Quote:
Originally Posted by GordonBlue
I'm looking a the fact each quarter they're making record profits.
Then they guy comes out to say that prices will likely rise.
I don't give a #### what their margins are. The bottom line is these guys are making billions in profit.
They can afford to give us a break for something we need to survive, and still make billions in profit.
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I hope I don't overly simplify the explanation.
A company typically needs positive profit margins to continue to exist as an entity, pay down loans etc. and because you can't sit down and drill down into millions if not billions of transactions over multiple periods (individual transactions, not dollars of the PPP cycle and SRR cycle; purchases, payables, payments cycle and Sales, receipts and receivables cycle) that the entity will engage in, you need to rely on wide brush tools like gross margins to stay solvent. Keep in mind that for every billion dollars or movement in, 1% is 10 million.
If you had an item that cost you $0.48 to acquire, store and sell and you sold it to the consumer for $0.50, that's a margin of 4%.
Let's say that item now costs $0.95 to acquire and you sell it for $0.99, that's a margin of 4%.
But let's say now that the item is now costs $3.85 to acquire and you sell it for $3.99, your margin is 3.5%.
If you always sell 1,000,000 units per month. You'd get:
- Profit of $20,000 at $0.50.
- Profit of $40,000 at $0.99.
- Profit of $140,000 at $3.99.
Yes, the profits are up to record levels. But so is the cost of a plum or peach or egg. They're not gouging you at all based on a definition that they're intentionally increasing the profit margin. They're selling those things for the same purchase and resale ratio they have always sold them at (if not slightly less). This is only a few items that a grocery store sells.
"Maybe they should limit the margins so that the total profit is limited." Grocery store chains usually have something like 10,000 to 40,000 unique items and SKUs for things they sell at their stores. It's not an effective use of time. If then you do it across the board, you might have negative margins. But going back to the original item. If it costs $3.85 to acquire that item, then it costs the company $3,850,000 per month to purchase that item for 1 million people to buy. It originally cost $500,000 to purchase that item for 1 million people to buy. The store needs to maintain margins so that the next time certain items have a meteoric rise, they have the cash flow necessary to acquire it. Or they have the money to expand locations and improve logistics of their operations etc. It is not a wise decision for the company to drop the margins and risk their ability to operate if they're doing nothing wrong and people will complain either way. Otherwise, you'd see some of these stores potentially run into shortages and solvency issues quickly. This is the purpose of margins for these companies.
So let's say they sell that same item that costs $3.85 for $3.90 and make $50,000 in profit on that item selling 1,000,000 of the things. Will people complain any less? No. So there's no point in dropping the selling price into the 1-2% range to reduce profit if there's risk that operations can be badly affected if those items go from $3.85 to $4.00 or higher.
What the companies do in terms of bonuses and compensation is a totally different story that sure, go ahead and be enraged at that. If a company sold 10 billion and had margins of 2%, then there would be 200 million in excess. They might skim 10% and give their management 20 million and reinvest 180 million into the company and we get upset by that. That's fair. But keep in mind the scale of how big things go. That 20 million based on my crap calculations is .2% of the activity of the company. Or, some of the profit margin is legally obligated to be paid out to shareholders on a percentage basis as dividends to the stock holders.
Loblaws alone is about $15-20 billion in revenue per quarter which x4 around 60-80 billion in revenues per year. If my previous calculation scale seemed big, it's not even as big as the real scale of the companies. As mentioned, grocers operate on average scales of about 2-3% margins. They operate on a thin line between profitability and rapid move towards insolvency. It's only due to a nationwide level scale that it seems insane and unreasonable, but in reality, if you start comparing companies on gross margin scales, what is going on with grocers is not completely unreasonable.
Keep in mind also that a company like Loblaws can operate on smaller margins due to their size, logistics/tech advantage and scale of operations. Small mom and pop grocers typically have to be operating at much higher margins of 7-14% to stay alive. This again is due to scale because these small grocers aren't selling 1 million units, they're selling hundreds.