Corporate profits

The 30-year golden age of corporate profits is coming to an end

Photo by Alex Menendez / Getty Images

According to the latest publication from the McKinsey Global Institute (MGI), the streak of three decades of extraordinary earnings growth for the world’s largest companies may be coming to an end.

“Over the past three decades, companies have enjoyed record growth in profits, new market opportunities and lower costs. But this unprecedented race could come to an end. New rivals are warning industry leaders as the business environment becomes more uncertain and hypercompetitive, ”MGI said in its“ Playing to Win: The new global competition for corporate profits ”report.

The report states that over the past three decades “in all global corporations, earnings before interest and taxes more than tripled in real terms from 1980 to 2013; net profit after interest and taxes quintupled ”. He also pointed out that companies in advanced economies make more than two-thirds of global profits.

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This saw profits drop from $ 2 trillion and 7.6% of world GDP in 1980 to $ 7.2 trillion and 9.8% of GDP in 2013. And this is largely due to three key factors:

    1) New consumers – between 1990 and 2010 the world added 1.2 billion consumers

    2) New investment

    3) Global supply chains

But, the report predicts that if profits will reach another 8.6 trillion US dollars by 2025, that will represent a decline in the share of global GDP to 7.9%. It would almost be a full round trip to where he was when the extraordinary race started in 1980.

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SOURCE: MGI – Play to Win: The New Global Competition for Corporate Profits

The report says that this decline will come from the fact that competitive forces will be “let go by two groups of demanding competitors.”

  • On the one hand, a huge wave of companies based in emerging markets. The largest have been operating as industrial giants for decades, but over the past 10 to 15 years they have achieved massive scale in their home markets. Now they are expanding globally just like their predecessors in Japan and South Korea did before them.
  • On the other hand, high-tech companies are introducing new business models and entering new sectors. And the tech (and tech-driven) giants themselves aren’t the only threat. Powerful digital platforms like Alibaba and Amazon serve as a launching pad for thousands of small and medium businesses, giving them the reach and resources to challenge large businesses.

These challengers are more and more numerous according to the report while becoming more “formidable and more global”. Dangerously, they seem to be working in favor of customers and “some destroy more value for incumbents than they create for themselves”.

This is important because as new competitors take market share, driving down prices for customers (destroying more value than they create), MGI states that “some of the external factors that have contributed to the Profit growth over the past three decades, such as labor arbitrage and falling interest rates, are reaching their limits ”.

But all is not lost. The report says companies that adapt quickly to new realities “can seize huge opportunities.”

It is still true.

But the question for boards of directors, executives and stock market investors is whether their companies can rise to the challenge and what impact this changed landscape will have on their business and profitability.

This is important, because MGI says:

Over the next decade, increased consumption in the emerging world will create new markets. Technology will drive new products and services. Startups will be able to exploit the world
investors, suppliers and customers with little initial investment. But companies will face intense pressure to grow, innovate and become more productive, not just to seize these
opportunities but simply to survive.

Here is MGI’s loan calculation on what businesses need to do to survive and thrive.

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