Will Wage Pressures Help American Companies Maintain Profit Margins?

| About: Dr Pepper (DPS)

There was a fascinating article in yesterday's New York Times about a strike that's occuring in a Mott's apple juice factory in upstate New York. Apparently, Dr. Pepper Snapple Group (NYSE:DPS), the plant's owner, wants to cut its employees' wages from an average of around $19/hour to the $14/hour rate more prevalent for comparable jobs in the area, despite the fact that the company is highly profitable and even recently raised its dividend.

According to the article, DPS's management isn't claiming that it needs to push through these wage (and benefit) reductions out of any sort of hardship, but simply because it feels it can get away with it in the current slack labor market, and thus enhance returns for its stockholders.

It will be interesting to see if this kind of wage pressure (actual pay cuts, rather than just "no increases") becomes more widespread. After all, an increasing amount of labor-- even of the highly skilled variety-- is now internationally fungible, thus providing U.S. employers with significant "pricing power" over many of their employees. If this does occur with greater frequency (and you can bet that every Fortune 1000 CEO in America read this article yesterday with keen interest), it may allow American companies to continue to have surprisingly good profits relative to their rather lackluster revenue figures.

Of course, increasing profits through cost-cutting (rather than growth) isn't a sustainable strategy; it may, however, allow the "upside earnings surprise" game to continue a bit longer than one might otherwise anticipate.

Disclosure: Short SPY, long SDS