown, the rest of the world was still growing quite rapidly at least for some time and Wal-Mart had meaningful international sales to report. In 2003, international sales were just 16.7 percent of overall revenues. But thanks to aggressive expansion in Mexico, China, and elsewhere, Wal-Mart became an increasingly multinational corporation. In the 12 months that ended in January 2008, international sales rose 17.5 percent and constituted 24.2 percent of overall sales. The growth in rapidly expanding international operations added more dollars to Wal-Mart’s top line than the slower growth of the massive U.S. base. Having essentially saturated the United States, there was not much Wal-Mart could do to increase sales dramatically in the U.S. especially at a time of an economic strain. Thus, it's international expansion came quite to it's rescue during the crisis.