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Supermarkets and grocery stores have low profit margins. The average profit margin grocery stores generate ranges from one to three percent. That’s because they sell off their products at almost the same price they buy from suppliers.
While it seems like they’re barely making sales, they do. Grocery stores sell in volumes. They depend on customers shopping for more than one item to make their profit. This is how they recover the money they spend on buying or making their products.
For example, most shoppers don’t just buy one item. They usually have numerous items on their shopping list. E.g., fresh produce, toiletries, medicine, etc. So the probability of a customer walking into the store to buy one bottle of mustard is low.
In the following sections, you’ll learn more about the average profit margin grocery stores generate. We’ll also explain what a profit margin is.
What is the profit margin of grocery stores?
A profit margin refers to the percentage at which a business’ profit surpasses its expenses or costs. In this case, it is the money a grocery store makes from selling items. The original price of acquiring those goods from suppliers is then deducted. The result is the profit margin.
For example, Walmart spends $2 on each mustard bottle from suppliers. Then Walmart sells off the mustard at $2.50 per bottle. The profit margin here is $0.50.
As aforementioned, grocery stores have a profit margin ranging from one to three percent. So if you’re considering running your own grocery business, these figures can be discouraging. Especially if you need a business that’ll rake in lots of money fast.
Why is the profit margin for grocery stores so small?
Competition is a major reason why grocery stores have low profit margins. Grocery stores provide basic necessities and more. E.g., food, clothing, health and sanitation materials, etc. Because of that, there is high demand for their services.
Now, grocery stores are everywhere trying to profit from this traffic. In the United States alone, there are over 38,307 stores. If you’re a grocery store owner, you’d understand how tough it’s going to be competing with such numbers. To beat the competition, most grocery stores lower their prices to attract customers. E.g., Aldi, the cheapest grocery store in the USA.
27% of customers agree that price influences their purchase decision. If the prices of items in your stores are on the high side, they won’t hesitate to leave for another store that sells them cheaper, even though your store is closer to them. Why spend double the price when they can go to another store with the same product and spend less?
Why is profit margin so important?
Profit margin calculations are essential to grocery stores. They help the store analyze, measure, and determine its growth.
You can tell if you’re making a high or low profit from the profit margin calculations you make. If you discover you’re barely making enough, this insight will help you make informed decisions.
That includes changing or improving your store or services to boost sales and increase profit. It will also help you decide if you need to increase your prices or reduce expenses.
Profit margins help grocery store owners assess investments in products. They typically use inventory management systems or software to monitor product movements in and out of their warehouses and stores. The software can tell the owner how many units have been sold and how much income he has generated.
Every product in the grocery store is an investment. The store owner bought them to resell at a higher price. So he expects a higher return than what he initially chipped in.
If a product brand is not selling out fast, the inventory management systems will help the store owner know that. This is possible because Inventory Management Systems integrates with the store’s sales channels. This allows it to collect and store customer order or purchase data.
By viewing this data, the store owner will know when to replace products with new ones. In other words, profit margins influence product purchase decisions within grocery stores.
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Irene is a Freelance content writer who helps professionals and startups build an audience with original content online. She has written over +100 articles, and is backed up by 3 years experience. She loves gaming and listening to music, while she’s not tapping furiously on her laptop.