The retail sector may be the most diverse industry in the United States, encompassing everything from agriculture to automobiles to fashion accessories. Some retail sub-sectors, 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 0.5 to 3.5%.
Retail Margins by Sub-Sector
The most profitable retail sub-sectors by net margin 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 sub-sector.
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, due to cyclical consumer spending patterns.
Wal-Mart (WMT) is the world's largest retailer by far, but it generally only experiences a 3% net profit margin each year. 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; they make decisions quickly, and can often change their minds and return purchases without consequence. This means there is a relatively high price elasticity of demand for retail goods, which makes it difficult to raise prices.
Significance of Low Retail Margins
Walmart and Target (TGT) and to have a high sales volume to be successful, and they are known for their low-margin, high-volume sales strategy or business model. Similarly, for retail salespeople to be successful, they need to sell a lot of items, and must focus on constantly converting shoppers into paying customers; hence, the strategy of 'always be closing' (ABC).