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Grocery stores have always provided an important service to consumers. But in the midst of COVID-19, grocery has emerged as one of the most important industries in the world—and one of only a handful of industries deemed “essential” and allowed to remain open and operational through the pandemic.
But even essential businesses need to mind their bottom line—and even though people are shopping at grocery stores now more than ever, it’s still important for owners and managers to have a clear understanding of their profit margins.
Let’s take a look at the average profit margins for grocery stores—and how to calculate the profit margin for your retail store:
What is a profit margin?
First things first—before we jump into average profit margins in the grocery industry (and how to calculate yours), let’s quickly touch on what, exactly, profit margins are.
As a grocery business, you stock a variety of items—and then sell those items to your customers at a retail price. The sum of what you sell to your customers is your store’s total sales.
But not everything that you sell is a profit. As a business, there are a huge variety of costs you incur in order to actually sell those products to your customers, from the cost of purchasing the goods for sale to overhead costs to taxes. And those costs impact how much of your total sales your business actually gets to keep.
That’s your profit margin. It’s the amount of your total sales your business actually pockets as profits—or, in other words, how profitable your grocery store is after you account for the costs of doing business.
There are two categories of profit margins you need to know about: gross profit margin and net profit margin.
Gross profit margin is the amount of money made off each product sale after you factor in the cost of goods sold (also known as COGS). The calculation for gross profit margin looks like this:
(Total Sales – Cost of Goods Sold) / Total Sales
So, for example, if you buy a bag of rice from your supplier for 25 cents and then sell that same bag of rice to a customer for $1.50, your gross profit for each bag of rice sold would be $1.25—or a gross profit margin of 80 percent.
But gross profit margin doesn’t take into account all the other expenses involved with running your grocery store, like operating costs, taxes, and marketing and advertising costs. So, that $1.25 isn’t your actual profit.
Net profit margins is the amount that’s left over after you factor in all of your business expenses—or, in other words, the percentage of your sales your business actually gets to keep.
The calculation for net profit margin looks like this:
(Total Sales – COGS – Business Expenses) / Total Sales
So, for example, let’s say your grocery store sold $100,000 worth of products last month. If your cost of goods sold was $50,000 and your total business expenses were $45,000, your net profit would be $5,000—or a net margin of 5 percent.
To summarize, your net profit margin is how much money your business profits after you take into account the costs of operating your retail store, including cost of goods sold, rent, utilities, taxes and any other operating costs.
But what do profit margins typically look like for grocery stores?
Average grocery store profit margins
Grocery stores operate on slim profit margins. In 2017, the average net profit for grocery stores was 2.2 percent. That means for every dollar in sales, grocery stores made 2.2 cents in profit. (Profit margins for specialty grocers, like natural food stores, can be slightly higher.)
2.2 percent isn’t a huge profit margin. But where grocery stores typically make their money is in volume.
Just about everyone shops at the grocery store. And while there are definitely people who stop by the grocery store to pick up a stray item or two, most grocery shoppers buy a high volume of products during their visit. (This is even more true during the COVID-19 pandemic, when people are stocking up to avoid multiple trips to the store.) So, when you have a high volume of shoppers buying a high volume of products, that 2.2 cents on the dollar adds up, driving significant profits for the business owner.
How to calculate the net profit margin for your grocery store
As a business owner, you want to have a comprehensive understanding of your business’ profitability, including your gross profit margin. But your net profit margin is what really gives you the full picture of your grocery store’s profitability. It provides deeper insight into your growth and sustainability and can help you determine any changes you need to make in order to make your business more profitable and sustainable—making it one of the most important figures to your grocery store’s financial health.
So, how do you calculate the net profit margin for your grocery store—and how can that help you build a better profitability strategy for your business?
Again, the net profit margin formula looks like this:
(Total Sales – COGS – Business Expenses) / Total Sales
So, let’s say you’re trying to calculate your net profit margins for YTD. Your sales are $500,000, your cost of goods sold is $250,000 and your total business expenses are $250,000. In that scenario, you’d just be breaking even—and your net profit margin would be 0.
But even though that situation is discouraging, understanding each component of your net profit margin can give you helpful insights into what steps you can take to make your grocery store more profitable. So, for example, you might look to bring your COGS down by negotiating with your suppliers or researching new vendors. If you were able to get your COGS down to $225,000, you would increase your net profit margin from 0 to 5 percent. Or you might raise retail prices for your customers, increasing your total revenue—and, in turn, increasing your profit margins.
The point is, understanding your net profit margin will give you a clear picture into the financial health of your grocery store and give you insights into how to improve that health by making your business more profitable. So, as a business owner, it’s important to keep your finger on the pulse of your grocery store’s profit margins—and adjust your strategy based on your company’s profitability.
Grocery stores are essential—now more than ever
Grocery stores have always provided a valuable service—but that service is even more important now, as we navigate the COVID-19 pandemic and stay-at-home orders. And now that you know how to calculate profit margins for your grocery store, you have all the information you need to make sure your business stays profitable as you continue to provide essential support to your community.