How to Relieve the Pinch

FEW things disturb U.S. business management more than an economic malady known as the profit squeeze, which is its way of describing lower profits on every dollar of sales--even when sales are rising. Last week managers and owners across the U.S. were voicing their concern over profit squeeze--and trying to bring it under control in ways both obvious and oblique. Second quarter 1960 profits for 721 companies surveyed by the First National City Bank of New York were 12% below the alltime-record second quarter of 1959 and down 4% in the first half as compared with 1959.

The reason for the squeeze, complain businessmen, is that the cost of labor, materials and services has risen, while increased competition at home and abroad prevents rises in prices. Says Mark V. Keeler, vice president of International Harvester Co.: "We just can't increase prices as fast as costs." Adding to the burden is a buildup of inventories early this year that have not been absorbed as quickly as expected. The squeeze has put its greatest pressure on such volatile industries as steel (profits 29% below 1959's first half), aluminum, railroads, farm equipment and autos, but it has affected nearly all industries.

Fighting the profit squeeze, companies usually begin with traditional weapons. The most obvious--if not always the wisest--is to lay off workers; the long-range version of the same device is the major cost-cutting transition to automation in U.S. industry. Last week the Union Pacific Railroad laid off some 1,200 employees in a move to reduce costs, and Dallas' Lone Star Steel Co. announced that it will lay off between 1,500 and 2,000 employees starting this week.

Though some firms also try to cut down on executive expenses and to weed out excess or unproductive management, the executive's usual penalty in times of falling profit margins is a pay cut. Douglas Aircraft Co. recently reduced salaries for all employees making more than $12,000 a year by 5% to 25%. After Merritt-Chapman & Scott omitted the quarterly dividend, Chairman and Chief Stockholder Louis E. Wolfson--who can well afford a pay cut--gamely announced last week that he will not accept any of his $100,000-a-year salary until profits pick up and the dividend is resumed.

The profit squeeze has led many firms to diversify in search of new sources of profits. Some retail jewelers are widening their lines to include typewriters, radios, stereo phonographs and small appliances. Shrinking profits have hit such giant food chains as A. & P., National Tea and Kroger, though some others have relieved the pinch by selling more and more items besides food. The Jewel Tea Co. chain (277 stores) has hiked its profits since it added high-profit-margin nonfood items--including brassieres.

To many a businessman, the best and most sensible way to live with the profit squeeze is to concentrate on increasing sales volume. Such heavy appliance makers as General Electric and Frigidaire. stuck with big inventories, have cut prices 5% to 12%. To increase sales while cutting costs, S. S. Kresge Co. (749 variety stores) has switched to supermarket check-out counters in 431 of its stores. Explains Kresge President Harry B. Cunningham: "We have accepted the idea of smaller profit margins even though we don't like it. The only answer is greater volume."

Many companies try to cut costs in small but effective ways that are overlooked in times of plenty. NBC Chairman Robert Sarnoff now has two secretaries instead of three. American Airlines, which had more than a 50% decline in first-half profits, has decided to re-use plastic dishes from its food trays instead of discarding them. Minute Maid Corp. tallies the length of all long-distance phone calls, gives a "Joe Blow" award to the longest-winded employee. Savings per year: $80,000.

Just how tight the profit squeeze will get before it eases is a matter of lively debate. Government economists expect an upturn in profits in the fourth quarter. But Ford Motor Co. Economist Dr. T. J. Obal, who believes the current profit squeeze fits the pattern of an economy in the second year of recovery from recession, thinks that "there will be further slippage." Chase Manhattan Bank Chief Economist Wil liam Butler says that the profit squeeze "is very serious as a long-term matter," argues that it will cause a decline in capital expenditures in 1961.

However long the profit squeeze lasts, it is not a new phenomenon to U.S. businessmen, who faced it in the 1957-58 recession and learned to live with it. Although a profit squeeze is a symptom of such major problems as foreign competition, automation and changing patterns of living, it can also be a sign that a company--or an industry--is growing sluggish and sloppy. Many of the moves that companies make to combat profit squeezes are moves that should have been made be fore to keep them trim and healthy. Thus a period of profit squeeze--like the measles--is not just an annoyance but a chance to build up a measure of immunity for the future.

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