Perhaps counterintuitively, on aggregate the brunt of the costs of the Great Recession were born not by companies but by workers, as payrolls were slashed and hours extended to improve productivity.┬á This has enabled 9 straight quarters of double-digit increases in earnings for the S&P 500, even as economic growth has remained slow in the 2-3% range.┬á Corporate profits have gone from a 50 year average of 6.1% of GDP to their current level of 10.3% – a post WWII high.
This arrangement is┬ádifficult to sustain┬áas over time with such a large proportion of wealth accumulating to capital investors.┬á Already there have been a number of protests against income inequality across the country.┬á Setting aside the social and political aspects of the phenomenon, there are a number of reasons to believe that these high profit margins will eventually decline.
Perhaps the simplest argument is simply that of mean-reversion.┬á Profits fluctuate around an equilibrium level depending on the bargaining power of the various negotiating parties (workers, coporations, customers, tax authorities,┬áetc) and also depending on commodity costs.┬á
Another is the dynamism of competition within a capitalistic economy.┬á High profit margins encourage competitors to enter into industries to take market share from the entrenched companies.┬á Depending on the difficulty of enterring an industry this may take time to occur, however economic theory holds that┬ácompetition works over the long run to improve the well-being of society as a whole at the expense of the industries and companies that are slow to adapt to evolution in the marketplace.
For example Coca Cola is a company that has been able to maintain high profit margins and pass along costs to consumers for decades.┬á They have unmatched distribution, marketing, and quality control to protect these profits from competition.┬á However a company called Sodastream has created┬áproducts that cost between $80 and $200 to enable customers to make their own soft drinks at home and realize significant savings.┬á Similarly Amazon.com allowed customers to shop at home and cut out the costs of transportation and searching for products in big box retail stores such as Wal-Mart and Target.┬á While nowhere near the scale to be a competitive threat to Coca Cola yet, Sodastream does illustrate how an industry can shift over time to change the profitability potential of a company.
Another example is the rapidly growing industry around sharing items and locations, such as ZipCar and AirBNB, which facilitate car-sharing and vacation home sharing respectively.┬á These companies make it much easier and cheaper to book travel arrangements and lodging facilities.┬á The result is lower profits for companies in the auto and hotel industries as marginal consumers shift their buying habits away from the old methods of meeting their needs.
Wide profit margins should be an opportunity for smaller firms to take market share and grow rapidly relative to their larger peers.┬á For the megacap multinationals it will be increasingly important to remain flexible and innovative to protect their value, and to expand their┬áoperations overseas where markets and competition are not yet as developed.