What Is the Average Profit Margin on Retail?
As a retailer, you know that profit margins are important. But what is the average profit margin on retail? We take a look at the data to find out.
For our business, we need to make sure that we’re always aware of our margins. After all, it’s one of the key indicators of how well our business is doing.
What is a Profit Margin?
Before we learn what is the average profit margin on retail, let’s first define what a gross margin and net margin are.
According to the business mentor site, bizfluent.com, sales minus the cost to produce the goods you sell, is your gross profit margin.
In this example, the retailer’s annual sales are $985,000 while the cost of goods is $591,000, so the gross profit margin is $394,000.
As a percentage, the gross profit margin is equal to the gross profit divided by sales. In this particular case, the gross profit is $394,000 and the sales are $985,000, so the gross profit margin would be 40 percent.
And how’s the net profit margin doing?
According to businessdictionary.com, “a percentage of revenue remaining after subtracting all costs, including taxes, interest payments, and overhead.”
Net profit margins indicate better what retail business owners actually take home. This is because it takes into account the business expenses associated with running the business, such as the cost of goods sold, operating expenses, and taxes.
However, it is recommended that retailers are aware of their gross profit margins as they assist retailers in understanding how efficiently raw materials and labor are used to produce goods and services. This also allows for the tracking of profitability trends.
What Is the Average Profit Margin on Retail?
There are many different types of businesses in the retail industry, so it can be difficult to get an accurate sense of the average profit margin. However, it may still be helpful to look at how other businesses in the industry are doing.
The study found that retail stores that use Vend’s POS system saw a 9.4% increase in sales on average, as compared to stores that used other POS systems. Based on the study, it appears that using a Vend POS system can lead to a significant increase in retail sales.
The average gross profit margin of retail businesses is 53.33%.
Beverage manufacturers, jewelry stores, and cosmetics retailers tend to have higher gross profit margins than other types of businesses, such as alcoholic beverage stores, sporting goods stores, and electronics stores. On average, these retail businesses have gross profit margins of 65% or more. However, businesses in the latter category typically have a net margin of just over 35%.
Net margins are lower than expected.
According to Investopedia, the average profit margin for retail is typically from 0.5 to 3.5%.
The 2016 Deloitte study found that the average net profit margin for the ten largest retailers was 3.2%. This is lower than the average profit margins for many retail companies.
The average net profit margin for the ten largest retailers is 3.2%. The net profit margin for Wal-Mart is 2.9%, Costco is 2.0%, Kroger is 1.7% (Grocery Stores as an industry: 2.3%), Walgreens is 3.6%, Amazon is 1.7%, Home Depot is 8.4%, CVS is 3.0%.
Consider these other industries that have higher margins:
The retail and commercial banking industry sees an average profit margin of 24%. Restaurants see an average profit margin of 3-5%, though this number can vary based on the type of restaurant. The electronics sector has a profit margin of 6.7%, which includes semiconductors, technical instruments, circuit boards, photographic equipment, communication devices, and other electronics and computer equipment. Electrical equipment manufacturers have a profit margin of 7%.
Retail companies in these sectors often achieve average net margins around 5%.” Output: According to Investopedia, building supply and distribution retailers are typically more profitable than other retail sub-sectors, with an average net margin of around 5%.
The average company in these industries achieves a 5% margin.
How to Increase Your Profit Margins
Now that you know how much your retail competitors are making, let’s look at the specific ways you can increase your own profit margin.
Here are some ways to increase your retail profit margins.
1. Price increases
Prices don’t need to be increased across the board. You can increase the price of your most popular products by selectively raising them. This will increase your profit margins and add to your bottom line.
2. Limit the discounting
It is tempting to resort to discounts when you have to make a sale. Mark-downs can be a drain on earnings and don’t improve retailers’ profit margins.
Discounts can work but only when used sparingly. A quarterly promotions schedule is a good idea. In a post-Covid world, customers are less driven by safety than price. Limit the discounting.
3. Reduce waste
Are you looking to hire for jobs that your current staff could do, or are you considering hiring?
Consider the window washer. Is it really necessary to hire an additional person to do this job?
Even if you don’t have full staffing, you can do more with what you have. You’ll be rewarded with higher retail profits.
4. Retail employees should be scheduled according to your needs
Are you averaging three employees when you really only have two? Do you feel understaffed on Saturdays when you know you are always slammed?
You should ensure that your employees’ work schedules are in line with your store’s needs. You can save money, but you don’t want to lose customers to the competition because of poor service.
5. No overtime — Period
I’m not suggesting that you shouldn’t take advantage of your retail sales staff.
But, don’t allow high-cost hourly managers to fill in for hourly entry-level employees. Instead, hire salaried staff if you need them.
6. Schedule for your employees’ convenience
Do you want to learn a managerial skill that will increase your profits? You only need Vance for four hours. Schedule him for four hours even if he prefers to work eight.
Consider staggering shifts if your region is still severely affected by the pandemic. To improve profit margins, you must keep your doors open.
7. Merit-based awards for extra hours
Based on the average sales of employees (or the number sold per customer), you can grant more hours to employees.
Although I understand your desire to be a nice boss it’s better for the associate who helps you sell merchandise to be rewarded than to say yes every time you are asked.
8. When deserved, give bonuses
Pay bonuses should be proportionate to profits, not total sales. You might also reward Expressive or Driver salespeople — two personality types who use discounts to increase sales, effectively stealing your profit.
9. Match inventory to sales to avoid theft
A fully-featured POS system makes tracking what came in the back, what went out the front, and what went missing between them easily.
There are ways to get the software if you don’t have it. One example is a restaurant franchise that audits internal theft by matching the number of received cups to the number ordered.
10. Fire unprofitable customers
Every retail business needs a customer.
The one who requires all the help. The one who beats you up over price and calls you with time-consuming issues.
If your company is large enough you can ask your sales rep or order desk to list the top 10 complainers. Next, compare them with the number of lucrative orders they generate.
Even if they are able to deliver large volumes of products or services to your company, they must pass the profit test. If they don’t pass, tell them.
“While I value your business, the cost of managing your account is more important than the profitability. We must implement a price increase.”
So, what is the average profit margin on retail? Overall, the average profit margin for retailers is 9%. This means that for every $100 in sales, they make an average profit of $9. Of course, there will be businesses with higher or lower margins depending on their specific circumstances. But this gives us a good benchmark to work with.