Profit and Loss

Do Grocery Stores Use Markup or Margin?

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Margin refers to what percentage of a retail price is profit, whereas markup refers to what percentage a wholesale cost gets marked up to create the selling price. But do grocery stores use markup or margin?

Grocery stores use both markup and margin, most commonly using markup to determine the retail price of products and using margin to track bottom-line profit or loss.

I was a manager at Whole Foods for over twenty years, so let me clear up the confusion, as the above is just the tip of the iceberg.

In this article, we’ll explore what the profit margin in a grocery store is and why grocery store profit margins are low. But we’ll also check out how grocery stores set profit margins.

Let’s get started.

gro stores markup margin lg

What is the profit margin in a grocery store?

As a general rule, conventional grocery stores have a profit margin of about 2.2%. But natural, organic, and gourmet stores tend to have profit margins in the 5-10% range.

What I shared above are averages.

The reality is that different products naturally have different margins. Dry products, meat, produce…have varying margins, and they differ from store to store. So, grocery stores compute margins per product line and for the store as a whole.

It’s a very important number since it shows what percentage of its revenue a grocery store has been able to convert into profit and is usually represented as a percentage.

Now, a profit margin of 2.2% is not very impressive (in other words, it means a profit of 2.2 cents on every $1 revenue), but that’s the reality of the industry; especially when talking about so-called “conventional” grocery chains like:

However, while they may not make much gross profit, their pricing strategies mean tens of thousands of customers come in each week. So the sheer volume of customers combined with lower wholesale costs and low labor costs mean they still make a lot of money.

But smaller grocery stores, specialty markets, and natural food stores tend to have higher profit margins.  And your local grocery store, even with higher prices, likely doesn’t make nearly as much money as the big grocery stores.

Stores, as a rule, do not manufacture most of the products they sell. So, they are constrained by the prices they buy from manufacturers, and they also have to meet huge overheads.

Even the products that bear the name of the chain (what are called private label products) are made by a 3rd party; they just slap the store’s label on there.

But are grocery stores laid out in a way to maximize profits?

A recent article of mine offers you an insider perspective (seeing as I was a manager at Whole Foods for 20+ years). In it, I shared info about the most common areas of a grocery store and whether they’re designed to make you walk in a certain way. But I also share the most common grocery store terms.

Just click the link to read it on my site.

Why are grocery store profit margins so low?

Grocery store profit margins are low because of competition and wanting to get as many shoppers as possible to shop instead of going elsewhere. In many major metro areas, there are 2 or more grocery chains within a few miles of one another.

So competition is the main reason grocery stores have low margins, and a lower price on something.

Grocery stores are everywhere. A store can’t just decide to increase the prices of its products unreasonably because it knows that folks have an incredible number of choices. They would simply go to other stores.

A lot of customers are price-conscious. They are highly conscious of the options available as they can easily access the prices of whatever they’re interested in online. It’s a buyers’ market, if you will.

But there’s also the theory of the slow dime and the fast nickel.

Overall, many conventional grocery chains would rather get a smaller amount of money more quickly and frequently than stores like Whole Foods that would rather have fewer shoppers willing to pay more for higher-quality products.

And the driving force behind that concept is customer service.

If you have shopped in Whole Foods, you’ve likely encountered knowledgeable, passionate Team Members who are happy to talk about the products, make recommendations, and even get you a free sample.

In an Albertsons, Safeway, or WalMart, by comparison, you’re lucky to find anyone working there aside from the cashiers. And it’s pretty rare to have super-helpful and knowledgeable employees there.

So higher-end stores can offer better service by having fewer customers who are willing to pay more.

How do grocery stores set profit margins?

Grocery stores set bottom-line profit margins based on the anticipated mix of products in the overall sales as different categories will have different profit margins. But competition and demographics also factor into margin setting.

So, it’s something that requires a lot of planning, and it’s done at the corporate level for chain stores.

Demographics factor in as some stores cater to more affluent shoppers than others. And if income within a 5-mile radius is high and competition is low, you can bet the store’s profit margins will be higher than other stores.

But that being said, for nationwide chains, it would be uncommon to see different prices for the same product at 2 different stores in the same city.

As for categories, being able to project whether a new store will sell a lot of prepared foods (high margin, but also high labor costs) is crucial.

But if a store is more likely to just sell commodity goods (Heinz ketchup, Kellogg’s cereal, etc.), since those are traditionally low-margin items, they’ll have to find other ways to compensate.

Here’s a handy chart showing the typical margins for different categories in a higher-end grocery store.

Category Typical Gross Margin %
Dry goods (cereal, canned veggies) 35%
Milk, eggs, butter 30%
Frozen Foods 45%
Fresh fruits and vegetables 50%
Beer 21%
Meat and Seafood 35%
Prepared Foods 60%
Vitamins 55%
Bakery 48%

If you would like to know more about how to calculate margin and markup, you’re in luck because in a recent article, I offered a deep dive. I explained what retail markup is and what is the retail margin. But I also explained the difference between margin and markup.

Just click the link to read it on my site.

How to calculate margin

To calculate margin, deduct the cost of goods sold from the sales price. Then, divide the result by the sales price, and multiply by 100. For example, if the cost of an item is $20 and it’s sold for $40, its margin is 50%.

We arrived at the figure using ($40-$20/$40)*100.

In other words, margin percentage = (Sales price – Unit Cost)/Sales price x 100

We can see that margin is the cost of the product divided by the retail price. It reflects what percentage of sales price the profit is. In other words, when we sell a product for X amount, that fraction of X is our profit.

It is a very important ratio seeing as profit is our reward, right?

It shows what percentage of the total revenue we were able to convert to profit. And the higher, the better. Now, there are several types of margin, as it were. What we looked at above is the most basic form.

The types of profit margins are:

  1. Gross profit margin (Retail sales price minus the wholesale cost)
  2. Operating profit margin (Gross profit minus all expenses before paying taxes and before paying interest on any debt)
  3. Pre-tax profit margin (Gross profit minus all expenses before paying taxes)
  4. Net profit margin (Gross profit minus all expenses after paying taxes)

In a recent article, I explained in some depth what the profit margin is.

I looked at the different types of profit margins and how they work together, and I shared how taxes impact profit margin. But I also revealed why profit margins are very important for net income.

Just click the link to read it on my site.

How to calculate markup

To calculate markup, deduct the cost of the product from the sale price, and divide by the cost of the product. Then, multiply the result by 100. For example, if the wholesale cost of an item is $20 and it’s sold for $40. Its markup is 100 %.

We arrived at the figure using ($40-$20/$20)*100.

In other words, markup percentage = (Sales price – Unit Cost)/100 x 100

The markup calculation is the percentage of the profit that is your cost. Essentially, it’s the difference between the selling price of a product or service and its cost. It’s the premium over the cost of a product or service that provides the vendor with profit.

What is the average markup in different grocery store categories?

The average markup in different grocery store categories can vary greatly.

Generally, higher-priced items such as bottled water and organic produce have a higher markup than lower-priced items like milk and eggs.

The percent markup for produce can range from 10-50%, depending on the type of produce and whether it is organic or not. Prepared foods typically have a higher markup than other grocery items, with some prepared meals having a markup of up to 100%.

Variable costs also play a role in how much money is added to the bottom line.

For example, if the cost of ingredients for a prepared meal increases, then the price of the meal will also increase. This means that the store will make more money on that item due to the higher price. Or if their costs went up considerably and they raised their prices accordingly, their profit may actually just stay the same despite consumers feeling the pinch.

On the other hand, if there is an increase in competition for certain items, then stores may be forced to lower their prices in order to remain competitive.

In general, grocery stores are able to make a profit by marking up their products by an average of 10-20%.

However, this number can vary greatly depending on the type of product and its unit costs. For example, bottled water may have a much higher markup than milk and eggs due to its convenience factor and higher cost.

On the other hand, organic produce may have a lower markup due to its higher cost and limited availability.

Overall, it is important for consumers to understand how much money is being added to their bottom line when they purchase groceries from different stores. By understanding how much money is being added on top of the cost of goods, consumers can make more informed decisions about where they shop and what they buy.

This knowledge can help them save money in the long run by avoiding overpriced items or taking advantage of sales when possible.

How does markup determine the selling price?

The best way to determine the markup for a product is to use a markup formula.

This formula takes into account factors such as cost, demand, competition, and profit margins. By using this formula, businesses can calculate how much they should charge for their products in order to make a profit. Higher markups will result in higher prices, while lower markups will result in lower prices.

Higher markups can be beneficial for businesses because they allow them to make higher profits from their products.

However, it’s important to remember that higher prices may also lead to fewer sales if customers are unwilling or unable to pay them. Therefore, businesses must carefully consider their pricing strategy when setting their markups in order to maximize profits without sacrificing sales volume.

Lower markups can also be beneficial for businesses because they allow them to offer lower prices and attract more customers.

However, lower markups also mean lower profit margins since businesses are not able to charge as much for their products. Therefore, businesses must carefully consider their pricing strategy when setting their markups in order to maximize profits without sacrificing customer satisfaction or loyalty.

As I mentioned above, it’s the question of whether you would rather have a slow dime or a fast nickel.

Stores like Walmart (which have low profit margins) prefer the fast nickel. They keep labor costs low by not having enough staff, paying them fairly low wages, and having a lot of self-checkouts.

Stores like Whole Foods (which have higher profit margins) and other natural food markets understand the value in making their stores not only a destination but a place where customers connect with and want to hang out; not unlike Starbucks.

So they prefer (less so since Amazon bought them) the slow nickel approach.

Conclusion

In the article, we explored what is the profit margin in a grocery store and why grocery store profit margins are low. The food business is a complicated thing despite it being something almost 100% of us rely on.

But we also checked out how grocery stores set profit margins. Then, we looked at how to compute margin. Lastly, we wrapped things up by looking at how to compute markup. And we compared the often confused margin vs markup.

Where do you do your grocery shopping?

How Do Grocery Stores Make Money? (Insider Tips)

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If you’ve ever considered owning a grocery store, work in one, or are just curious, you may have wondered how do grocery stores make money?

As a general rule, grocery stores operate on a profit margin as low as 1-3%. So they make money by selling large quantities. They also try to minimize shrink (theft and spoiled products) and keep labor costs as low as possible, often by hiring more part-time employees (who get fewer benefits).

But there’s a lot more to grocery store profitability than just that. So let’s (as they say in The Princess and the Frog), dig a little deeper.

Grocery store profit margins are very low. Even so, owning a grocery store can be very lucrative.

But how exactly do grocery stores work? How much do grocery stores pay for inventory and what is the profit margin? What is the most profitable item in grocery stores?

I’ll answer all of these questions and more. Just keep reading!

How do grocery stores work?

Grocery stores, when staffed with the right people, run like a well-oiled machine.

Grocery stores provide a service. They don’t typically sell a product of their own unless they have a large prepared foods section.

Rather, they buy existing products from distributors for stocking their local stores to sell to customers. 

Once those products make it to the local store, it’s up to that store’s manager and team members to provide the services and resources that attract new customers and retain loyal ones.

Grocery store managers are responsible for all aspects of running the store. From supervising employees to maximizing profits.

They are the conductor of the orchestra if you will. If one part of the store falls apart, the rest of the store suffers.

In turn, if the store doesn’t have a good leader, the whole thing falls apart. So the manager is responsible for not only keeping the team together but the store running smoothly.

Grocery store managers are responsible for hiring and training employees.

They look for employees that can be trained to be the best in their department. And they also communicate with their employees to discuss potential stocking issues, answer questions, and address any staffing needs.

Lastly, they also need to think about what makes a good grocery store.

Good grocery stores have decent parking, even when the store is busy. They also have nice, wide aisles and competitive prices. They have properly staffed checkouts and an atmosphere that makes you want to hang out and shop.

There is so much that goes into running a good grocery store, and how they work.

It really can’t be properly addressed in one section of an article. So I wrote an entire article on how to run a successful grocery store!

To read all about what it takes to run a successful grocery store, read this recent article.

Just click the link to read it on my site.

Are grocery stores profitable?

Most large grocery chains earn between 1-2% net profit whereas specialty grocers including Whole Foods Market typically earn between 5-12% net profit.

So they can be profitable. But margins are low and there is a lot of competition.

You probably think about Publix, Whole Foods, or even Walmart. Typically, when you think of a chain of any kind of store, you probably think they make a lot of money.

And those conventional chain stores are pretty profitable. But not in terms of a profit margin; just gross dollars.

In fact, conventional grocery stores only make 1-2% bottom-line profit. Compared to other kinds of businesses, that’s pretty low.

But as I mentioned stores like Whole Foods Market may actually generate a 5-12% profit.

However, for small independent grocery stores, 1 to 4% is more typical. There are also a lot of factors that affect independent owners more, such as marketing, product costs and shrink.

Because smaller markets sell so much inventory, typically don’t give out free samples, or usually have an in-house butcher, 1-2% profit margin is pretty good.

Think about it this way.

If the average Safeway does $1,000,000 in sales per week, that means $20,000 per week profit, max. That adds up to a little over a million dollars profit per year for that one store.

Smaller mom and pop stores might be closer to 10-12% profit margins, but they likely won’t do as much in sales, which means much lower profit.

There is a lot more to talk about when it comes to the profitability of grocery stores.

To read more, check out this recent article. In there, I go a lot deeper into how to maximize profits for a grocery store, and the one thing that will almost assuredly tank a store’s profit.

Just click the link to read it on my site.

What is the most profitable item in a grocery store?

Here are the Top 10 most marked-up items in a grocery store:

  1. Prepared Foods
  2. Vitamins
  3. Bodycare
  4. Fresh coffee
  5. Reuseable shopping bags
  6. Cheese
  7. Deli meat
  8. Produce
  9. Bulk Foods
  10. Frozen Foods

But trying to figure out how much to price a product and how much profit you can make when you sell it is tricky.

And this is kind of a tricky question.

The items with the highest retail markup will bring in the most profit per item. But, if you only sell one or two of those items, it won’t be very profitable.

On the other hand, markup can be lower if you are selling large quantities of items, resulting in a higher profit dollars.

The way grocery stores typically make a profit is by selling volume. So selling more of a lower priced item at higher volume will bring in more profit than selling one or two items with a higher markup.

I know the difference between markup and margin is confusing.

To read all about the differences in profit margin and markup, and how to calculate them to make the most profit, just read this recent article.

Click the link on my site to read the article, and hopefully take away some of the confusion.

For this example, I’m going to talk about the single most profitable item with the highest markup.

Bottled water and alcohol.

Alcohol typically has a 25% markup where other items are only 5-10%. (source)

Bottled water is marked up significantly, too. It takes about $1.50 to make 1,000 gallons of water. A single bottle of water may cost anywhere from $1 to $3, making it very a very profitable grocery item. (source)

But most of the profit made by grocery stores comes from volume. Canned goods, produce, lunch meat – the things that people purchase regularly are what’s going to keep money coming in.

How much do grocery stores pay for food?

Grocery stores often operate on a gross margin between 25-35%, meaning that the cost of their goods is often between 65-75% of the price they are charging.

But without looking at their books, there is really no way to know exactly how much grocery stores pay for their inventory. 

There’s also a big difference between a Dollar General and Whole Foods Market.

Because grocery store mark up is pretty low, you can rest assured that grocery stores aren’t paying much less than their customers. They also take hits that customers don’t always see.

For example, if a grocery store pays 60 cents for a can of beans and sells it to you for $1.00, they’ve made a gross profit of 40 cents. 40 cents for every can of beans sold, sounds great, right?

Well..that’s not exactly how it works.

Gross profit is the amount of profit a store makes before any expenses have been deducted.

For example, if our can of beans was dented and couldn’t be sold, you’d have to eat that cost, unless the vendor gave you credit for it. Most distributors give stores a flat percentage to cover damage losses rather than allowing them to return every item for full credit.

But grocery store profits are much more complicated than our simple bean example.

To read more about how profitable grocery stores are, read this recent article.

Just click the link to read it on my site.

What is the profit margin on grocery stores?

Profit margins, a commonly used term that has to do with describing the profitability of a business. A profit margin represents what percentage of sales a business has turned into profit.

In other words, and to put it even more simply, a profit margin shows how many cents of profit a business makes for each dollar of sales. And that number is typically represented as a percentage.

Conventional grocery stores have a profit margin of about 2.2%, making them one of the least profitable industries in the US.

But they make their money by selling in large volume and multiple locations. However, stores in natural, organic, and gourmet niches tend to see bottom-line profit margins closer to 5-10%.

But there’s a lot more to know about grocery store pricing and profit margins.

To read more about how grocery store profit margins and how they maximize profits in a competitive industry, read this recent article. I even get into some of the display techniques designed to subliminally get you to buy more.

Just click the link to read it on my site.

Final Thoughts

Grocery stores may not have very large profit margins, but they do a pretty good job of making money.

Let’s face it – people have to eat. As such, there will always be a market for supermarkets. It takes a lot to run a grocery store. From having the right people, to how the store is laid out, and even the general atmosphere.

All of these things are taken into consideration when determining how grocery stores make money.

Are you planning on owning your own grocery store?

 

What is the Profit Margin for Grocery Stores?

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Grocery stores are everywhere: from the small, family-owned market on the corner to the grocery store giants with locations all over the world. It’s clear that the grocery store business can be profitable and sustainable, but what is the profit margin for grocery stores?

Conventional grocery stores have a profit margin of about 2.2%, making them one of the least profitable industries in the US. But they make their money by selling in large volume & multiple locations. However, stores in natural, organic, and gourmet niches tend to see bottom-line profit margins of closer to 5-10%.

But there’s a lot more to know about grocery store pricing and profit margins.

So in this article, we’ll explore margins and markups. But also, how a company like Safeway or Kroger might have different profit margins than a Whole Foods or Trader Joes. Ultimately, we’re answering the question of what is the profit margin for grocery stores.

Time to get down to business!

What Are Profit Margins?

Let’s understand why grocery stores have the profit margins they do. That way, you’ll have a basic understanding of what profit margins actually are and why they’re important.

You’ll also want to know a little bit more about how grocery stores operate as a business. Let’s walk through both aspects before getting into the actual profit margin for grocery stores.

Profit margins are a commonly used term that has to do with describing profitability in business. A profit margin is the number that represents what percentage of sales a business has turned into profit.

In other words and to put it even more simply, a profit margin shows how many cents of profit a business makes for each dollar of sales. And that’s typically represented as a percentage.

There’s actually a lot more that goes into it than just that, though. So let’s dive in a little further.

The Different Types of Profit Margins and How They Work

There are actually different types of profit and profit margins that all blend together. The types of profit margins are:

  1. Gross profit margin
  2. Operating profit margin
  3. Pre-tax profit margin
  4. Net profit margin

All of these types of profit tie in together. But the most commonly used and perhaps the most significant type of profit margin is net profit margin.

If you are confused about the difference between markup and margin, relax. MANY people are confused between the 2. I have a recent article that breaks down both AND shows you how to calculate either one. I also give you a handy chart that shows up number by number what margin a certain mark up is.

Just click the link to read it on my site.

How do all these profit margin types tie together?

Think of it like this: a company has a product in its store that it makes a sale on. When the company takes in the revenue from that sale, it has to pay the direct costs of buying that product.

What’s left after paying the direct costs of the product is the gross profit margin.

For example, if you buy an apple for 50 cents and sell it for $1.00, your gross profit is 50 cents or a 50% gross profit margin.

Next, the company needs to pay its indirect costs, like advertising. Once indirect costs are paid, what’s left is the operating profit margin.

The company will also need to pay other expenses, like debts and charges. Once those are paid, what’s left is the pre-tax margin.

How do taxes impact profit margins?

Like all retailers, grocery stores pay both state sales tax and they pay payroll taxes for their employees.

45 states plus Washington DC have a state sales tax. Sales tax is sometimes paid monthly, quarterly or maybe even annually depending on state law and sales volume for the company.

Payroll taxes are mandated on the Federal level. But they too could be due daily, weekly, monthly, or quarterly depending on the amount of money due.

Once a company has paid taxes, what they’re left with at the bottom line is called the net profit margin.

Net profit margins show the company’s profitability after every other expense has been paid, really showcasing the profitability of the company. This is why net profit margins are so commonly used and important.

Whole Foods Market, where I worked as a leader for 2+ decades was fond of doing things differently than many other companies.

So with them, we really only focused on gross profit and net profit. And for them, net profit was where ALL expenses, from marketing, labor, rent, utilities, etc were all deducted from the gross to give us a bottom-line profit.

Why Profit Margins Are Important

Why are profit margins so important? If a company is making money, it shouldn’t really matter, right? Actually, no.

Profit margins are very important because they are indicators of important aspects of a company, like growth potential, management skill, and (of course) financial health.

Profit margins are used by not only businesses themselves, but they’re also used by investors and creditors, which are extremely important in business. Investors and creditors may use the profit margins of a business in order to decide whether to invest in it or lend to it.

Ultimately, though, if a store generates a lot of sales, but can’t manage to have a bottom-line profit that is a positive number, they will eventually go out of business unless that can turn that around.

If a store goes out of business, it doesn’t just affect the owner either as every business has multiple stakeholders or people who are impacted by the decisions being made by the owner. Here are all the people that could be affected if a store closed:

  • Employees – Who would have to find other employment. In this interim, they will be forced to slow or stop spending on their personal needs altogether, affecting other retailers in the process
  • Customers – Who will have to find another grocery store to shop at. If the new store is further away, that’s less convenient, can use more gas in their car, and could cut into their time spent shopping in other stores, again affecting other retailers
  • Product Vendors – The people who sold their products to the store will clearly feel the hit as their sales will go down unless they find other markets to sell to. Depending on how busy the store was that closed, or if we’re talking multiple locations, the vendor may have to lay off employees of their own

So as you can see, poor decisions by the owner of a grocery store can negatively trickle down and affect dozens, if not hundreds of other people.

Why Are Grocery Store Profit Margins So Low?

We briefly described this at the beginning of the article, but grocery stores actually have a very low profit margin.

When you look at successful big grocery store chains and companies like Kroger, Publix and Albertson’s, you probably can’t help but wonder how they’re so successful if they have low profit margins.

Let’s take a look at that.

Conventional grocery store chains have an average profit margin of about 2.2%. This means that for every dollar of sale a grocery store has, they make 2.2 cents of profit.

The main reason grocery profit margins are so low, especially for conventional grocery stores is competition.

There are 38,307 grocery stores in the US according to Statistica. That’s literally 1 store for every 5,459 adults over age 18. Now to be fair, 5,459 sounds like a lot, but it really isn’t when you consider a lot of us just shop once per week.

Now we’re talking only 779 people per day in a store. If that store opens at 8 am and closes at 10 pm, that’s only about 55 people per hour shopping; relatively small.

So with all those stores, and people being more price-conscious than ever and the ability to see many store’s prices and specials on their smartphones, grocery stores have to be way more competitive now than ever before.

Because of those low margins, grocery stores are still considered one of the least profitable industries in the United States due to their low profit margins.

It’s not uncommon at all for grocery stores to have a low profit margin and to make a profit of cents or less on the dollar.

However, grocery stores can be and are still successful despite lower profit margins. So if you’ve ever wondered whether owning your own grocery store is profitable, it can be! I have a recent article which breaks that down. I even cover start-up costs and everything you need to understand to get going.

Just click the link to read it on my site.

How Grocery Stores Can Still be Successful With Slim Profit Margins

Grocery stores have a slim profit margin.

So, how can they still be successful and make money? The key comes down to several factors, like volume, and being able to spread administrative and corporate expenses across multiple stores.

Sales Volume and Labor Costs

Larger grocery stores like Kroger or Albertson’s can have a smaller profit margin than small “mom and pop” grocery stores, a local market or a company like Whole Foods.

The reason for that is two-fold:

  • They have hundreds of stores to share corporate administrative costs across
  • Many of those stores do upwards or over a million dollars a week in sales, so even 2% can be a large amount of money at that volume

Whole Foods, by comparison, is not a small company really. That’s even truer since Amazon bought them. But they actually only have 500 stores currently (there were only 5 when I started with them). By comparison, Kroger has 2,800 stores.

The other key difference, and why Whole Foods profit margins tend to be a lot higher is service.

You can walk into a Whole Foods and maybe talk to a wine person who might actually be a real sommelier. Or you can talk to a butcher. You can also go to the nutrition area and get a detailed plan on how to get started on a master cleanse.

In Kroger or most conventional grocery stores, you’re lucky to find anyone to talk to aside from the cashiers. Conventional grocery chains can operate on lower margins because they typically use significantly less labor.

And it makes sense. How much customer service do you really need to buy Cheetos and Folgers coffee?

So smaller companies or natural and gourmet shops with a heavier focus on customer service have to operate on high profit margins to survive and to cover their increased labor costs.

What they typically sacrifice in doing that is sales volume.

Final Thoughts

In this article, we took an in-depth look into the world of grocery stores.

We examine how they price their products and how they make their money. But we also explored how a small mom and pop shop or a gourmet market or organic supermarket might have different margins than the mainstream convention grocery stores.

Ultimately we answered the question what is the profit margin for grocery stores.

Is Owning a Grocery Store Profitable? (Not always Here’s why)

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As a store manager for years, I someday dreamed of opening my own store. But I always wondered, is owning a grocery store profitable?

Conventional grocery stores make 1-2% bottom-line profit, but stores like Whole Foods Market may generate 5-12% profit. However, for small independent grocery stores, 1 to 4% is more typical. There are also a lot of factors that affect independent owners more, such as marketing, product costs, and shrink.

But, there’s a lot more to know about independent grocery stores, start-up costs, margins, markups, and profit.

After all, while I ran million-dollar stores for Whole Foods Market for well over a decade, having that corporate support behind me gave me a level of support that’s just not there for small independent grocery store owners.

Large chains benefit from having the buying power of hundreds of stores behind them. That gets them quantity discounts on purchases that the mom-and-pop owners just can’t get. Smaller operations also have increased marketing costs since they are promoting generally 1 store instead of dozens or hundreds.

So in this article, we’re exploring everything there is to know about grocery stores and whether or not starting your own is a good idea. Specifically, we’re exploring is owning a grocery store profitable.

Let’s get going!

What is the typical profit margin for a grocery store?

First, let’s define the terms so we’re both talking about the same thing.

Gross profit is simply what you sold an item for minus what you paid for it.  If you sold a can of beans for $1.00 and bought it for 60 cents, you made 40 cents gross profit.  Net profit deducts a number of other expenses.

For instance if, in that case of 12 cans of beans, one was dented and couldn’t be sold, unless you can get the vendor who sold you that to give you credit, that’s your loss. You report that as what’s called shrink or spoilage.

Deduct all the expenses associated with selling that can of beans and you’re left with the net profit or the bottom line.

Next, we have to recognize there’s a difference between Safeway, Albertsons, or Kroger (depending on which part of the country you live in) compared to a Whole Foods, Wegmans, Sprouts, or Dean and Deluca.

The typical “conventional” grocery stores operate on lower profit margins.

The reason for that is simple; they want to sell more items for a lower price. Those types of stores don’t have as many employees walking the aisles handing out free samples or giving cooking tips. And those grocers also don’t usually have a butcher in-house who can trim up that brisket for you either.

So they can get by on fewer employees and lower profit margins. Generally speaking, these types of mainstream grocery stores can get by on 1 to 2 percentage profit margins. In other words, 1 or 2% of the total store’s sales would be profit.

If the average Safeway does $1,000,000 per week, that means $20,000/week profit per week, max, or $80,000/month and a little over a million dollars profit per year.

Whole Foods, on the other hand, where I spent more than 20 years of my life, typically (and this is before Amazon bought them) might operate as low as about 5% for a larger more complex store like the company flagship I opened in downtown Austin.

But smaller, more straightforward stores might be closer to 10-12% bottom-line profit margins.

Bottom-line profit is after all expenses including wages, taxes & insurance, and all other costs associated with running the store are taken out.

What is the average markup in a grocery store?

Margin is what percentage of the sales price your profit is, whereas markup is what percentage of your cost the profit is. Basically 2 sides of the same coin. Different, but related.

Also, understand that different departments in a grocery store mark things up differently.

I go into much greater detail about the differences between margin & markup and how to calculate both in a recent article. Don’t worry, I explain exactly how a 15% markup is only a 13% margin. Just click the link to read it on my site.

It’s also important to think about how products get into your shopping cart and how much that might be marked up every step of the way. First, there’s a manufacturer who made the product. They make the product and allow a distributor, sometimes called a wholesaler, to sell their product for them for a cut.

The distributor, essentially the middle man between the company who made the item and the grocery store selling it, marks up the product about 15% before selling it to the grocery store.

The grocery store then marks up, on average, about 12% (10.5% profit).

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How different departments mark up differently

As I mentioned, different departments mark up differently in a store. There are 3 main factors which impact why a department might mark up higher or lower compared to another:

  • Labor costs 
  • To be competitive on price 
  • Shrink

In other words, a full-service food operation like you see in Whole Foods, with a sandwich station, pizza oven, hot and cold bars spends a lot of money on paying all the employees who work there. They also throw away a lot of food at the end of the night, so they have high labor and high shrink.

Generally, a department like that might use 100% markup (50% profit) to help cover all those costs.

Then in a category like general merchandise (toilet paper, charcoal, pet food, etc), especially if there’s a Wal-Mart or Dollar General down the street, they may use much lower markups. After all, those products get damaged less, expire less, and generally have much lower shrink and labor costs.

So they might only mark up 10-20% (again depending on whether you’re talking about a Whole Foods or a Safeway).

Some of those figures are courtest of Integra Systems, Inc. while others are from my own knowledge of the industry.

How much does it cost to start a grocery store?

There are, of course, a lot of little costs associated with starting a grocery store.

But generally speaking, you can expect to spend upwards of $500,000 to open a small to medium-sized grocery store.

The big expenses would be:

  • Rent or mortgage
  • Attorney fees (for everything from leases, permits, etc)
  • Taxes (both sales and payroll)
  • Insurance
  • Refrigeration equipment
  • Cash registers/POS systems and software
  • Shopping carts
  • Equipment (hand-trucks, forklift, pallet jack, etc)
  • Shelving (both retail and in your back room)
  • Labor costs (wages, including your own)
  • The wholesale cost of the products you sell

Some of these are obviously recurring monthly fees and others are larger one-time expenses.

Much of the above expenses will also have to be spent before you even open your doors. So you need to have enough working capital (money in the bank) to pay these expenses before you start making any money.

From a tax standpoint, the larger one-time expenses might get depreciated over the life of the product.

In other words, if you buy $6,000 of grocery carts (1 cart can easily cost $150), those will hopefully last you 7 years or more. So from a business expense tax write off standpoint, you’d deduct an equal portion of that on your taxes each year over 7 years.

How do you calculate grocery store profit?

This part is easy. You start with your sales at the top and then subtract out all your expenses below that.

Some companies might call this a P&L (profit and loss statement). Whole Foods, fond of making up its own names for everything, called this a margin report.

What’s left at the bottom is your net profit (or loss); your bottom line.

Here’s an example of the types of expenses that might get subtracted from your gross sales:

 OCCUPANCY EXPENSES  SALARIES & BENEFITS  OTHER EXPENSES
 Rent  Salaries  Supplies
 Repairs & Maintenance  Payroll Tax  Cost of Goods Sold
 Security  Insurance  Marketing
 Property Tax  Benefits  Bank Charges
 Utilities  Employee Expenses  Utilities
 Property Insurance    Depreciation, Amortization

Just subtract all those (and any other) expenses you have from your total sales and that’s your gross profit. Many companies go off of a “fiscal period” rather than a calendar month.

This is because a fiscal period is exactly 4 weeks, whereas a month is sometimes 28 days and other times 31 days, making it hard to compare apples to apples.

So decide if you want to track your P&L monthly or by fiscal period.

If you use a fiscal period method, you will end up with 13 periods per calendar year. But no matter what method you choose, be consistent, and follow that system each and every time you calculate your profit and loss.

How much does a grocery store owner make?

I can tell you as a salaried Store Team Leader for Whole Foods Market, I typically made in the low 6 figures annually. I got paid an hourly wage (but was salaried and did not clock in) plus I got a quarterly bonus.

Whole Foods currently lists $99,000 as the average annual salary for it’s Store Team Leaders. But unless things have changed a lot with Amazon, that sounds low and probably isn’t including any bonus.

However, an independent grocery store owner’s pay can fluctuate quite a bit more than a corporate lackey such as myself.

After all, as the sole owner, there’s no corporation to back you up and if your store isn’t profitable for 1 or more fiscal periods, there aren’t hundreds of other stores making a profit to balance that out like there are with corporations.

Done right though, your earning potential could be multiple hundreds of thousands of dollars per year; maybe as high as $300,000/year.

But there’s a lot that goes into being able to make that kind of money. Things like the following can impact that dramatically:

  • Location
  • Competition
  • Your ability to build a loyal tribe
  • How well you treat your employees (who then serve your customers)

Interestingly, there’s 1 business model that’s a hybrid of being a solopreneur and just another faceless employee for a large corporation.

That’s with a franchise.

A franchise such as the one offered by Grocery Outlet Bargain Market gives owner-operators the freedom and flexibility to run their own stores and keep a decent chunk of the profits while also giving them a certain level of corporate security and systemization.

I have a recent article that breaks down their program and whether or not it’s worth it. I go into everything from earning potential to how they split profits, including the 1 thing that would probably prevent me from wanting to do it.

But they do have some owner-operators making $300k/year, so for some, it’s a great opportunity.

Final Thoughts

In this article, we took a look at the world of starting a grocery store and how profitable that might be.

We examined how grocery stores mark up products and what kind of bottom line profits are typical. We examined start-up expenses, typical costs, and even what expenses would typically show up on a P&L statement. And how unexpected things like a power outage might affect your perishable items if you don’t have a backup generator.

Ultimately, we answered the question of Is owning a grocery store profitable?

How to Calculate Markup and Margin for Retail

by

Trying to figure out how much to price a product and how much profit you can make when you sell it is tricky. But after 20+ years in retail grocery, here’s what I’ve learned about how to calculate markup and margin for retail:

Margin is the percentage of your sales price that is profit. Markup is the percentage of the profit that is your cost. To calculate markup subtract your product cost from your selling price. Then divide that net profit by the cost. To calculate margin, divide your product cost by the retail price.

But there’s a lot more to know about markups and margin. You’ll want an easy way to calculate both on the fly, and you’ll want to understand both the difference, but also how they relate to each other.

So in this article, we’re taking the mystery out of it. We’re also steering clear of talking like your accountant. That way you can understand in plain English exactly what you need to do; simply and easily.

Let’s get going!

What is a retail markup?

Let’s say you buy a product from a warehouse for $1.00. That’s called your wholesale cost.

Whatever price you decide to sell it at is called your retail price. How much more your retail price is compared to your cost is considered your markup. Usually, this is shown as a percentage.

So markup, broken down as simply as I can state it, is what percentage of the profit your cost is. If something costs a buck and you sell it for 2 bucks then you have 1 dollar of profit. Since both your cost and your profit are 1 dollar, that’s a 100% markup.

In other words, you simply doubled your cost to come up with your retail sales price.

What is a retail margin?

Margin, while similar and related to markup, is altogether different.

If markup is the percentage the profit is of the cost, margin is what percentage of the sales price the profit is. So in a way, it’s the same thing in reverse.

Let me explain. No, there is no time. Let me sum up. (sorry, old guy Princess Bride reference).

Again if you buy something for 1 dollar and sell it for 2 dollars, we know that’s a 100% markup. But for margin, since we marked up the price by 1 dollar, and we sell it for 2 dollars, the profit (1 dollar) represents exactly half of what we’re selling it for. Or a 50% margin.

Most retailers would LOVE to make a 50% margin, so just know that I used simple numbers to make the math easier.

In many cases in a grocery store or other retail environment, you’re likely not seeing margins that high.

What’s the difference between markup and margin

As I just explained above, markup is what percentage of your cost the profit is.

By comparison, margin is what percentage of the sales price your profit is. So they are related and are all based on the same set of numbers. But they are both different (but important).

Here’s a handy chart to help explain the difference and show some examples:

Markup Margin
15% 13%
20% 16.7%
25% 20%
30% 23%
33.3% 25%
40% 28.6%
43% 30%
50% 33%
75% 42.9%
100% 50%

Some people say “sales cure all”.

What they mean by that is if you can find ways to drive an increase in sales, a lot of your problems go away. Where that saying falls a little short or perhaps is naive, is that you have to be driving those sales on a solid financial foundation of systems for setting, tracking, and monitoring things like sales, costs, and shrink.

Otherwise, you’re likely going to find you grow your problems too.

How do you calculate retail markup?

So again, in our example, you buy something for $1.00 and let’s say you sell it for $2.50. That means you marked it up $1.50 from what you paid for it.

That $1.50 we made on top of our cost is called the gross profit.

It’s called “gross” profit because there are expenses involved in running a store that gets subtracted before you know the bottom line. The bottom line profit, after expenses are deducted is called the net profit (more on that below).

As I mentioned, typically markup is shown as a percentage. The percentage of markup represents what percentage of the profit your cost is.

So to calculate the percentage we want to see the profit divided by the cost.

To make it really simple, using our examples, we’ll divide the gross profit ($1.50) by the cost ($1.00). Doing that simple math, we get 1.5%. To look at that math backward, you would simply multiply 1.5 times your cost to figure out what you want to sell the item for.

But in this example, you have a 1.5 markup.

So if your retail store is pretty consistent, in what you buy and sell and you mostly sell a lot of the same kinds of items, you can decide what markup might make sense for you, and just use that every time you price your items.

Where it gets more complicated is when your store sells a wide variety of items, such as a deli section, fresh meat or seafood, or vitamins.

Those categories typically have very different markups both because stores have to be competitive on price with other stores, but also due to what’s called spoilage. Spoilage is when you buy something and it goes bad before you can sell it. Generally, the more perishable an item (like meat, seafood, produce), the higher the spoilage.

So often the markup takes a certain amount of spoilage into account to ensure the store isn’t losing money.

How do you calculate the selling price and margin?

As noted author Stephen Covey says, “Begin with the end in mind”.

In other words, let’s figure out how much money we need to keep the store running, and then work backward. A typical large grocery store might want a gross profit of about 40%. But also bear in mind that the higher the sales, the lower the profit percentage can be.

By that I mean if your store sells $80,000 in products each week, and you have 25 employees, you could probably sell $100,000 in 1 week before you have to hire additional people. In other words, there isn’t a 1 to 1 correlation between expenses, sales, and profits.

But if we want a 40% gross margin, that means, as we explained above, the margin is what percentage of the retail price is the profit. If we know our product cost (let’s stick with the $1.00 example) and we know we want the profit to be 40% of the selling price,

So now we know the why behind how to figure out what margin to set prices at. Let’s do the math.

Let’s say we know we want our small grocery store to hit a gross profit margin of 40% (which is not uncommon).

That means we want the cost of the products we are buying to not be more than 60% of what we are selling it for.  So if we know we want to sell a product at $2.00 because that’s what the competitors sell it for, then we know we want our cost to be at or under $1.20.

If you can hit those numbers, your gross margin will be at or better than 40%. But let’s look at it in reverse. Let’s say we know it costs 1 dollar. 

How much do we mark it up to get to a 40% margin?

Simply take 100-40 (for the 40% margin). Then express that answer as a decimal (.6%). Now divide your cost ($1.00) by that .6%. The answer is $1.67. That is the retail price you should sell a product for if you bought it for $1.00 and want to make a 40% margin.

Want a different margin? Do the exact same math substituting your target margin where I used the 40.

What’s the difference between gross profit and net profit margin?

Gross profit is simply what you sold something for minus what it costs.

Going back to our 1 dollar example, if we buy for 1 dollar and sell it for 2 bucks, the gross profit is $1.00. Net profit, however, takes other expenses into account. Sometimes people call this “bottom line”.

In other words, if you’re running a small grocery store, you not only have to pay for the product, but you also have other expenses like:

  • Rent
  • Utilities
  • Wages for your employees
  • Insurance
  • Marketing costs (website, advertising, discounts)
  • Skrink (products that go bad before you sell them and have to be thrown away or donated)

You might think you’re doing great marking something up 25%, but when you get done subtracting all your costs at the end of the month, you might find that your net profit is a negative number.

While we, as retailers don’t want to be greedy and we do want to sell our products at a competitive price, if we can’t keep the doors open, we are ultimately failing not only ourselves but also our employees and the community we serve.

That’s why we have to balance all the needs and come up with a fair price for our products. That’s also why an average grocery store might shoot for a gross margin (gross profit) store-wide, of 40%.

Because once you’re done subtracting all the expenses, you’ll be lucky if that leaves you 6% net profit.

Final Thoughts

In this article, we took a look at the world of profit margin and retail markup.

We explored how the 2 relate, but also what the difference is and how to calculate each one. We examined how the price you set effects the margin. And we broke it all down in plain English; no accounting degree needed!

Ultimately, we answered the question of how to calculate markup and margin for retail.