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American Margin

Updated on August 24, 2014
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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.

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    • Mr. Happy profile image

      Mr. Happy 4 years ago from Toronto, Canada

      "Exxon, the world’s largest publicly traded oil company, reported a second-quarter profit of $15.9bn, up from $10.7bn a year ago." - That's a number I am seeing in a few articles after making a Google search on the topic of Exxon Mobil's profits.

      "Chief Executive Rex Tillerson was granted a bonus of $2.4 million, down 40 percent from a year ago." - This is from a Reuters article from 2009 (http://www.reuters.com/article/2009/12/01/exxon-pa...

      In terms of sharing the wealth so to speak or the theory that wealth trickles down, how much does Exxon pay its regular workers?

      A Senior Research Engineer is offered $125,699, from today's job market.

      A Senior Engineer is offered $132,918.

      A Project Engineer is offered $103,493. (http://www.glassdoor.com/Salary/Exxon-Mobil-Salari...

      These examples I have given are all Engineer jobs (two of them Senior Jobs, which require experience thus, that is not the starting salary). It costs a lot of money to go to school to become an engineer. It also takes a lot of time and effort. Now, in comparison to what top executives receive these workers are getting paid peanuts (or very close to peanuts ...).

      You wrote about Bill Gates ... I just saw a documentary about billionaires (http://www.youtube.com/watch?v=Lt89AYksS5k&lis... which explained how Bill Gates' fortune grows by 4 million dollars each night, as he sleeps. Haha!! He goes to bed and wakes-up 4 million dollars richer - must be nice!

      "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." - The money is coming from the bonuses of the top executives, which are in the millions and millions of dollars and some can also come from the overall profit of the business. How much is minimum wage again? This is what we have to take into consideration: the disparity between how much top executives get paid and how much the common worker gets paid.

      I am not against capitalism but I am all for a capitalist system with checks and balances, where the common man is not being taken advantage of and where fairness is a virtue.

      Thank You for the read Mr. Wayne.

      All the best!

    • Attikos profile image

      Attikos 4 years ago from East Cackalacky

      Corporations with monopolies slide into what could be called evil. Those are relatively few, most of them in the financial industry, and they cannot exist without regulatory protection. Competition keeps the rest out of the dark side.

      The largest, most well entrenched institutional monopoly is government. That old canard that "we are the government" was never fully true, and it has not been close to truth for a long, long time. It has always amused me that almost all professional politicians and the statists who support them, the vast majority of whom today are on the left, have the ignorance, arrogance and cheek to hurl that "evil" accusation at business. They themselves are the ones with the horns and tails.

      Come to think of it, maybe they are trying to divert attention from that. An endless supply of manufactured demons is necessary for their style of politics.

    • William Young profile image

      William Young 4 years ago from Eaglle Grove, Iowa

      Excellent article, Wayne! The other thing that those on the left never seem to mention about the oil companies is the fact that they pay hundreds of millions in taxes. The amount of corporate taxes these companies are paying is astounding! Great read!

    • Mitch Alan profile image

      Mitch Alan 4 years ago from South Jersey

      Voted Useful and Interesting. Great Hub. Insightful and well laid out. Most people don't grasp simple economic principles. Glad to see another Hubber making sense.

    • Wayne Brown profile image
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      Wayne Brown 4 years ago from Texas

      @Mr. Happy...The dollars are only relevant in terms of the investment itself. That is exactly why I did not use them in this discussion...they confuse more than clarify. As to the salaries and bennies of CEO's and tope executives, for all practical purposes, that is a norm in most large corporations....it is the going rate to gain the talent for the job. At the same time, while you consider a six figure salary of a senior engineer peanuts compared to the CEO, keep in mind that engineer is not charged with the bottomline and does not stand to lose his job if it is not attained. It is totally the reason the CEO and others are there and spelled out to them very clearly in the contractual stage. Their job could well be on the line. That does not mean I agree with it but it is a given in the business and seemingly to the board of directors, a necessity. I do not see any company wanting to pay more than it has to in order to accomplish the task at hand. Thanks for the good words, glad to see you coming by! ~WB

      @Attikos...Well stated my friend, well stated. I agree totally. Thanks much. ~WB

      @William Young....I think it is a shame that the oil companies have sat back in silence and allowed such a face to be painted on them by politicians. Groceries are up 15% due in large part to the cost fuel in transportation by both truck and railroad yet we have a president who wants to make it virtually impossible for domestic oil to be harvested though he claims publicly that is not the case...a total lie. It is he who is putting that bottom line on the groceries yet claims to be working for the middle class. This guy needs to be outed. There are many questions based just on this write alone that the media could throw at Obama but then they would never crucify the "savior". Sadly, we have too many involved in the work to overcome without some efforts and some miracles. Thanks much...glad you enjoyed it. ~WB

      @Mitch Alan....I am working as hard as I can to see Obama as one term president. I'll vote for a tree in Brooklyn ahead of him. I see what he is and what he is attempting to do. He has hidden himself in the mass of the middle class in the hope that he can sell himself off as being not only for them but a part of them....just another socialist angle on destruction from the inside. We have to change direction and soon. Thanks much, Mitch! ~WB

    • Happyboomernurse profile image

      Gail Sobotkin 4 years ago from South Carolina

      This is a very well written and researched thought-provoking article. Thanks for sharing this information with us.

      Voted up, useful and interesting.

    • Mr. Happy profile image

      Mr. Happy 4 years ago from Toronto, Canada

      Greetings once again Mr. Wayne,

      "As to the salaries and bennies of CEO's and tope executives, for all practical purposes, that is a norm in most large corporations....it is the going rate to gain the talent for the job." - We may end-up having to agree to disagree on this point but I am of the opinion that this norm will change sooner than later - it is inadmissible, insensible, greedy bordering criminal.

      Everyone has responsibilities in their jobs, which if they fail to accomplish they end-up losing their jobs - that is not true only of CEOs and top executives.

      Take this headline from April this spring: "Last week the country saw one of the fruits of the Dodd-Frank financial reform bill. The bill requires that major corporations offer their shareholders the opportunity to vote on the pay package for their chief executive. The shareholders of Citigroup voted down the $14.9 million pay package for CEO Vikram Pandit by a margin of 55-45 percent." - It is outrageous to even suggest that a human being on this planet should receive this kind of pay package when most human beings in this world live for under two dollars per day. Or I can keep this to North America and say it is ridiculous to even suggest that one man should get paid nearly fifteen million dollars when minimum wage in not even fifteen dollars per hour.

      Mr. Wayne, this is why I slept for a month in a tent down in the financial district, as part of the Occupy Movement - to raise awareness on issues such as this and to try to speak about morals, fairness and such ...

      And there is another issue as well with these corporate crooks. When the banks failed the banksters still received these types of pay packages from TARP money - taxpayers money. The banks failed yet, the banksters took home millions and millions so, if that is what You meant by "it is the going rate to gain the talent for the job", I understand ... failure is a talent and is rewarded with millions and millions of dollars if You work on Wall St.

      I will shut up for now but I will certainly continue to raise awareness on the great unfairness in wages, which is all too common in our days.

      Thank You once again for the conversation.

      All the best!

    • Angela Blair profile image

      Angela Blair 4 years ago from Central Texas

      Thanks, Wayne, for getting down to the "meat & taters" of economics -- I'm up on some of it but have a lot to learn and when you put it all down so understandably -- well, I feel like I have a bit more of a handle on that. I'm ready to see the Irish kid go (O'Bama) and all his little "pots of gold" friends -- what a mess we're in. Best/Sis

    • Wayne Brown profile image
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      Wayne Brown 4 years ago from Texas

      @Happy Boomer Nurse...Thanks much...maybe it will stimulate some thought get some folks to look at the details rather than just the emotion. ~WB

      @Mr. Happy....Don't look at me to defend it...I was just attempting to analyze the basis on which it occurs. If it takes a a vote of the stockholders then I think that is great. I don't see anyone worthy of that level of compensation either but, as you know, it is a familiar occurrence. At the same time, I don't think that being the Superintent of Schools is Dallas Co. TX is worth over a quarter million a year plus bennies but that is what it pays....Superintendents of Education and City Managers are way over compensated and folks line up for the jobs. There is a certain emotion there that quietly states that the job is going into the best hands....I think that is bull myself. I appreciate your view point and I am glad to post it. Best Regards! ~WB

      @Angela Blair...Politicians have done a good job of painting the business world into evil colors. As Mr. Happy points out, those businesses are engaged in a competitive free market must adjust to competition to keep their customer base...that is the checks and balances of a free market economy which does not require over-regulation by the government. Obama wants all that gone. At the same time, he wants middle class America to believe that he is going to tax the corporation which only gets passed through to the consumer pocketbook...ending up an "indirect tax" on the consumers....including the poor. Thanks, Sis! ~WB

    • Faith Reaper profile image

      Faith Reaper 4 years ago from southern USA

      Very insightful and thought-provoking hub to say the least. A lot to ponder. This is very well-written. Thank you for your thoughts on all of this, much to think about. In His Love, Faith Reaper

    • Wayne Brown profile image
      Author

      Wayne Brown 4 years ago from Texas

      @Faith Reaper....My intention is get get folks to talk in term so relative numbers rather than emotions. We cannot sit around hating oil companies for making big profits when those profits are on the safe side of the target not the gouging side. Numbers have a way off shutting out the emotional lies in the argument. Thanks much for your good words...glad that it was helpful. ~WB

    • Conservative Lady profile image

      Sheila 4 years ago from Surprise Arizona - formerly resided in Washington State

      Wayne you have made it all so very easy to understand and as you said - "no emotions invloved" - why can't the media do the same..... Voted Up, Interesting, and Useful - nicely done in my humble opinion.

    • Wayne Brown profile image
      Author

      Wayne Brown 4 years ago from Texas

      @Conservative Lady...I think most conservative get it just like you. The numbers may not be apparent but the gut feel is there. Corporations have been painted to be evil entities over the past four years yet they are the lifeblood of our economy. If they are legitimate, as you see it the is example just looking at Wal-Mart, competition will regulate their ability to make a profit. We cannot let those who want to manipulate our minds and destroy our country use such tactics to convince us that capitalism is bad, that free markets are bad, and that our Constitution and our Bill of Rights are just "outdated documents" which impair the movement of progress. If we do, we are trading all that we know in terms of our history for a blind future that hold nothing positive for us. God helps us if that trade is made and this election will decide it. ~WB

    • ercramer36 profile image

      Eric Cramer 4 years ago from Chicagoland

      Great Hub! Very informative. Many people also forget is that these "mean & greedy" corporations create a lot of jobs when they are successful not only in their own nusiness but up and down the supply line. Also in the travel and food industries. Voted up!

    • breakfastpop profile image

      breakfastpop 4 years ago

      You have done an excellent job peeling away the layers of myth and distortion. Sadly, the average person is happy to exist on a steady diet of sound bites provided by the mainstream media and the left. Up useful and awesome.

    • Wayne Brown profile image
      Author

      Wayne Brown 4 years ago from Texas

      @ercramer36....I agree totally. On that basis, how can one not see the reality of trickle down economics....in a growing economy, it is everywhere and expanding expotentially in many cases. Thanks for the good words! ~WB

      @breakfastpop...Thank you, Poppy. Your observation is exactly how we end up with an "Obama" type in the White House. Just remember, the media thought Jimmy Carter might be able to win a second term because he was a sitting president.....they were very wrong. ~WB

    • Diana Lee profile image

      Diana L Pierce 4 years ago from Potter County, Pa.

      Very interesting research you've done here, Wayne. I guess there is much truth in "The rich get richer and the poor get poorer". Guess we all should try to stay somewhere in the middle, but I believe the middle class are carrying most of the tax load mainly because we out number the rich and the poor. I expect Walmart will see an increase with them putting their lay-a-way for Christmas back in place. They surely don't want K-mart or others to get this advantage on them again this year.

    • The Frog Prince profile image

      The Frog Prince 4 years ago from Arlington, TX

      Something I learned in business school which still holds true to this day. Corporations exist to pay dividends to the shareholders who make it possible to be a corporation. Without shareholders then we have no large amounts of capital to make things possible.

      Demonization is at work most times. That and maybe envy. If you want to take the risk, because there is risk involved, then put your money where mouth is and invest in a corporation or two. Too timid to do that? Then shut up and watch the rest of the world as it makes things happen for your benefit.

      Nicely done Wayne. Just an added spin on my part. Being a business major makes me know a bit about some of this :)

      The Frog

    • Wayne Brown profile image
      Author

      Wayne Brown 4 years ago from Texas

      @Diana Lee....Isn't it wonder how the competition keeps all the dogs in the hunt? Based on the last figures that I saw, the top 5% of the wage earners in the country pay 57% of the annual taxes. Tack the 47% that pay no taxes at all to that figure and it covers 52% of our population...that leaves us the remaining 48% (mostly middle class) who pay the other 43% of the taxes. So in effect, 53% of the population pays 100% of the taxes at present. It appears to me that quite a few folks are paying more than their fair share at the present. Obama has us looking at the top 1% with envy when we need to be wondering how many in the 47% no tax grouping could be paying tax first.....funny, he's not interested in that angle.....Thanks much! ~WB

      @The Frog Prince...Very true TFP. I decide a long time ago to join the fray and become one of those stockholders awaiting my dividends.....Scottrade will set up an account for the sum of $500 and put one in business. I did it for not only the possibility of making some money but to also educate myself in the investment arena. This is part of our freedoms and our liberties as Americans to take advantage of these opportunities, take some risk and potentially enjoy the fruits of the effort. One thing I have learned....it beats the hell out of sending the government money and watching it go up in smoke. Thanks much! ~WB

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