A:

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 percent.

For example, Amazon (AMZN) has had a net margin of less than two percent for each year since 2010, but sports a market capitalization of over $600 billion.

Retail Margins by Subsector

The most profitable retail subsectors by net margin include the building supply and distribution retailers. Companies in these sectors often achieve average net margins around five percent, 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, due to cyclical consumer spending patterns.

Walmart (WMT) is the world's largest retailer by far, but it generally only experiences a three percent 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. This means there is a relatively high price elasticity of demand for retail goods, which makes it difficult to raise prices.

 

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