The growth of internet sales has had a negative impact on the profits and survivability of small retail stores. These small stores are having to deal with declining sales, rising rent costs and increases in labor expense, particularly as states pass laws raising the minimum wage. Making a profit is a challenge.
Gross profit margins and pre-tax profits have likewise been under pressure. Retailers in all types of industries have experienced declines in profits and have had to find ways to cope with the changing landscape.
What are the Important Financial Metrics for Small Retailers?
By looking at several financial metrics of a few types of small retailers, we can see the impact of online sales and rising costs on these businesses. Some examples of these metrics, according to 2018 data from The Retail Owners Institute, are as follows:
Gross profit margins
- Womens's clothing: 46.5 percent
- Jewelry: 42.6 percent
- Shoes: 44.3 percent
- Pet supplies: 43.6 percent
- Furniture: 45.0 percent
- Sporting goods: 38.6 percent
- Supermarkets and grocery: 28.8 percent
- Beer, wine and liquor: 26.3 percent
- Hardware: 37.4 percent
- Baked goods: 56.5 percent
Pre-tax profits
- Women's clothing: 2.9 percent (was 4.7 percent in 2014)
- Jewelry: 3.0 percent (declined from 5.4 percent in 2014)
- Shoes: 1.1 percent (down from 3.7 percent in 2014)
- Pet supplies: 4.1 percent (up from 3.4 percent in 2014)
- Furniture: 4.1 percent (was 4.0 percent in 2014)
- Sporting goods: 2.0 percent (down from 2.9 percent in 2014)
- Supermarkets and grocery: 2.0 percent (up slightly from 1.8 percent in 2014)
- Beer, wine and liquor: 2.5 percent (down slightly from 2.9 percent in 2014)
- Hardware: 3.5 percent (unchanged since 2014)
- Baked goods: 7.2 percent (up from 6.2 percent in 2014)
Inventory turnover times
- Women's clothing: 4.3
- Jewelry: 1.4
- Shoes: 2.4
- Pet supplies: 6.2
- Furniture: 3.5
- Sporting goods: 2.7
- Supermarkets and grocery: 14.7
- Beer, wine and liquor: 6.2
- Hardware: 2.8
- Baked goods: 57.5
Gross margin return on inventory
- Women's Clothing: $3.74
- Jewelry: $1.04
- Shoes: $1.91
- Pet supplies: $4.79
- Furniture: $2.86
- Sporting goods: $1.70
- Supermarkets and grocery: $5.95
- Beer, wine and liquor: $2.21
- Hardware: $1.67
- Baked goods: $74.68
What is the Average Gross Profit Margin for a Retailer?
The data reveals that the average gross profit margin varies by the industry. From this sample, supermarkets and grocery stores and beer, wine and liquor retailers are the lowest with 28.8 and 26.3 percent, respectively. Women's clothing and furniture stores are at the high end with 46.5 and 45.0 percent, respectively.
Baked goods stand out with a gross profit margin of 57.5 percent.
What about Pre-tax Profits?
The real picture of the condition of small retailers shows up in the analysis of changes in pre-tax profits.
The sample data shows that pre-tax profits over the past five years have been declining. Profits are down in women's clothing, jewelry, shoes and sporting goods. The others are basically unchanged or have small changes.
However, people love their pets and warm, fresh baked bread. Profits in pet supplies and baked goods are up.
How Has Internet Sales Affected Small Retailers?
Retail sales are a huge component of the U.S. economy, and the common belief is that the internet is putting small brick-and-mortar stores out of business. However, as noted in Forbes, even the online giant retailers are having a problem making a profit. The net effect of the increase in online sales is to put downward pressure on the profits of both the online giants and the small retailers.
All small retailers have a certain amount of fixed overhead expenses. Landlords expect rent payments every month. The utility companies want their payments for gas and electric. These expenses do not go down.
Any sales decline pushes small retailers' profits closer and closer to the break-even point or a loss.
How do Retail Businesses Make a Profit?
Consumers are more price savvy these days. They can compare prices on the internet and demand that local retailers match these prices. So, how do retailers react?
Some of the answers are in the figures for inventory management. Small retailers must know and understand their customers extremely well to adapt their product mix to the needs and desires of these consumers, set a competitive price and turn the inventory.
Take women's clothing, for example. These stores turn their inventory more than four times per year and earn a GMROI of $3.74. Pet supplies do even better, turning inventory turn slightly more than six times and earning a GMROI OF $4.79.
Being a small retailer is not easy, but it's not impossible to survive and make a decent profit.
FAQs
Generally, a gross profit margin of 5% is low in retail, while 10% is an average margin and 20% is considered a good margin. The average gross profit margin for retail businesses across the world is around 50%. It can reach 60% to 65% in the jewelry and cosmetics industries.
What is a reasonable gross profit margin for a small business? ›
What's a good profit margin for a small business? Although profit margin varies by industry, 7 to 10% is a healthy profit margin for most small businesses. Some companies, like retail and food, can be financially stable with lower profit margin because they have naturally high overhead.
Is 50% profit margin good in a small business? ›
Net profit margins vary by industry but according to the Corporate Finance Institute, 20% is considered good, 10% average or standard, and 5% is considered low or poor. Good profit margins allow companies to cover their costs and generate a return on their investment.
What is the gross margin in retail margin? ›
How do you calculate gross profit margin? First, subtract the cost of goods sold (COGS) from the net sales. Next, divide the resulting number by the net sales to calculate gross profit margin as a decimal. Convert the decimal to a percentage to find gross profit margin.
What is a respectable profit margin? ›
A net profit of 10% is generally regarded as a good margin for most businesses, while 20% and above is regarded as very healthy. A net profit margin of less than 5% is relatively low in most industries and can indicate financial risk and unsustainability.
What is a good profit margin for retail? ›
Profit margins vary greatly depending on store types. Generally, a gross profit margin of 5% is low in retail, while 10% is an average margin and 20% is considered a good margin.
What is a realistic gross profit margin? ›
But for other businesses, like financial institutions, legal firms or other service industry companies, a gross profit margin of 50% might be considered low. Law firms, banks, technology businesses and other service industry companies typically report gross profit margins in the high-90% range.
What is a good annual revenue for a small business? ›
In general, the average revenue is around $44,000 per year for a company with a single owner/employee. Two-thirds of these small businesses make less than $25,000 per year. Most of these businesses are based out of the home.
What profit margin is too low? ›
As a rule of thumb, 5% is a low margin, 10% is a healthy margin, and 20% is a high margin.
What is the difference between gross profit and gross margin? ›
Gross profit is the money left over after a company's costs are deducted from its sales. Gross margin is a company's gross profit divided by its sales and represents the amount earned in profit per dollar of sales. Gross profit is stated as a number, while gross margin is stated as a percentage.
What is the Average Markup Price? Since markup is the difference between the selling price and the cost of the product, there is no such thing as an average markup price. Rather, there is an average markup percentage–which is typically 50%.
What is retailer's expected margin? ›
It is the sale price of an item minus the good's cost, divided by the selling price, and then multiplied by 100. If an item has a sales price of $100 and the merchant paid $50 to acquire the item, the retail margin is 50%. A store must consider overhead costs, and this formula only calculates gross profit.
What is the gross profit margin of Walmart? ›
Walmart Gross Profit Margin (Quarterly): 24.81% for April 30, 2024.
What is a healthy profit margin for a small business? ›
But in general, a healthy profit margin for a small business tends to range anywhere between 7% to 10%. Keep in mind, though, that certain businesses may see lower margins, such as retail or food-related companies. That's because they tend to have higher overhead costs.
What is the rule of thumb for profit margin? ›
What is a Good Profit Margin? You may be asking yourself, “what is a good profit margin?” A good margin will vary considerably by industry, but as a general rule of thumb, a 10% net profit margin is considered average, a 20% margin is considered high (or “good”), and a 5% margin is low.
What is a fair gross profit margin? ›
A Good Gross Profit Margin is around 30 – 35% on average, but varies widely by industry. Refer to our averages listed in this post to determine if your business is tracking well with the competition.
Is 20% a high profit margin? ›
An NYU report on U.S. margins revealed the average net profit margin is 7.71% across different industries. But that doesn't mean your ideal profit margin will align with this number. As a rule of thumb, 5% is a low margin, 10% is a healthy margin, and 20% is a high margin.
Is 15 a good gross profit margin? ›
What is a Good Profit Margin? You may be asking yourself, “what is a good profit margin?” A good margin will vary considerably by industry, but as a general rule of thumb, a 10% net profit margin is considered average, a 20% margin is considered high (or “good”), and a 5% margin is low.
