16 Least Profitable Industries in the US
In this article, we will be taking a look at the 16 least profitable industries in the U.S. To skip our detailed analysis, you can go directly to see the 5 least profitable industries in the U.S.
The largest economy in the world by far, the U.S. has faced a turbulent 2022, along with most economies across the world, as rising inflation rates, and the subsequent consisting hiking of interest rates, has wreaked havoc on the global economy, with many countries, including the U.S., expected to enter a recession. While the most profitable industries in America in 2023 are expected to provide a boost to the national economy, the least profitable industries in the U.S. will need to work hard to improve profitability or else, in a slowing growth environment, major companies within the sector are likely to result in an absence of the going concern accounting principle.
According to EY's latest economic outlook for the U.S. in 2023, the country's economy is currently "unwell", and in all likelihood, improvement in the short-term seems to be unlikely. The outlook goes on to discuss some of the industries weighing down on the nation's economy, which include some of the least profitable industries in the U.S. The outlook goes on to say "With homes sales plunging 30% over the past year and construction activity following the downfall with a lag, the housing sector is likely to remain under significant pressure in the coming months. And while the recent decline in interest rates and easing home prices (especially in some of the hottest regional markets) could provide some support to potential home-buying activity, we should recall that housing affordability remains near its all-time low. Fortunately, the historically rapid housing correction occurred at a time when household leverage was near a 20-year low. As such, the current correction is not a repeat of 2008 when excess leverage and elevated credit risks combined into a broader financial crisis. With 80% of homeowners having locked in mortgages rates below 4%, the biggest concern for housing going forward is less of a credit risk than a lack of housing mobility and an elevated barrier to entry."
Meanwhile, this is the lowest level of business activity seen in the U.S. since May 2020, when the Covid-19 pandemic wreaked havoc across the global economy after forcing lockdowns and with many economies coming to a standstill as governments attempted to control the spread of the virus. Even though some positives were expected from China's reopening, none seem to have materialized so far and both, durable goods and shipment trades also falling. According to EY, it is likely that business investment will see a contract in Q2 2023 and even possibly in Q3 if things fail to improve.
EY goes on to say that consumer spending is still the backbone of the U.S. economy, and January statistics showed a very resilient consumer market, which has since been proven to be a false start as data from recent months started to come in. Spending has slowed down towards the end of Q1, which is likely to be partially offset by the good news that real income has rebounded to some extent in the last 8 months, though it is still well below pre-Covid 19 levels.
Meanwhile, some industries with really margins are also susceptible to facing going concern issues during a recession, which is especially relevant considering the current American economic scenario. Whenever a recession hits, banks bear the brunt of the chaos because of low capital levels and high leverage, leaving them high and dry, and often in the need of a bailout. According to the Federal Deposit Insurance Corporation, in the 2008 recession, 25 banks went belly-up, including Washington Bank, the biggest bank collapse in American history. In the next 3 years, 400 more banks collapsed. Moving on to 2023, two major banks collapsed after bank runs were made by clients, threatening a larger industry collapse, with a third major bank in First Republic not going under only after 11 major banks swooped in to save it with a $30 billion rescue.
Also, even though they're enjoying record profits off the back of a major energy crisis as a result of the global energy crisis, oil and gas companies are also generally unable to adapt to recessions, with one reason being that oil and gas distribution is one of the least profitable industries out there with razor-thin margins. This means that when the price of oil is impacted, oil companies are often unable to adjust to downward pricing pressure, which can often last for years after a recession.
Of course, a slowing economy has a major impact on investment decisions and businesses. With growth slowing for most companies even as inflation rises, many executives have started to focus on cost-cutting and managing expenses in order to protect operating margins. This has been particularly visible in industries which have seen a turbulent 2022, such as the tech industries where some of the biggest names including Meta Platforms, Inc. (META), Alphabet Inc. (NASDAQ:GOOG), Twitter and Amazon.com, Inc. (NASDDAQ:AMZN) have all seen major reductions in their workforce as a cost-cutting measure, with the latter's job cuts being particularly relevant as retail is one of the least profitable industries in the U.S. However, the tech industry is known for its high margins which is why it is seen to be more recession proof than traditional companies. On the other hand, traditional media companies generally tend to have lower margins, and with higher competition from tech companies, many are on the brink of bankruptcy and just a step away from irrelevancy.
However, one of the biggest industries in the world, and also among the least profitable industries in the world, is the airline sector, which has historically run on high volume and low margins. The Covid-19 pandemic threatened the existence of top companies in the airline sector, many of which are yet to return to profitability, leading to the Federal government issuing a $54 billion bailout to ensure the continuity of an industry which is integral for the success of many other sectors as well. On the other hand, the airline industry has taken advantage of pent up demand and significantly increased prices per passenger, which has led to much higher profits than expected.
Some industries whose profit margins have plummeted have seen this happen as a result of the Covid-19 pandemic with industries in the hospitality sector being particularly impacted. While recovery seems to be improving as things return to normal, with the World Health Organization also stating that Covid-19 is no longer a global health emergency, it will still possibly take years before profits return to pre-pandemic levels.
To determine the least profitable industries in the U.S., we relied on statistics generated by the New York University pertaining to industry margins in the U.S. We then ranked each industry based on its gross and net margins, assigning 70% weightage to the latter as that indicates the final profit levels. So, now, without further ado, let's take a look at these industries, starting with:
16. Aerospace/Defense
Gross margin: 16.69%
Net margin: 4.05%
We kick off our list with the defense and aerospace industry, which might be a bit surprising to see here considering governmental contracts are generally lucrative for such companies. However, ballooning costs of research, well in excess of the forecast often times, do tend to eat away into a company's margins.
15. Retail (Online)
Gross margin: 42.78%
Net margin: 0.64%
Online retail has always had razer-thin operating margins, which is why while Amazon.com, Inc.'s (NASDAQ:AMZN) majority sales may be derived from its online retail segment, most of its profits come from operations in other areas such as cloud computing.
14. Computer Services
Gross margin: 24.23%
Net margin: 2.53%
The computer services industry is generally divided into multiple parts including repair and maintenance and network support services. Some of the companies operating in this space include Arrow Electronics, Inc. (NYSE:ARW) and PC Connection, Inc. (NASDAQ:CNXN).
13. Retail (General)
Gross margin: 23.25%
Net margin: 2.35%
Retail is one of the biggest industries in the U.S., and yet, is also one of the least profitable industries in the U.S., and includes the biggest company in the world by employees and revenue as well in Walmart Inc. (NYSE:WMT). Retail margins have plunged in recent years, but according to Fitch, margins are expected to recover which in turn will offset lower volumes or retailers in the U.S. in 2023.
12. Furn/Home Furnishings
Gross margin: 26.38%
Net margin: 2.03%
The home furnishings industry is heavily reliant on consumer income and remodeling, which has taken a hit as consumer spending and disposable income has fallen as a result of higher inflation. Some of the companies involved in this industry include Bassett Furniture Industries, Incorporated (NASDAQ:BSET) and Ethan Allen Interiors Inc. (NYSE:ETD).
11. Reinsurance
Gross margin: 10.64%
Net margin: 3.54%
The reinsurance industry refers to companies which provide insurance to insurance companies, and include Reinsurance Group of America, Incorporated (NYSE:RGA).
10. Oil/Gas Distribution
Gross margin: 23.60%
Net margin: 2.08%
Many oil and gas companies, including some of the largest oil companies in the world such as TotalEnergies SE (NYSE:TTE), are vertically integrated in the oil and gas process, from exploration and extraction, to market and distribution. While the production and exploration industry in the oil and gas sector sees higher margins, distribution sees much lower margins. Despite this, many oil and gas companies have recorded their highest ever profits as a result of the European energy crisis resulting form the Ukraine war.
9. Retail (Grocery and Food)
Gross margin: 24.71%
Net margin: 1.96%
Several industries in the retail sector, including grocery and food, are among the least profitable industries in the U.S., which is why some of the largest grocery chains in the world including Albertsons Companies, Inc. (NYSE:ACI) and The Kroger Co. (NYSE:KR). Inflation has resulted in the prices of food and grocery items increasing significantly, but even then, in some instances, the entire increase in cost hasn't been passed on to consumers, resulting in a bigger cut in margins.
8. Trucking
Gross margin: 27.26%
Net margin: 1.29%
Even though truckers earn handsome salaries which many may not be aware of, the trucking industry is still one of the least profitable industries in the U.S. While the country's economy would be impacted heavily in case of a collapse of the industry, margins are still non-existent. Some of the companies operating in the U.S. in this industry include J.B. Hunt Transport Services, Inc. (Nasdaq:JBHT) and U-Haul Holding Company (NYSE:UHAL) among others.
7. Electronics (Consumer & Office)
Gross margin: 32.29%
Net margin: 0.54%
Consumer and office electronics include companies such as GoPro, Inc. (NASDAQ:GPRO), which is one of the biggest companies in the industry with a market cap of over $600 million in May 2023. The products of GoPro, Inc. (NASDAQ:GPRO) have gained significant popularity in today's world as vlogging has become a viable career choice for many, and these products provide the items needed to obtain success in this niche, especially for adventurous people.
6. Engineering/Construction
Gross margin: 13.92%
Net margin: 2.16%
Engineering and construction is one of the biggest industries in the world, and is integral to uninterrupted operations of many other industries, which is why when lockdowns were first eased, the biggest relief was provided to the construction industry. Some of the biggest construction companies in the world include Lennar Corporation (NYSE:LEN) which built nearly 60,000 homes in the previous year.
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Disclosure: None. 16 least profitable companies in the U.S. is originally published Insider Monkey.
