Declining profit margins reflect tough times

Press Release

30 March 2012

Declining profit margins reflect tough times

Overall profits of New Zealand’s small and medium sized privately held businesses fell by more than a quarter last year, according to a study completed by accounting firm Grant Thornton New Zealand Ltd.

A panel drawn from Grant Thornton New Zealand’s 5000+ SME clients identified key leading indicators of business performance. These showed that while revenue grew by 6.7%, compared with 2010 figures, overall profits fell by 27.7%.

Grant Thornton Partner Paul Kane says the rising cost of sales, which increased by 12%, is the major cause for this decline in profits.

“Businesses are struggling and are attempting to generate sales through price reduction which is having a detrimental effect on the profit margin,” he says.

The business panel showed profit levels in the retail trade sector dropped by a massive 76.1%, while revenue and cost of sales increased by 8.3% and 118% respectively.

“The recent profit plunge announced by Kathmandu shows that this kind of thing is happening throughout the country,” says Kane.

Kathmandu’s first-half profits declined by 43%, which the company has blamed on lower gross margins and higher costs.

Wholesale trade was the only sector within the Grant Thornton panel to report a rise in profits (7.1%) which Kane says is most likely due to improvements in the buying currency, as many businesses within this sector import goods.

The Briscoe Group, which recently reported a record net profit among a struggling retail sector, also imports a number of their goods.

The company announced a profit increase of 27% against the previous year while annual revenue grew by 4.5%.

Briscoe Group Managing Director Rod Duke is reported as saying that the constant focus on inventory management and cost control are two reasons for the company’s strong profit growth.

The overall figures from Grant Thornton mirror the economy which showed nominal GDP growth at 6% and an overall production price increase of 5.3% in 2011.

Kane says: “While the data from the Grant Thornton panel is only indicative, it gives us a feel for a number of industry-wide performance indicators and is well ahead of other business statistics.”

He also says it is important to note that despite profits having fallen, most businesses were still profitable in 2011.

“This is a good sign and a reason to be hopeful for 2012,” he says.

ENDS

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