US Corporate Profit Margins at Record-High
I have just returned from a short trip to the US, where I saw Bubba Watson win the US Masters at The Augusta National Golf Club. While this is indeed an extraordinary sporting event, I think I now have a better idea why US corporate profit margins (as a percent of nominal GDP) are at record-high levels.
At a restaurant in Aiken, South Carolina, it was revealed that our waiter was paid US$2.30 per hour.
However, with tips, this averaged closer to US$14.00 per hour.
Hence, the restaurant owner has effectively out-sourced a large portion of the waiter’s cost base directly to the customer.
And hence, the restaurant owner is enjoying the profit margin!
Chief Executive Officer of Montgomery Investment Management, David Buckland has over 30 years of industry experience. David is a deeply knowledgeable and highly experienced financial services executive. Prior to joining Montgomery in 2012, David was CEO and Executive Director of Hunter Hall for 11 years, as well as a Director at JP Morgan in Sydney and London for eight years.
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Matthew
:
Thanks for pointing out the very high level of US corporate profit margins. From the studies I’ve seen, the key determinant of this is overspending in the Consumer and Government sectors, which is not sustainable. Based on historical studies the combined Govt & Consumer sector will start saving more and hence corporate profit margins will reduce.
Jon E
:
One thing rarely known about the US/Canadian tipping system is a little thing called Tip-Out.
It is not unusual for your waitress you are tipping 10-15% to have to tip the hostess 2.5% and the kitchen staff another 5%.
So the picture is bleaker for the staff.
Another interesting note is since there is no way for the restaurant to know how much cash was tipped they have to Tip-Out regardless of if you tipped. I had a few of my mates in Canada in this situation a few times serving aussies who didn’t tip. When you are on minimum wage it can get ridiculous.
Also a lot of people living on tips choose not to declare (or under declare) it in their tax which in turn results in lost tax revenue for the government. All in all a messy system.
Andrew Legget
:
If we were to go down a different route rather than accepting the Australian system and all its benefits and faults. I would prefer the American version of tipping to the system seen in tourist areas of Italy where a per person charge is added to the bill.
As has been said tipping does provide an incetive to offer good service where as the cover charges as a fixed charge tend to do the opposite in my experience.
Whilst not necessarily needing to go to the extremes, i do think Australia should look at other countries such as America to help innovate our current workplace relations laws to allow for greater employment opportunities. Something like tipping though i believe would be more hard in practice than legislating. I don’t have an issue with tipping even do it in Australia, but have seen many other Aussies in the states who react as if you insulted their family when asked to contribute to tip.
One interesting note, and it depends on your point of view whether this is a good or bad thing, is that even after factoring in tips ($14 p/hour), the staff member is still being paid less than the minimum wage a similar person would be getting paid for if in Australia.
Simon Stewart
:
Hi David,
Perhaps a little bit of a simplistic point of view given that the cost of the Australian wages are included in the price of the meal. One thing the US system does, it gives you excellent service. The wait staff need to provide good service to get the tips to supplement the low income. Makes dining out a better experience so you tend to dine out more, good for business indeed. Go to an apartment store…no tipping…no help…not a good experience.
Swings and round abouts
cheers
Simon
Roger Montgomery
:
Hi Simon,
Thanks for that. Don’t think David was making a point merely offering an observation.
carlos.cobelas.1
:
I would never want such a wages system ( ie tipping ) in Australia,
it is an awful system