Although a retail store’s typical initial markup on merchandise could be 40 percent or more, actual profitability takes into account all expenses, such as payroll, rent, utilities, insurance and advertising.
While large retail corporations usually have very slim profit margins (less than 2 percent in 2000), a small store typically needs a higher margin because of its lower volume.
A National Shoe Retailers Association (NSRA) survey, for instance, showed an average 3.5 percent net profit for independent shoe stores in 1999, the most recent year for which statistics are available.
But profitability varies widely from store to store. Expenses, not sales volume or initial markup, make the difference between stores with high and low profitability, the NSRA survey determined. Stores with high profitability spent only 38 percent of their total sales volume on expenses, compared to 45 percent for the low-profit group.
Higher expenses for rent and wages, for example, help explain why stores in traditional enclosed malls barely broke even in the NSRA survey, averaging 0.0 percent net profit.
“The difference in total expenses between the high and low groups has been consistent over the past 10 years,” NSRA said in its 2000 Business Performance Report assessing the 1999 survey data. “Developing a low expense structure seems to be a key to strong profitability.”
Clearly, keeping expenses under control is essential for increasing a store’s profitability. Here are some areas to target:
- Employee productivity:Payroll is typically a store’s biggest expense other than the cost of merchandise. Well-trained, motivated employees can increase sales, making the employer’s investment in them worthwhile.
- Utilities:Michigan’s new electric deregulation laws allow businesses to switch to alternative energy suppliers for lower rates.
- Loss prevention:Shoplifting, employee theft and credit card fraud directly impact a store’s bottom line. Implement effective loss-prevention measures to avoid getting burned.
Check with the Michigan Retailers Association for programs that save on such essential services as credit card processing, workers’ compensation insurance, electric bills and health and dental insurance. Contact the Association at 800.366.3699.
