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.

Indications Of Current And Future Profitability Problems

Often various trends and conditions can signal that profitability problems exist and should be both recognized and rectified.

While such conditions are numerous and can vary by company, here are a few factors that can signal that significant profitability problems either exist or are impending:

  • gross margins are (inexplicably) declining
  • industry sales are falling faster than anyone anticipated
  • price is becoming more of an issue with customers
  • opportunities for profitable growth aren’t apparent
  • existing product (or service) sales are (continually) less than expected
  • new competitors are successfully entering the market
  • loss of market share (especially if unexpected)
  • company sales lag those of industry peers
  • sales decline despite price cuts
  • for new products, unforeseen price cuts are needed

Often, these factors can serve as “early warning indicators” if they are recognized quickly.   If they are recognized and properly addressed early enough, not only can further problems be avoided, but the resolution of such impending profitability problems may better position the company for increased sales and profitability.

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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.

Fast Food Industry Profitability

Margins, profitability and “value” in the fast food industry are issues that are becoming increasingly prominent.

A Wall Street Journal article of May 8, titled “McDonald’s, Wendy’s Battle for Value-Centric Customers” contains additional information concerning various issues including those concerning price affordability and price competitiveness.

Notable excerpts include:

McDonald’s Corp. and Wendy’s Co. are struggling to attract cost-conscious consumers who are demanding better deals than even these low-price fast-food chains offer.

also:

Fast-food chains like McDonald’s and Wendy’s may seem like they would be resilient in this tough economy, but consumers have come to expect $1 burgers, and more brands have jumped on the bandwagon, with chains like Yum Brands Inc.’s Taco Bell and Arby’s Restaurant Group testing out new value menus.

also:

McDonald’s last month reported weak earnings growth for the first quarter, saying it is sacrificing profit margins by focusing on value menus to avoid losing customers.

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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.