Gross profit percentages of major retailers range from the 'teens' to approaching 50%. The margins,
of course, are average markups included in the each retailers average sale dollar. For example, 40% margin indicates that goods that are bought for $60 are sold to consumers for $100. A 25% margin means that same item is being sold for $80.
Years ago, high gross margins were retail's holy grail. We'll remember that it was common, for example, for the many department stores, furniture stores, and all the rest to buy, say Jones of NY blouses for $20, ticket them for $60, and hope to average $35. Some customers would pay full price, and many would buy at 20%, 30% or 50% or more 'off'. Same with furniture, jewelry, shoes, everything. Book stores marked books that cost 4$ to $10... toy stores had similar pricing.
Wall St analysts loved it, newspapers and other advertising venues loved it, investors loved it - at least while it lasted. The 'losers' of course were consumers... maybe not the near-full-time clearance shoppers who scoured the racks and discount outlets, but everyday consumers.
Toys-R-Us was an 'early adapter' of the shift away from this. At a gathering of Wall St analysts, a Toys exec elicited an audible gasp from the group when explained that his dropping gross profit margins would hopefully be reduced further, and that Toys-R-Us passed the cost reductions it was achieving along to customers.
Walmart of course did this better than anyone... reducing the cost of getting product from manufacturers into its customers hands....killing even Toys-R-Us with better cost reduction execution than Toys ever dreamed.
Looking at the gross margins in the earlier post on this thread, it's helpful to also look at earnings. Despite its high gross margins (high markup), Saks has lost money, both last quarter and ttm. Sears also lost money last quarter. JCPenney's earnings were less than 1%. Target and Walmart each made money (4% +/-) for the quarter and YTD...suggesting among other things that Target's cost structure requires that it consistently be able to achieve its 7% to 8% pricing (gross profit) differential over Walmart. That's fine as long as Target can provide enough product differentiation so customers pay that premium. But if both are selling the same item and price is a factor, Walmart has a serious cost advantage. These reported margins indicate that an item that cost each retailer $6 item will sell for $8 at Walmart and $9 at Target, for each to make their few dimes on it.
Costco's margins are remarkable. We'll remember that simplistic ad that Fool ran for months, suggesting they've identified Walmart's nemesis (Costco, as those of us who took the bait to log on discovered). Costco can certainly get goods from manufacturer to consumer cheaper than Walmart or anyone else, on a dollar basis. But of course Costco won't replace Walmart. Walmart customers, of which there are huge numbers, can't afford Costco. Walmart customers live paycheck to paycheck - something Walmart is quite unapologetic about - it's a huge portion of the population, here and abroad. The Walmart customer can afford the can of food this week, not the whole case. Costco's $30 package of four steaks or $12 jar of nuts might be a good deal, but it's not in the Walmart customer's weekly budget. There's a place for both - and a much larger customer base wordwide for Walmart. Both have proven, however, that being the low cost distributor to the customer is critical..and that all things being equal, customers won't pay for expensively built stores or inefficient operators.
There will always be room for niche retailers, but unless they have a truly unique product that can't be replicated, they have no protective 'moat'. Who doesn't know that A+F, despite Jeffries' efforts, hangs on the fashion whims of kids. Like so many before it, it's a desirable brand until its perceived as not. And there's nothing anyone can do to stay of top of the wave when it's passed. And they have no cost advantages - a hurdle anytime, but deadly in a recession. There's nothing inherently compelling aside from their ability to source 'must have' goods this season that people will pay a premium to buy.
of course, are average markups included in the each retailers average sale dollar. For example, 40% margin indicates that goods that are bought for $60 are sold to consumers for $100. A 25% margin means that same item is being sold for $80.
Years ago, high gross margins were retail's holy grail. We'll remember that it was common, for example, for the many department stores, furniture stores, and all the rest to buy, say Jones of NY blouses for $20, ticket them for $60, and hope to average $35. Some customers would pay full price, and many would buy at 20%, 30% or 50% or more 'off'. Same with furniture, jewelry, shoes, everything. Book stores marked books that cost 4$ to $10... toy stores had similar pricing.
Wall St analysts loved it, newspapers and other advertising venues loved it, investors loved it - at least while it lasted. The 'losers' of course were consumers... maybe not the near-full-time clearance shoppers who scoured the racks and discount outlets, but everyday consumers.
Toys-R-Us was an 'early adapter' of the shift away from this. At a gathering of Wall St analysts, a Toys exec elicited an audible gasp from the group when explained that his dropping gross profit margins would hopefully be reduced further, and that Toys-R-Us passed the cost reductions it was achieving along to customers.
Walmart of course did this better than anyone... reducing the cost of getting product from manufacturers into its customers hands....killing even Toys-R-Us with better cost reduction execution than Toys ever dreamed.
Looking at the gross margins in the earlier post on this thread, it's helpful to also look at earnings. Despite its high gross margins (high markup), Saks has lost money, both last quarter and ttm. Sears also lost money last quarter. JCPenney's earnings were less than 1%. Target and Walmart each made money (4% +/-) for the quarter and YTD...suggesting among other things that Target's cost structure requires that it consistently be able to achieve its 7% to 8% pricing (gross profit) differential over Walmart. That's fine as long as Target can provide enough product differentiation so customers pay that premium. But if both are selling the same item and price is a factor, Walmart has a serious cost advantage. These reported margins indicate that an item that cost each retailer $6 item will sell for $8 at Walmart and $9 at Target, for each to make their few dimes on it.
Costco's margins are remarkable. We'll remember that simplistic ad that Fool ran for months, suggesting they've identified Walmart's nemesis (Costco, as those of us who took the bait to log on discovered). Costco can certainly get goods from manufacturer to consumer cheaper than Walmart or anyone else, on a dollar basis. But of course Costco won't replace Walmart. Walmart customers, of which there are huge numbers, can't afford Costco. Walmart customers live paycheck to paycheck - something Walmart is quite unapologetic about - it's a huge portion of the population, here and abroad. The Walmart customer can afford the can of food this week, not the whole case. Costco's $30 package of four steaks or $12 jar of nuts might be a good deal, but it's not in the Walmart customer's weekly budget. There's a place for both - and a much larger customer base wordwide for Walmart. Both have proven, however, that being the low cost distributor to the customer is critical..and that all things being equal, customers won't pay for expensively built stores or inefficient operators.
There will always be room for niche retailers, but unless they have a truly unique product that can't be replicated, they have no protective 'moat'. Who doesn't know that A+F, despite Jeffries' efforts, hangs on the fashion whims of kids. Like so many before it, it's a desirable brand until its perceived as not. And there's nothing anyone can do to stay of top of the wave when it's passed. And they have no cost advantages - a hurdle anytime, but deadly in a recession. There's nothing inherently compelling aside from their ability to source 'must have' goods this season that people will pay a premium to buy.
