“Someday this will all be yours,” I said, waving my hand across the aisles of the Piggly Wiggly. I was trying to ingratiate myself with my boss, the general manager for the biggest grocery store in Clarksville, Texas. He just smirked and shook his head. “For every dollar in sales, how much do you think this stores earns in profit?”
At the time I was taking high school economics and considered myself something of a financial savant because I knew the difference between stocks and bonds. Still, I was in full-on toady mode and thought it best to undershoot what I believed the true profit margin to be. I went with a safe number that I knew must be far too low. “About forty cents?” I asked.
“One cent,” he said. “For every dollar we put in the cash register we keep about one penny in profit.”
I was stunned, both by the skimpy profit margin and by my astoundingly shoddy ability at financial estimation. Unfortunately, I wasn’t alone. A poll taken last year asked a random sample of American adults, “Just a rough guess, what percent profit on each dollar of sales do you think the average company makes after taxes?” The average response was 36 percent.
As Mark J. Perry explains, the public’s estimates are way, way off:
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!
Before my lesson in supermarket economics I had wondered why they couldn’t pay us a higher wage or why they didn’t hire additional workers since they were getting us dirt cheap. When I learned a successful venture like the Piggly Wiggly only made a penny per dollar profit I gained a better understanding of why they paid a low-productivity worker like me a sub-minimum wage ($2.85 an hour in 1986). I still resented the low wages, of course, because I had that American sense of entitlement; I was not only owed a job I was owed a wage that I felt was fair.
That sense of entitlement probably wouldn’t be abated even if the vast majority of people understood that government often earns more from a business than do the stockholders. Many would still prefer that companies pay a “living wage” even if it means fewer people earning any wage at all.
Still, a dose of reality about corporate profit margins can be healthy for the body politic. With this information some economically savvy Americans may better grasp how thin the line is between a profitable company and a bankrupt one. As Perry says, “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.”