A:

Some retail subsectors, such as high-end clothing and personal care retailers, can have famously high gross profit margins, but net margins for the industry are low compared to other sectors. Each year, the S&P 500 releases industry specific returns on equity and net margins, and each year the retail industry is among the least profitable. This is especially true for web-only retailers, which often see net margins as low as 2.50 to 3.50%.

Retail Margins by Subsector

The most profitable, by net margin, retail subsectors include the building supply and distribution retailers. Companies in these sectors often achieve average net margins around 5%, almost double the average for the online retail subsector.

Certain markets, such as retail electronics and retail clothing, have to adapt to constant changes in consumer tastes. One company might be very profitable in the first quarter of the year and struggling by the fourth quarter.

Walmart is the world's largest retailer by far, but it only experienced a 3% profit margin in 2014. To put this in perspective, it takes Walmart 30 days in a 31-day month to pay off its cost of merchandise, labor, taxes and other operating costs.

Why Retail Margins are Low

The Internet has made it easier than ever to compare prices and shop from around the world. Low-cost foreign competition has also made it tough on retailers. However, one of the major reasons retail margins are so relatively low is most retail spending is purely discretionary. Consumers can afford to be frugal and picky when it comes to discretionary items. This means there is a relatively high price elasticity of demand for retail goods, which makes it difficult to raise prices.

RELATED FAQS
  1. What has the retail sector evolved to its current structure?

    Find out about the retail sector, the size of United States and global retail markets and why online retailers are changing ... Read Answer >>
  2. What's the difference between profit margin and operating margin?

    Find out the differences between a company's gross profit margin, net profit margin and operating margin, and what each metric ... Read Answer >>
  3. What is considered a healthy operating profit margin?

    Operating profit margin is one of the key profitability ratios that investors and analysts consider when evaluating a company. ... Read Answer >>
  4. What is the difference between operating margin and profit margin?

    Understand the difference between operating margin and profit margin in relation to evaluating a company's profitability ... Read Answer >>
  5. How does the long-term outlook of the retail sector compare to the broader economy?

    Find out why the retail sector is primed for strong growth moving forward, especially online retail, and learn why it outperforms ... Read Answer >>
  6. What is the difference between operating margin and contribution margin?

    Understand the difference between two measures of profitability, operating margin and contribution margin, and the purpose ... Read Answer >>
Related Articles
  1. Investing

    A Look At Corporate Profit Margins

    Take a deeper look at a company's profitability with the help of profit margin ratios.
  2. Investing

    Consumer Spending As A Market Indicator

    What people buy and where they shop can provide valuable information about the economy.
  3. Investing

    The 4 R's Of Investing In Retail

    In retail, successfully managing return on investment (ROI) and other financial indicators is the key to a healthy business.
  4. Managing Wealth

    What's a Good Profit Margin for a Mature Business?

    How to determine if the amount you clear dovetails with the competition.
  5. Investing

    Jumping On Retail With ETFs

    Retail ETFs offer limited trading and investment choices, with two primary funds and a single illiquid leveraged fund.
  6. Investing

    Q1 Retail Earnings Could Collapse 6.8 Percent

    Earnings in the ailing retail industry are on track for their greatest quarterly decline in four years.
  7. Investing

    How Zombie Retailers Are Dragging Down the Industry

    Zombie retailers, which are living on the edge of bankruptcy, are undermining healthier retailers.
  8. Investing

    Retailers Slicing Jobs to Employment Bone

    The retail sector, which is expected to report dismal first-quarter results, is aggressively reducing its workforce to cut costs.
RELATED TERMS
  1. Profit Margin

    Profit margin is part of a category of profitability ratios calculated ...
  2. Marginal Profit

    Marginal profit is the profit earned by a firm or individual ...
  3. Margin

    1. Borrowed money that is used to purchase securities. This practice ...
  4. Profitability Ratios

    A class of financial metrics that are used to assess a business's ...
  5. Retail Industry ETF

    An exchange-traded fund that invests in companies whose main ...
  6. Operating Margin

    A ratio used to measure a company's pricing strategy and operating ...
Hot Definitions
  1. Stagflation

    A condition of slow economic growth and relatively high unemployment - a time of stagnation - accompanied by a rise in prices, ...
  2. Notional Value

    The total value of a leveraged position's assets. This term is commonly used in the options, futures and currency markets ...
  3. Interest Expense

    The cost incurred by an entity for borrowed funds. Interest expense is a non-operating expense shown on the income statement. ...
  4. Call Option

    An agreement that gives an investor the right (but not the obligation) to buy a stock, bond, commodity, or other instrument ...
  5. Pro-Rata

    Used to describe a proportionate allocation. A method of assigning an amount to a fraction, according to its share of the ...
  6. Private Placement

    The sale of securities to a relatively small number of select investors as a way of raising capital.
Trading Center