When considering profit margin for retail stores is it important to remember the difference between gross or net margin.
The gross profit margin is calculated by deducting the cost of the product from the amount it is sold for. For example, if a product is sold for $10 and was purchased from the manufacturer for $4, the profit margin is $6, or 60%.
Net profit margin looks at how much profit is left after all expenses have been deducted from sales. This will include overheads such as rent or staffing.
A good profit margin for retail varies greatly according to the type of retailer. Retailers such as supermarkets focus their strategy on high volumes of sales, but with a low margin on the products sold. The net profit margin of the large American retailer Wal-Mart is reported as just 1.6%, but it generates hundreds of billions in revenue.
A smaller store, which makes fewer sales but has larger margins built into their product pricing, may be more profitable. In general, net profit margins for retail are considered to be lower than for other businesses and are typically in the region of 1.5% to 3.5%, though can be up to around 5% depending on the category of goods sold.
Online retailers may have the lowest profit margins of all retailers, as the need to offer competitive pricing to attract customers can result in product margins being eroded. For example, for several years Amazon recorded net margins of less than 2%. However, the scale of their sales still resulted in large profits.
Retail profit margins can vary significantly over a period of time due to a variety of factors such as customer confidence. Some categories of retail such as electronics and clothing are mainly driven by discretionary spending, so if customers have limited funds or lack confidence to spend, these areas can swiftly be impacted by a fall in sales.
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