Ch 3 Corporate Savings: Squeezed Profits & Market Efficiencies
companies use to have profit margins of 30% to 50%. They have collapsed to half or even fractions of this during this recession period. Wal-Mart has squeezed their profits down to under 5%. They have about $20 billion in profits against $400 billion in total revenue. This is half the profit margins of even a couple decades ago. This is on top of other operational efficiencies that further reduced cost. For example, they found that half the cost of milk went into shipping. They got rid of milk-crates and redesigned the containers and dropped the weight and cost for shipping. Wal-Mart is notorious for squeezing manufacturers – sometimes below the cost to produce the goods. Manufactures found savings by subsidizing Wal-Mart orders against other retailers who paid more or by ‘economies of scale’ (greater volume reduces costs per unit). These Corporate savings shaved off trillions to America’s cost of living.
Wal-Mart Deflation Subsidy
Wal-Mart is also being subsidized by the US gov’t. There are the usual tax and regulatory breaks along side the federal benefits used by hundreds of thousands of part time employees now on the public dole for food stamps and health care. These taxpayer costs are offset in large part against the deflation value Wal-Mart has provided to America’s buying power. This will not always prove true, but it is today.
Cost Savings Ending
The larger point is that millions of companies learned to do significantly more on significantly less. Some of this has come from wages and other worker cutbacks, but a larger factor has been through operational efficiencies, technology and reduced profit margins. We are reaching the end of these cost savings while companies are beginning to build profit margins up once again.
(And yes, we are familiar with this misconception that such ‘efficiencies’ and technological upgrades are the reason for all these job cuts. They are not. We outline the falsehood of this in our article:
‘Jobs vs Low Wages and Taxes:’
More importantly, the answer is quite simple. This will be covered in our ‘10 things to Jump Start American Manufacturing Jobs.’
Republicans get this round for their commitment to ‘free markets.’ This was partially validated through these cost reductions.