Posted on 06/03/2019 7:12:54 AM PDT by Yardstick
I find this totally fascinating, though not completely unexpected. When a random sample of American adults were asked the question “Just a rough guess, what percent profit on each dollar of sales do you think the average company makes after taxes?” for the Reason-Rupe poll in May 2013, the average response was 36%! That response was very close to historical results from the polling organization ORC’s polls for a slightly different, but related question: What percent profit on each dollar of sales do you think the average manufacturer makes after taxes? Responses to that question in 9 different polls between 1971 and 1987 ranged from 28% to 37% and averaged 31.6%.
How do the public’s estimates of corporate profit margins compare to reality? Not surprisingly they are off by a huge margin. According to this Yahoo!Finance database for 212 different industries, the average profit margin for the most recent quarter was 7.5% and the median profit margin was 6.5% (see chart above). Interestingly, there wasn’t a single industry out of 212 that had a profit margin as high as 36% in the most recent quarter. The industry “REIT-Diversified” had the highest profit margin at 33.5% followed by just one other industry – Wireless Communications at 30.9% – with a profit margin higher than 30%.
“Big Oil” companies (Major Integrated Oil and Gas) make a lot of profits, right? Well, that industry had a below-average profit margin of 5.1% in the most recent quarter. And evil Walmart only made a 3.1% profit margin in the most recent quarter (as I reported recently), which is less than half of the almost 7% average government take on retails sales in the form of state and local sales taxes. Think about it – for every $100 in sales for Walmart, the state/local governments get an average of $6.88 in sales taxes (and as much $9.44 in Tennessee and $9.16 in Arizona, see data here), while Walmart gets only $3.10 in profits!
Bottom Line: The public’s complete overestimation of how much companies earn in profits as a share of sales explains a lot. If $36 of every $100 in sales at a company like Walmart, McDonald’s, Home Depot, Ford Motor Company or a local dry cleaner or restaurant really did turn into profits, then of course those companies could afford to pay unrealistic living wages of $15 per hour, accept unreasonable demands from labor unions, provide all sorts of generous fringe benefits including weeks of paid holidays, long paid maternity leaves, and gold-plated pension programs, etc. The public that believes in the fantasy-world of sky-high 36% profit margins would naturally think companies are just being greedy and stingy when they don’t pay higher “living wages” and have to be forced to do so through minimum wage, or living wage, legislation.
If the average person could realize that a 36% profit margin isn’t even close to reality, and that the typical, median firm has a profit margin of only 6.5%, or almost 30 percentage points below what the public thinks is a normal profit margin, then hopefully the average person would become a little more realistic about how the business world operates. Companies aren’t being stingy when they pay competitive wages, they’re just trying to survive on what are sometimes razor-thin profit margins, in a competitive environment where there’s not a large margin of error. If they’re not operating efficiently and watching costs very carefully, it’s pretty easy for a business to go from a 6.5% profit margin to a 0% break-even situation, and then to losses and bankruptcy — just look at the more than half a million businesses that fail every year.
I think I first found this factoid out when I read one of Thomas Sowell’s books.
I agree. Boy, can you imagine how blazingly successful a company could be to realize 30% profit margin?
It would be fun to see someone ask Occasional-Cortex or the Warren/Harris/Booker turd-set this question in an unscripted setting on national television. “What is the average profit-margin that Apple Computer achieves each year?”
A company could certainly clear 36% gross profits and only 7% after all expenese accounted for. So in theory both could be correct.I didnt notice a distinction in the article. The gross profit for my business was 35.9% last month....net will be around 1/3 of that.
You have a point. Most people hear anecdotally that a retail jewler has a 100 to 200% Mark-up and they use such an item to generalize profit overall.
They likewise think since a small house builder charges about 20% on a change order that the builder of an office building makes a like gross profit when it is likely 4% gross markup.
Its intentional; they want our children to grow up thinking that capitalism is exploitative and that companies are evil.
I don’t think the average person knows the difference between markup and gross profit.
A company making between 7 and 10 percent is doing okay, 17 percent is ideal.
*************
Profit margin can be deceptive. Cash flow provides a better view of a company’s profitability.
Grocery stores would sell their children into slavery for a 1% Gross profit increase.
I don’t think the average person knows the difference between markup and gross profit.
*************
That is true. There are basically three margins: gross, operating, and profit. It can get a little confusing.
I had a friend who managed a grocery store.
He was always hauling food home. I don’t know
if it was stock destined for destruction or
not, but he was a regular Cornucopia.
It sure seems that most people are clueless about profit margins, or the various expenses involved in running a business.
***************
Indeed. Your simple example illustrates the fact that every business and industry has different characteristics.
Some businesses are more capital intensive than other. Some are cyclical. Some are heavily regulated. And risk profiles can be radically different. Myriad factors affect profitability.
It’s not the amount of cost of goods, it’s the amount of dollars from people. Cost of goods keeps the doors open. The amount of money is the profit margin. If I am willing to make a few cents less for a like product, not the same, just like, and I am willing to invest in the advertising to display that loss, I will make up the lost revenue of the cost with volume. Walmart, K-mart, Hancock Fabric, Costco... There are many that work in this manner.
Walmart, the most famous, showed a 3.1% profit margin in the graph. In 1995, they garnished a $94M pure profit after everyone was paid off. And Walmart’s annual gross profit for 2018’s business was $129.104B, a 1.7% increase from 2017. That increase isn’t in profit margin, it’s in sales from people. So getting stuck on profit margin is good for conversation, but has nothing to do with the amount of money.
rwood
I disagree. The NEA wants people to be mindless, unthinking zombies who follow LIB thinking like a squirrel endlesly chasing a shiny object. The NEA is a leftist organization pushing for ignorance (and good salaries, pensions and benefits). “For the children”, you know.
To the mindless socialists/communists among us, the higher the margin, the higher the level of “evil.” That’s why they lie about it to the public.
I was thinking the article meant ‘business’ in the private sector... not big labor, like NEA employees.
In high school a lot of guys worked sacking and carrying out groceries, then if you were going to college you could do stocking and part time checkout. Either way I got to know a bunch of those Grocery Store Zecutives and there were some doozies.
I was lucky enough to work during Nixon’s price Freezes when inflation was going crazy and I could spend all night changing prices on a daily basis. That was the Full employment act for us stockers.
One penny was everything to those guys, and we always took stuff home. Dented cans were always popular.
The best part was swollen cans, full of botulism. Give them some time to swell and you could blow them to smithereens with a .357. That may be why my face is still wrinkle free.
I think I just found the smartest profitable doctor around. I needed to get a DOT physical for a commercial driver license. Some doctor was advertising them for $70.
The doctor was a nice younger guy with a one room office in a ghetto area. Outside of a cup for urine sample and a test strip, his only cost was a few photocopies. It was just him and no staff.
At that rate, if he does 10 exams a day, he clears $150,000. Basically, if you can fog a mirror you pass the exam.
Back in the late sixties, I dated a Safeway cashier. She would call out the price of every item as she rang it up, with nothing to go on but memory. Maybe they all did that. It was amazing.
I worked for grocery store chains for a number of years. IF they have a Net profit of 1.5%, they are happy.
Bad checks, theft, and other problems keep their profits low.
grocery business very competitive and chains have unionized employees
Tax prep and bookkeeping are among the highest profit.”””
Not buying that.
High end jewelry-—Art Galleries—fancy Law firms—Medical Specialty practitioners...are all high profit.
Want to file for divorce in a small town in Nevada....?? CONSULTING fees-—NOT Court time—$375 an hour.
What kind of fees do you think those college bribery cases are bringing in???
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.