More realistic profit goals: 5 to 10 percent?

[Frank_Ridgeway]

Interesting tidbit in a story saying the Chicago Sun-Times' company is being looked at by the group that recently bought the San Diego Union-Tribune:

Halbreich said the old days of 30 percent profit margins are over, but he thinks that as normal businesses, making a 5 percent, sometimes 10 percent annual profit, newspapers have a future.

http://blogs.chicagoreader.com/news-bites/2009/06/19/sniffing-opportunity-sun-times/

 

[RickStain]

Five percent annual profit for a business that seems to be very risky is pretty crappy. No one will want to take that on.

 

[PeteyPirate]

Five percent annual profit for a business that seems to be very risky is pretty crappy. No one will want to take that on.

Belee dat.

 

[Colton]

Well, my shop is at 13 percent for the first two quarters and right there again to start the third -- and furloughs, etc. are still the name of the game.

 

[Brooklyn Bridge]

David Simon said the exact same thing about a week ago at the national press club. He also went on to criticize newspapers taking people off beats and a number of other subjects. I saw it CSPAN last weekend. Might be worth a watch (about 20 minutes).

 

[OnTheRiver]

I worked at a grocery store in high school in the 1990s. We were the biggest, by far, of three grocers in town. Our profit margin was, on average, 1.5 percent.

When we hit above 3 percent, the corporate office went ape****.

So yeah, I think 5-10 percent is reasonable.

 

[RickStain]

The risk involved with an established grocery store is much different than the risk involved with a newspaper. Higher risk has to equal higher rewards.

 

[Boom_70]

In the short term that is a reasonable number. It will attract investors looking for long term value. It also buys time to figure out the correct business model for the internet.

 

[RickStain]

For a 5% return, I can either:

A) Keep putting out a newspaper and hope it all doesn't fall apart.

or

B) Drain it of every last penny and put all that in a long-term CD (well, those are getting 3.5% right now, but that's at the absolute worst time to be buying them).

Why on earth would a businessman choose the former?

 

[Boom_70]

For a 5% return, I can either:

A) Keep putting out a newspaper and hope it all doesn't fall apart.

or

B) Drain it of every last penny and put all that in a long-term CD (well, those are getting 3.5% right now, but that's at the absolute worst time to be buying them).

Why on earth would a businessman choose the former?

Because you are hoping to buy the paper cheap and sell at some point down the road for a profit.

The CD comparison is not a good one. A better comparison would be if you could take the same money and invest in the stock of a company that is paying a dividend and show promise for higher stock price down the road.

Fast food restaurant chains such as Burger King and Yum Yum ( KFC / Taco Bell/ Pizza Hut) work on about 8% profit margin. The gold standard for fast food industry is McDonalds with 18% margins.

 

[Frank_Ridgeway]

Why is McDonald's profit margin so much higher than Burger King's?

 

[fishwrapper]

Why is McDonald's profit margin so much higher than Burger King's?

Ever get the $7 cheeseburger at the Grand Canyon?

 

[Boom_70]

Why is McDonald's profit margin so much higher than Burger King's?

They have 31,000 stores as compared to BK's 11,000. This gives MD much greater economies of scale to reduce expenses. Internationaly MD makes a very high profit margin per store wihich also helps bottom line. MCD has very loyal customer base with that spend more the the avg BK customer.

 

[fishwrapper]

and this!!!

 

[BTExpress]

Under normal circumstances, I think the beancounters would suck it up and accept 5-10%.

But that hardly services the massive debt many companies carry. And therein lies the problem.

 

[RickStain]

Because you are hoping to buy the paper cheap and sell at some point down the road for a profit.

The CD comparison is not a good one. A better comparison would be if you could take the same money and invest in the stock of a company that is paying a dividend and show promise for higher stock price down the road.

Fast food restaurant chains such as Burger King and Yum Yum ( KFC / Taco Bell/ Pizza Hut) work on about 8% profit margin. The gold standard for fast food industry is McDonalds with 18% margins.

That is a better example.

Point is: Why would anyone invest in something as risky as newspapers for a 5% profit margin, when there are far more profitable investments out there with far less risk.

 

[Boom_70]

Under normal circumstances, I think the beancounters would suck it up and accept 5-10%.

But that hardly services the massive debt many companies carry. And therein lies the problem.

You hit the nail on the head there. True in many industries. Basic business model is a good one but the debt service is sucking the life blood out of the company.

This is why those who run a good business should not take the call when the investment bankers are on the other end of the line.

 

[fishwrapper]

Under normal circumstances, I think the beancounters would suck it up and accept 5-10%.

But that hardly services the massive debt many companies carry. And therein lies the problem.

This is the main issue. 5% profit margin will not carry the large debt service.
Anyone giving 5% loans to risky institutions these days? That would be -- best case scenario -- a loser. You would need 8-10% to service debt then 5% on top of that to attract any investor. That's 15% and we're back to our old model.

 

[somewriter]

Net income is measured after interest paid is deducted. However you're defining profit margin, it should be post-interest to be relevant.

 

[Boom_70]

Net income is measured after interest paid is deducted. However you're defining profit margin, it should be post-interest to be relevant.

EBITA ( earnings before interest and taxes) is what the bankers look at.