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.
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.
Reducing costs by $2K for a grocery store with 2% profit margin equates to $100K in sales. If you were wasting 30% of your energy would you know it?#energymanagement #conveniencestores #groceryindustry #energyefficiency #sustainability #expensemanagementhttps://t.co/QMgOi0sPia pic.twitter.com/mIQq9kUDVm
— Resiliance Consulting (@resiliance_co) May 10, 2019
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.
— Piya Chaudhuri (@piya_chaudhuri) September 24, 2021
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%|
|Fresh fruits and vegetables||50%|
|Meat and Seafood||35%|
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.
— Debbie Parkhill (@debbieparkhill) July 26, 2014
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:
- Gross profit margin (Retail sales price minus the wholesale cost)
- Operating profit margin (Gross profit minus all expenses before paying taxes and before paying interest on any debt)
- Pre-tax profit margin (Gross profit minus all expenses before paying taxes)
- 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.
— Denver7 News (@DenverChannel) June 26, 2014
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.
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?