In the competitive world of retail, profitability is the ultimate goal for any business owner.
But what are the most profitable retail businesses? And just how profitable are they?
In this article, we will delve into the average profit margins of brick-and-mortar retail stores, explore the most lucrative retail shops with high profit margins and EBITDA, and provide insights into how to boost your bottom line.
To understand profitability in retail, it’s crucial to examine the average profit margin for brick-and-mortar stores in particular, as the profitability of similar e-commerce stores can often be extrapolated from that.
Profit margin is a key indicator of any business's financial health. It measures the percentage of revenue that the business owner keeps in their pockets after deducting all expenses, including overhead like payroll and rent, as well as interest, taxes, depreciation, and amortization.
According to Investopedia, average retail profit margins are between 0.5–3.5% across all industries and sectors. And a 2016 Deloitte study found that average retail profit margins stood at 3.2% nationwide.
In fact, some of the biggest publicly traded retailers in the country had shockingly low net margins a few years ago (although some have improved their bottom line since then):
Profit margin is a key indicator of any business's financial health. It measures the percentage of revenue that the business owner keeps in their pockets after deducting all expenses, including overhead, interest, taxes, depreciation, and amortization.
Various factors contribute to the profit margin of a brick-and-mortar retail business. These include the cost of goods sold (COGS), operating expenses such as rent, utilities, and staff wages, as well as pricing strategies.
While profit margins can vary, certain retail businesses have consistently proven to be highly profitable.
One way to try and measure the most profitable type of retail business is by looking at the profitability of retail businesses by sector. According to Employers.com:
This little slice of data isn’t too surprising. But it does show the vast discrepancy between what certain types of retail brick-and-mortar businesses can command in terms of profit margins as opposed to others.
Of course, you’re probably not that interested in the profit margins of banks (got a couple million to invest into your own bank and a team of lawyers to protect your interests?) or large household name-brand electronics distributors.
You’re more interested in what small retail shops can generate, right? Fair enough.
Statista has really interesting data on gross profit margins by industry. While this isn’t the same as net profit margins (which is what most people mean when they say “profit margin”), it’s still very revealing:
When looking at just gross profit margins, the same sectors infamous for having low net profit margins actually look like they aren’t hurting too badly for cash (at least as a measure of COGS).
Of course, gross profit isn’t the entire picture, but these numbers lead to an interesting observation: if you can keep rent (e.g., you own the building the store is in) and payroll (e.g., headcount) low, you can run a really profitable specialty food & beverage or cosmetics business.
Last but not least—these numbers don’t take into account services-based brick-and-mortar businesses like specialty healthcare clinics or cosmetic dentistry (more on this later).
With a strong demand for skincare, makeup, and personal care products, beauty retailers enjoy healthy profit margins. This is due to the high markup on beauty products, as well as the brand loyalty and repeat purchases common in this industry.
Think about all of those Korean beauty products that sell like hotcakes in every salon across the country—as well as how low COGS actually is for those products.
Another highly profitable retail business is the specialty food & beverage market. As consumers become more conscious of their dietary choices, demand for unique and gourmet food items has surged.
Specialty food & beverage stores that offer organic, artisanal, or locally sourced products often command higher prices, allowing for impressive profit margins. Microbreweries, which have extremely steep equipment startup costs, are the notable exception.
Finally, home decor and furnishings have proven to be lucrative retail businesses (as shown by Home Depot leading the pack earlier).
As people invest in their living spaces, there is a growing demand for stylish and unique home decor items. Retailers that offer a curated selection of furniture, accessories, and interior design services can enjoy substantial profit margins.
For more information, NYU Stern School of Business maintains a Margins by Sector page with a lot of useful and regularly updated information on retail margins and expenses.
While large retail chains dominate the industry, small businesses can also thrive and achieve high profit margins. As of 2021, some of the most profitable retail businesses you could own are all in the specialty food & beverage sector:
At the other end of the retail spectrum are specialty service providers, which basically all fall under healthcare and/or fitness.
These kinds of retail businesses include specialty beauty salons that offer high-ticket services like full-body laser hair removal, botox injections, etc. as well as specialty healthcare clinics, such as cosmetic surgery or dentistry, that are as expensive on a per-transaction basis as any retail business can get outside of specialty auto body shops (which we’ll cover in a separate article).
Of course, these are just some examples. But it’s easy to see why specialty healthcare clinics and cosmetic practices enjoy some of the highest gross and net profit margins in retail.
Regardless of the retail business you run, there are strategies you can implement to increase your profit margins. One effective strategy is to negotiate better pricing and terms with suppliers. By building strong relationships with suppliers, you can secure favorable pricing, discounts, or exclusive deals, allowing for higher profit margins.
Another strategy is to optimize your inventory management. By implementing inventory control systems, analyzing sales data, and forecasting demand accurately, you can reduce carrying costs, minimize waste, and maximize profits.
Additionally, focusing on customer retention and loyalty can significantly impact profitability. By providing exceptional customer service, personalized experiences, and loyalty programs, you can increase customer satisfaction and encourage repeat purchases, leading to higher profit margins.
Profitability is the lifeblood of any retail business. By understanding the average profit margins in your particular line of business, you can gain actionable insights into the financial health of your own operation.
For example, did you know that small retail businesses with high gross and net profit margins (like specialty healthcare or cosmetic dentistry/surgery practices) are often wasting the most money on unnecessary expenditures, like credit card processing fees.
By implementing strategies to increase profit margins, such as negotiating with suppliers, optimizing inventory management, and focusing on customer retention, you can boost the bottom line of your retail business.
Improving business profitability requires careful planning, market research, and a commitment to providing exceptional products and services. But it also helps to know where you can cut costs without impacting the quality of your services.
Nadapayments can help you by getting rid of those pesky credit card processing fees today.
