The new era in the economy and the business world has meant that all calculations have had to be made again. In a range of sectors from paints through pasta and automotives to white goods, firms are no longer enjoying the same profit margins and are trying to get used to falling rates. Moreover, companies which are pining for former margins are expecting even lower figures in the future. Firms are now beginning to prepare for higher productivity and to get used to living with these rates.
What Will Future Profits Be?
In the 1990s paint producers operated on profit margins of 20-25 percent. Price-focused competition and producers from the grey economy meant that in time they had to abandon a proportion of these profits. Today paint producers are trying to survive on margins which have fallen to less than 10 percent.
It is not only in paints, in many other sectors companies are being forced to abandon the high profits of the 1990s. The biggest sacrifices are in automotives and white meat where producers’ margins have fallen below 5 percent. In some sectors the tragic falls have sent the market players into shock. In the second half of the 1990s companies in the mobile telephone market were able to enjoy profit margins of over 100 percent. But today these players have been left with single figure margins.
In the intensely competitive detergents market, even if the decline has not been as steep as in mobile telephones, margins have dropped from around 40 percent to 10-15 percent. When we look at all the sectors overall we see that the bumper profits of the 1980s and 1990s are now in the past. Sectoral analysts expect the declines to continue in the margarine, furniture, cosmetics, mobile telephone, automobiles and white goods categories. In hotels and pasta, companies are expecting a small increase of 1-2 percent.
Automotives peaked in 2000
The 21st century has been a time when competition has really intensified on the domestic market in the automotive sector. The fact that the market is not saturated has motivated all the brands, and resulted in them staking out a place on the market with both competitive pricing and with the provision of more vehicles. Higher volume sales than in the past and the fierce competition on the market have condemned automotive companies to working with lower profits. Today the profit margins for primary producers and authorized retailers have fallen to 1-5 percent. There are even those who are selling at cost.
Analysts forecast that in the near future this rate may fall a little more. This will force primary producers and authorized retailers to focus more on efforts to reduce costs.
Fall to continue in cosmetics
In fact, the cosmetics market is one in which there is room for an increase in levels of consumption. But competition and consumer sensitivities regarding price are dragging down profits in the sector. In the mid-1980s the cosmetics retailing sector was working at profit margins of 25-30 percent. One should add that these margins varied from product to product. The sector succeeded in maintaining these rates through the 1990s. After 2001 the profit margin fell to 20-25 percent and remains at this level today.
A leading executive in the sector says that the decline will continue and adds: “There is a significant real decline in price levels on the market. There is no expectation of an increase in prices and, taking this into account, margins can be expected to fall to 15-20 percent.”
Cement profits causing concern
The cement market witnessed a lot of privatization in the period 1989-1994. This process naturally increased competition in the sector. While the sector was dominated by the state gross profit margins were around 50 percent. Despite the increases in productivity in the private sector, in 1998-2003 economic crises and earthquakes fuelled more intense competition. During this period capacity utilization rates also fell, dragging down prices from US$60 per ton to US$30 per ton. Uncoordinated increases in capacity after privatization also played a part in this decline. In recent months the local elections, demand from Iraq and falling interest rates have fuelled an increase in demand and raised prices to an acceptable level. Today the gross profit margins in the sector are around 10-20 percent. An expert from the sector said: “In the short-term the profit margins may remain at 15-20 percent. But, following the sale of factories belonging to the Uzans and the return to normal of temporarily inflated demand, net profit margins will stabilize at 8-12 percent.”
The mobile telephone market began to expand during the second half of the 1990s. The players really made the most of the benefits of it being a new market. At the time, profit margins on some goods were running at nearly 100 percent. The increase in competition, the market reaching a certain level of saturation and changes in technology had a marked impact on profitability. Sectoral analysts say that today the profit margins have fallen to 7-8 percent.
The photography market underwent a similar process to that in mobile telephones. In the period 1990-2000 overall growth and a competitive market economy had an impact on this market and there was a significant decline in retail profits. Today retailers are working on an average profit margin of 50 percent in films and 100 percent in processing and printing.
OSMAN DİNÇBAŞ / ERNST & YOUNG GENERAL MANAGER FOR TURKEY “THE ERA OF HIGH MARGINS IS OVER”
THE ERA OF SACRIFICE HAS BEGUN After 2001 there was a major fall in consumer demand throughout the country and a significant loss in terms of purchasing power, which eventually brought price increases almost to a halt. Manufacturers lost the ability to reflect increases in the cost of input goods to prices, and suffered falls in expected profit margins. Today, in order to survive in a competitive market and protect their position on the market, all sectors are having to make major sacrifices in terms of their margins.
HIGH BY WORLD STANDARDS Before 2001 margins were anyway extraordinarily high by the standards of other free market economies in the world. The crises which we experienced forced businesses to completely review all of their operations and put an end to these high profit margins. These crises created a low inflation economic environment and marked the end, never to return, of the era of high margins in Turkey.
WHICH ARE THE LUCKY SECTORS? From the point of view of profit margins, we believe that the companies which are relatively fortunate are mostly those selling niche products, those which use the latest technology or those which have analyzed their customer segment very thoroughly and adjusted their position accordingly. These may include organic foodstuffs, surgical technology products or tourism services targeted at rich tourists.