The retail sector is one of the most diverse industries in the U.S., 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 澳洲幸运5官方开奖结果体彩网:profit margins, but 澳洲幸运5官方开奖结果体彩网:net margins for the indu🦩stry tend to be low compared to other sectors. 

This is especially true for web-only retailers, which often see low net margins. For example, Amazon (AMZN) had a net margin of less than 2% for several years prior to 2018, but today commands a 澳洲幸运5官方开奖结果体彩网:market capitalization of $1.64 trillion and a net margin of around 3.62%. But what really is a good pr♔ofit margin for retailers? Below covers the points to take into consideration when valuing a company's m𒁃argins.

Retail Margins by Sub-Sector

The most profitable retail sub-sector by 澳洲幸运5官方开奖结果体彩网:net margin is usually the building supply retailers. Companies in these sectors often achieve average net margins of 8.40%, more than the average for the online retail sub-sector, which on average is 6%, which is still higher than many other retail sectors.

Certain markets, such as retail electronics and retail clothing, have to adapt to constant changes in consumer tastes. Due to cyclical consumer spending patterns, a company might be very profitable in the🐎 first quarter of the year and struggle during the fourth quarter.

Gap, for example, posted a net margin of 0.30% at the end of its quarter ending Oct. 31, 2023, right before the holiday season, and -1.29% for its quarter ending Jan. 31, 2023, after the holiday season the previous year. 

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 for retailers; however, one of the major reasons retail margins are relatively ♏low is most retail spending is purely discretionary.

Consumers can afford to be frugal and picky when it comes to discretionary items, as 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 diff♛icult to raise prices.

Significance of Low Retail Margins

Most major retailers that hope to be successful need to have a high sales volume. A low-margin, high-volume sales strategy has proved successful for companies like Walmart (WMT) and Target (TGT).

Walmart has a net margin of just 2.55% as of Oct. 31, 2023. It generated an income of $16.29 billion on extremely high revenues of $638.79 billion by being one of the largest retailers in the world.

At the same time, if a retailer can’t achieve some sort of scale and advantage that allows them to be profitable, like Walmart, they’ll ultimately go out of business, as so many companies have, including RadioShack, 澳洲幸运5官方开奖结果体彩网:Nine West, Payless Shoes, and Toys R Us.

The Bottom Line

Retailers generally have low profit margins due to the nature of their businesses. Online retailers tend to have higher profit margins than 澳洲幸运5官方开奖结果体彩网:brick-and-mortar retailers. In order to generate respectable profit margins, companies need to generate high sales, known as a low-margin/high-volume sales strategy.