How Businesses Would React To Changes In Material Costs

The Atlanta Federal Reserve publishes a monthly report titled “Business Inflation Expectations” (BIE) that contains statistics from a survey of regional businesses’ views on various factors that impact profitability.  These factors include unit costs, unit cost expectations, sales levels, profit margins, and other factors.

As described on the site:

Approximately 300 panelists receive the survey each month. Panelists represent businesses of various sizes headquartered within the Sixth District, which encompasses Alabama, Florida, Georgia, and sections of Louisiana, Mississippi, and Tennessee. Panelists range from executives of large corporations to owner-operators of small businesses. The industry composition of the panel roughly reflects the makeup of the national economy. Nevertheless, survey responses are weighted by industry shares of national gross domestic product.

An excerpt from the BIE Survey of July 17 (pdf) (involving 209 firms) :

Firms also report that, compared to this time last year, their unit costs are up 1.8 percent. The improvement in sales levels noted by respondents in June have receded somewhat, with 50 percent now saying their current sales levels are at or above normal compared to 56 percent in June. Profit margins also declined slightly from the June reading, with 46 percent of firms stating that their margins are at or above normal, compared to 49 percent in June. 

Also, this month’s “special question” was with regard to how businesses would react – from a pricing perspective – to a 10% increase or 10% decrease in raw material costs.  The chart of the questions results can be seen below:

Fed 7-17-13 BIE reaction to raw materials cost changes

As well, a July 16 blog post from the Atlanta Fed, titled “Commodity Prices and Inflation:  The Perspective of Firms,” discusses the findings.

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StratX, LLC offers the above commentary for informational purposes only, and does not necessarily agree with the views expressed by these outside parties.

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StratX, LLC (stratxllc.com) is a management consulting firm and strategic advisory that focuses on the analysis of current and future business conditions, and offers corporations and businesses advice, strategies, and actionable methods on how to optimally increase revenues and profitability.

Business Expectations Concerning Price Changes And Unit Costs

The Atlanta Federal Reserve publishes a monthly report titled “Business Inflation Expectations” (BIE) that contains statistics from a survey of regional businesses’ views on various factors that impact profitability.  These factors include unit cost expectations, sales, profit margins, and price change expectations.

As described on the site:

Approximately 300 panelists receive the survey each month. Panelists represent businesses of various sizes headquartered within the Sixth District, which encompasses Alabama, Florida, Georgia, and sections of Louisiana, Mississippi, and Tennessee. Panelists range from executives of large corporations to owner-operators of small businesses. The industry composition of the panel roughly reflects the makeup of the national economy. Nevertheless, survey responses are weighted by industry shares of national gross domestic product.

A couple of excerpts from the BIE Survey (involving 190 firms) of June 21 include:

Respondents indicate that, on average, they expect unit costs to rise 1.8 percent over the next 12 months, roughly in line with the recent year-ahead inflation forecasts of private economists.

also:

The special question asked respondents to assign likelihoods to various price change scenarios over the coming year. 

Respondents’ mean expectation (weighted by industry share of GDP) for the change in the average price of their products and/or services was 1.5 percent.

Here is a chart depicting responses to the question of Year-Ahead Price Change Expectations:

Fed 6-21-13 - Atlanta Fed BIE Year-Ahead Price Change Expectations

 

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StratX, LLC offers the above commentary for informational purposes only, and does not necessarily agree with the views expressed by these outside parties.

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StratX, LLC (stratxllc.com) is a management consulting firm and strategic advisory that focuses on the analysis of current and future business conditions, and offers corporations and businesses advice, strategies, and actionable methods on how to increase revenue and profitability.

Importance Of Company Profitability To CFO Compensation

Recently Deloitte released their “CFO Signals” “High-Level Summary” report for the 2nd Quarter of 2013.   There are various notable items seen in the report; two items seem especially notable from a company profitability perspective.

First, as seen on page 5, regarding the importance of profitability to CFO compensation:

Growth is important, but profitability is still king when it comes to driving CFO compensation. More than 95% of CFOs report at least moderate influence and 75% report strong influence. But it is interesting to note that economic performance (through metrics like ROIC that incorporate both income statement and balance sheet measures) are the next strongest driver of CFO pay, with more than 70% of CFOs reporting moderate or strong influence. Also interesting is that measures more limited to the functional scope of finance (factors like liquidity, cost of capital, treasury returns, and tax efficiency) are considerably less influential – but there are important industry differences.

Also of note is an item seen on page 14 regarding (company) “Board Worries” of an external nature.  Under the “Industry” Category, “Intensifying Competition” (prices, tactics, etc.) is seen as having a high (relative to other worries) percent of CFOs naming the risk as a top-three concern.

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StratX, LLC offers the above commentary for informational purposes only, and does not necessarily agree with the views expressed by these outside parties.

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StratX, LLC (stratxllc.com) is a management consulting firm and strategic advisory that focuses on the analysis of current and future business conditions, and offers corporations and businesses advice, strategies, and actionable methods on how to increase revenue and profitability.

The Current High Levels Of Corporate Profitability

Corporate profitability – and its sustainability – is a critical topic at this time for businesses.

While there are many ways to measure aggregate levels of corporate profitability, those used most prominently portray that overall corporate profitability is at (very) high levels when viewed from a long-term perspective.

One way to measure the level of corporate profitability is shown in a chart comparing corporate profitability as a percentage of GDP.   This chart, in which corporate profitability is depicted on an after-tax basis, is also depicted below. (For the chart of Corporate Profits After Tax, please see the May 30 post titled “After-Tax Corporate Profits Chart 1st Quarter 2013.”)

CP-GDP 5-30-13

Data Source: FRED, Federal Reserve Economic Data, Federal Reserve Bank of St. Louis; accessed May 30, 2013

This chart is through the first quarter and  the data was last updated on May 30.

A couple of statistics from the period shown on the chart, which dates back to the first quarter of 1947, include an average of 6.23% and a median of 5.87%.

As one might expect, other statistics concerning corporate profitability are also at or near record-high levels, such as the S&P500’s operating margins, operating profits, and EPS.

There have been various arguments offered as to the sustainability of current levels of corporate profitability; some arguments suggest that such levels are sustainable; others argue they are not.

There are various characteristics of this economic era that have been (very) favorable to corporate profitability; some of these factors include interest rates that, in general, are very low from a long-term historical perspective; subdued levels of wage growth; high-growth emerging markets that have expanded international sales – and in many cases margins; robust government deficits in many countries; and other factors.

I am of the belief (from an “all things considered standpoint”) that the current elevated levels of corporate profitability will not be sustainable; and the decline from these levels will have outsized ramifications in a variety of areas and for a number of parties.

In addition to the question as to whether corporate profitability is sustainable is the question as to what magnitude of a decline could be expected.  This topic is very complex and dependent upon many factors and assumptions.  However, it should be noted that a decline in after tax corporate profits as a percentage of GDP from it current level of 10.857% to the long-term average of 6.23% would represent a 43% decline.  Of course, due to a variety of factors, there is always the possibility of dropping below the average, perhaps substantially.

Such a decline in overall corporate profitability would likely impact each corporation differently, dependent upon a variety of its characteristics, including its industry, size, and numerous firm-specific business and financial characteristics.  From a corporate planning and risk management perspective, it behooves firms to (at least) contemplate, if not actively plan for a business environment in which a lower level of aggregate profitability exists.

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StratX, LLC (stratxllc.com) is a management consulting firm and strategic advisory that focuses on the analysis of current and future business conditions, and offers corporations and businesses advice, strategies, and actionable methods on how to increase revenue and profitability.

Profitability And Competition In The Grocery Business

Today (June 6), CNBC published an article titled “What’s Behind the Rush Into the Low-Margin Grocery Business.”  The article discusses various issues regarding competition and profitability in the grocery business.

Notable excerpts include:

Americans spend more than $565 billion dollars a year on groceries. After all, everybody eats, everyday…and more than once.

Despite the high revenue, the profit margins traditionally have been low in this business, but that hasn’t stopped retail giants Amazon.com and Wal-Mart Stores from escalating the national food fight.

also:

That said, grocery, online or off-line, remains a low-margin business. “Grocery is among the thinnest margins out there in retail. The average grocer probably gets a 2-, 2.5-, to 3-percent type operating margin. That’s a very slim margin, and that’s before interest and taxes,” Telsey Advisory’s Feldman said.

That doesn’t mean it’s a turn-off for the online behemoth, Feldman said. “Amazon’s history has been all about capturing market share and going as low as they can possibly go on price, sometimes even taking losses from what we can tell, if that’s the case, I don’t see why grocery would be any different, he said.”

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StratX, LLC offers the above commentary for informational purposes only, and does not necessarily agree with the views expressed by these outside parties.

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StratX, LLC (stratxllc.com) is a management consulting firm and strategic advisory that focuses on the analysis of current and future business conditions, and offers corporations and businesses advice, strategies, and actionable methods on how to increase revenue and profitability.