By: Wayne Brown
We hear a lot of conjecture today about the big ugly corporations in America that are purported to be “robbing consumers blind” and woefully remiss in “sharing their earnings” with their employees. Funny, we never see any real numbers associated with the claims…mainly just descriptive adjectives attempting to measure the level of larceny and disrespect for the employee those heartless corporations possess. Ultimately, as the old saying about tobacco goes, “the proof is in the puffin’” so let us flip over a few rocks and see what is underneath them.
Before we get down to measurements, let’s talk a bit about viable business models to set the stage. Every business person who has been successful and understands business accounting will tell you that every business requires a business model as a method to set targets in terms of revenues, profits, and earnings. That seems rather complex because every business is not alike…they all have different requirements and some of those may cost more than others. So how do we do it. The key is a simple business model which forms the basis for the accounting. For the purposes of this article, the one thing we need to understand is that it is fairly common place to see most business shooting for a 5% bottom line after all is said and done and everyone is paid. That might sound easy but it really is not easy at all. Just keep that number in mind. Without it, most business will eventually falter.
Let’s start our look and see with one of the more evil sectors of the corporate world…at least in the eyes of some. The big oil companies are said to be “getting rich off the poor man” and “making money hand over fist” off of the high gasoline prices we, as consumers see at the pump today. Take a look at two of the more well-known companies in the oil refining and retail sales business for examples…Exxon Mobil and Shell Oil (Royal Dutch Petroleum). For the three fiscal years 2009 – 2011, Exxon Mobil logged an average bottom line of 7.77%. Shell Oil did not fare quite as well but remained in business with an average over the same period of 5.50%. In neither case can one say that the bottom line margin looks excessive to the set goals of the basic model. In fact, most would say that both companies are slightly exceeding the target margin enough to maintain stability. The public perception of these companies ,which affects both companies in terms of negative image, is that their bottom line stems from numbers which are reflected in billions of dollars and often quoted as such by the media. At the same time, we as consumers, failed to realize that the expenses associated with this industry are also measured in the billions as well. In that case then, the best perspective is to consider the net margin as a percentage whether the company takes in $100,000 in annual revenue or $100,000,000,000. On the whole, looking at these two examples, maybe “big oil” is getting a bad rap in the public sector.
The U.S. auto industry is certainly not a place one would expect to find too much profit in the past 5 to 10 years. If we examine the margins of both General Motors and Ford Motor Company over the 2009-2011 three year fiscal term, there are considerable variations in the ability to maintain float and sustain a profit. General Motors, emerging from bankruptcy (Oops! Sorry I misspoke...they were recovering from the bailout by the federal government which save GM from bankruptcy), has only been profitable in two of the three years logging a three year average of 3.57% over the term. This does not consider the negative margin of 2009. Certainly, based on our target margin of 5% can we conclude that GM is out of the woods financially? Ford Motor Company looks a bit better having logged a double-digit margin in 2011 of 14.8% and averaging 7.4% over the three year term. Now, if you consider “Big Oil” evil at the margin levels of Exxon Mobil and Shell, then surely one must add Ford to this list yet leave GM off. Still, based on the average margin for any of them, one would not conclude that any of these companies are operating excessively above the model target.
Let us now turn to big box retailers and use Target and Wal-Mart as our example. This highly competitive market is paced heavily by Wal-Mart which is a monster of a global corporation. Still, the pain of competition shows in the bottom line margins even when all the tricks of off-shore buying are employed. Wal-Mart logs in with a three year average margin of 3.51% with only slight variations in performance over the term. Target actually fares better even though the revenue stream is smaller logging in with a three year average of 3.83% with only slight variations year to year. At this point, it does not appear that either of these giants is poised to exceed a 5% annual net margin anytime soon thus we can hardly condemn them for the margin they do earn. From 2010 to 2011, Wal-Mart’s revenue grew by 3.4% but their margin only increased by less than 1/10th percentage point (.09). Target saw similar results increasing revenue by 3.1 % with only a 1/20th percentage point (.05) increase in margin.
You must be asking about now, “Well, I’ve heard about these big evil money-making corporation, where are they?” Well, there appear to be some out making far more than I would expect they would and most are not on the liberal-left bad boy list. Start things off with Coca-Cola…not a particular necessity of life but one that certainly makes money. Over the three year term Coca-Cola Company turned in an average net margin of 24.8%...not bad for that colored sugar water they sell, huh? In contrast, Pepsico, a larger company in terms of revenue, logged in with a three year average margin of only 11.5%. In both cases, these are companies averaging well above the business model target at more than twice the expected level. At the same time, what they sell is not construed as a “necessity” of life so what does that say for the will of the consumer in terms of supporting corporate growth. Maybe it is time for all those who hate free-market capitalism to head on down to see these folks and tell them what bad, bad boys they are. They’ll probably give you a free soft drink for showing up.
Let’s throw some “Starbucks” in with that group above and see how they fare considering that “coffee at all times of the day” seems to be popular with our youth and yuppie types of today. Starbucks, while quite profitable, landed a little closer to earth than the stars logging in with a three year average margin of 7.84%. It seems that Starbucks is in that same zone with “big oil” so if their margins are at a level that makes them worth running out of business then say goodbye to the coffee or maybe you would like to reconsider then wake up and smell the coffee.
Why not take a look at the two poster boys of billionaire listings? I speak of Warren Buffett and Bill Gates and their companies Berkshire-Hathaway and Microsoft. Buffett’s BH comes in with an average margin for the three year term of 8.17%....right there with “big oil”! But Bill Gates operation, oh dear God, save us all…29.3% average margin over the same period. Gee, is that not odd….one earns as much as “big oil” by percentage and the other almost quadruples “big oil” by percentage yet the “bad guys” are the ones at “big oil”. Seems fair, huh? Dell Computers would love to be part of those numbers as they show up with only a 3.70% average margin for the same timeframe….technology apparently is not enough to run with the big dogs.
One last area that we need to look at is those evil folks engaged in getting our food to us…the grocery stores. A business model target with a net margin of 5% might be described as a “wild utopian dream” to someone in the grocery business. The Kroger Grocery chain touches almost all of us across America with the various subsets in their operation. Kroger took away an average margin for three years of less than 1% (.72). Safeway, another large grocery conglomerate came through with an average margin of 1.2% at best. Keep in mind, the price of groceries have gone up by approximately 15% over this timeframe yet that increase is not showing up in either corporation’s bottom line. Could it possibly be because those costs are driven by the increased prices of transportation of goods to market? Does this mean the big, bad, evil grocery-sellers are not stealing us blind? I would say that is a strong possibility. Let’s just blame “big oil”….what the hell! While you are considering that dwell on the thought that McDonalds had an average three year margin of 20.3%....net! So who is robbing you….”Big Oil” or “Big Mac”?
My whole point here is to say that many, many companies are, by perception, labeled as money-mongers and market cheats when the numbers simply do not support the case. They are also accused of not paying their employees a fair wage yet one has to remember that the wages are part of what creates that net margin figure. In a Fortune 50 company, I have read that a 1% increase in the wages of the corporate workforce comes with approximately a $12 million dollar price tag thus a company considering an average wage increase of 5% for the year is looking at an additional $60 million dollars coming off the bottom line in the next budget cycle. Where is that money coming from. We need to think about that a bit, so let’s switch paragraphs and get us some room.
Think back to the margins coming in for the “big oil” examples that I discussed above. When it was all said and done and everyone was paid, the companies retained 5 to 7 cents for each dollar of revenue. Now, if the corporation intends to incur that $60 million wage increase, we have to divide that amount by (use an average) 6 cents because that is the only unclaimed money that we have coming in at the moment to see where we will stand on the bottom line. Or, if we elect to target the status quo and maintain our bottom-line margin, we have to multiple 60 million times 6 cents to calculate the amount of additional revenue that must come in to make that offset, in this case the figure is $1 billion additional dollars of revenue. That is a lot of revenue growth for any company, no doubt and the conclusion assumes there will be no disproportional increase in overhead expense needed to capture that revenue. If you were the CEO, what would you do?
Grab yourself a handful of corporate financials and look them over. Don’t let the large numbers blur your vision just be cognizant of assets versus liabilities (owned versus owed). That relationship creates the platform or foundation upon which the financial strength of the company is built. Then look and profit and loss…what did you take in, what did you pay out, what’s left over afterwards? This is the annual figure that either sustains that foundational relationship that is established or it starts to erode it. Without a retained net margin, companies do not grow and they become less stable and less secure with time.
They are also not able to weather those momentary bumps in the economy. When companies disappear, the jobs go with them and no one wins. Oh, and by the way, while you are looking at those financials, note that all of them show a “margin or profit/loss” before tax and after tax. Companies do pay taxes and the more taxes they pay, the more those costs are passed on to us…the consumers. That is what happens when a net margin must be sustained. So, if you are a big fan of heavier and heavier taxes on corporation, then it goes without saying that you are ready to tax the middle class right out of existence. You have a choice on that in November, I hope you use it wisely. Capitalism and free-market are not all a bad thing as some would have you believe.
©Copyright WBrown2012. All Rights Reserved
10 September 2012.