Profit margin. Do those two words make you break out in a sweat?
You might have read that grocery stores and supermarkets have some of the lowest profit margins – and it’s true. Generally speaking, grocery store profit margins sit between one to three percent. But, as with most things, those numbers don’t tell the whole story.
Sure, big grocery stores have low profit margins, but they make money by selling large numbers of items in multiple locations. Smaller grocery stores can see higher profit margins through intelligent inventory management, excellent customer service, and savvy store management.
This blog post will help you understand grocery store profit margins, and detail how to improve your bottom line.
Your Grocery Store Profit Margin: A Guide
In simple terms, your profit margin is the revenue you make when you sell an item, minus the cost you paid to make or buy the item. Of course, you more than likely won't make your products; you purchase them from manufacturers or vendors.
As mentioned above, grocery store profit margins sit between one and three percent, but you can make up for it in volume. Large grocery stores have small profit margins but huge sales volumes which still results in satisfactory net income dollars.
Smaller markets serving fresh seafood or prepared meals can charge a premium, and although turnover might be lower, they can increase their profit margins.
While profit margin is important, you must track other numbers, like your inventory turnover and sales ratios. Low inventory turnover rates lead to spoiled products, and sales volume must remain high to turn a profit.
What is Profit Margin?
Let’s look at this from a high level first. Say you sell a bag of potato chips for $2, and you paid your supplier $1.50 for that bag; your profit margin is $0.50. It might not seem like a lot, but if you sell 10 items at the same profit margin, a customer purchase creates a $5 profit.
Now let’s get granular.
Gross Profit Margin
Before you work out margins, determine your gross profit.
- Gross profit = Revenue minus Cost of Goods Sold (COGS)
In other words, subtract the costs of making or purchasing your goods from revenue (sales), and you get gross profit.
Gross profit margin is your earnings, as calculated above. But margins are written as percentages. To calculate percentages, divide the gross profit figure by revenue, and you can see how much gross profit you generate after taking costs into account.
- Gross profit margin = Revenue minus COGS divided by revenue
Net Profit Margin
Net profit margin is one of the most crucial indicators of your store’s health. It indicates whether your business is generating enough profit and if you are managing operating costs and overheads well.
Net profit margin is also displayed as a percentage. Before you calculate net profit margin, determine net income.
- Net income = Revenue minus total expenses
Net income is your revenue minus the cost of goods sold and other expenses, such as staff, administration expenses, interest, and taxes.
Net profit margin measures how much income you generate as a percentage of revenues received.
- Net profit margin = Net income divided by revenue multiplied by 100
What is a Good Grocery Store Profit Margin?
Your grocery store makes money by selling products that meet basic human needs – from food and drinks to household products and pet food. But there’s a lot of competition in the industry. Stores often push down prices to attract customers, but is that the best way to go?
How do grocery stores stay afloat with an average profit of 2.2 percent? Big grocery stores have hundreds of locations and sell products at scale. They can lower operating and labor costs, and pass those savings on to their customers.
They also sell the right products for their location. With the right POS reports, it’s easy to spot trends and automate inventory tracking to see what’s popular – and to make informed decisions on what to keep in stock.
Not all grocery stores have low profit margins. Organic and natural food markets appeal to the younger generation who are willing to spend more money on fresher, high-quality produce. Profit margins are higher – about four to six percent.
How To Calculate Your Grocery Store’s Profit Margin
Now that we know what we’re looking for, let’s use the calculation above to flesh out an example.
In the previous month, your store generated $20,000 in revenue. Total expenses were $12,500, leaving a net profit of $7,500. Divide $7,500 by $20,000 and multiply that by 100 to get a profit margin of 37.5 percent.
How would that stack up against a larger grocery store with more revenue? Remember that a larger store might have higher expenses than you – more revenue doesn’t always mean more profit.
For example: Store B generated $30,000 in the last month. Their net profit was also $7,500 because their expenses were higher. Their profit margin is 25 percent.
Your store is more profitable. The numbers here aren’t realistic, but you get the gist. With smart decisions, good marketing, and excellent customer service, you can create a good profit margin and put more money in your pocket.
How to Improve Your Profit Margin
We encourage you to do competitor research when thinking about your store and the products you sell. Do you bypass wholesalers altogether and source your produce from local farms? Position your store as a supporter of local businesses and provide fresher, even organic, products.
Customers will pay more if you provide quality produce and align with their perspective – that organic = healthier, better quality food. And they will tell their like-minded friends.
Think of all the ways you can reduce costs. For example, you can reduce manual labor expenses by automating inventory management instead of manually tracking it. You can tighten up your supply chain by implementing in-full (OTIF) policies to compel your vendors to deliver your orders efficiently and avoid low stock issues.
Finally, make it easy for shoppers to buy more. Display deals and discounts at the door, recipes throughout your store for inspiration, and place baskets throughout the store so customers who pick up more than they planned can continue shopping.
Use a Robust Point of Sale (POS) System to Improve Your Grocery Store Profit Margin
Your POS system is a goldmine of data. Use the features and data at your fingertips to improve profit margins.
Make Informed Business Decisions
Thin profit margins, shrinkage, perishable goods, and potentially thousands of SKUs mean reporting and analysis are crucial.
With better inventory management, you know:
- What’s in stock
- Which products are running low
- What your top sellers and most profitable products are
- What isn’t selling well
Armed with this information, you can set reorder thresholds to reorder more products, stock more of your most popular items, and save shelf space.
Sales trends and patterns also provide valuable insights – and you don’t need to hire more staff to make this work. Modern POS systems use artificial intelligence to identify trends, patterns, and opportunities to help your business grow. For example, you may want to order extra stock of certain items based on seasonality.
A Better Checkout Experience
You could offer buy-online-pickup-in-store (BOPIS) or curbside pickups as a small grocery store. Local residents are more likely to shop in a store they know and like if it’s convenient. Consider the in-store checkout experience. Could you make it faster? More secure? More convenient?
With a modern POS system, you can:
- Accept different forms of payment like contactless, credit and debit cards, and mobile wallets.
- Empower your cashiers with POS tools like scanner, standalone, and deli scales to automatically ring up weighed items.
- Integrate payments with your POS system.
- Ensure you have the products that your customers want in stock.
Offering incentives to customers who choose BOPIS or curbside pickup is a nice touch, too. You can put coupons in their bags for goods they buy regularly. POS software allows you to create digital coupons and send them straight to your customer’s email address. You might also include free samples or small products.
Delight Your Customers
A modern POS system allows you to group products with mix and match pricing. Which items are frequently bought together? Use data and reports to find out, and offer discounts when customers purchase them.
Customer loyalty programs are the perfect way to please repeat customers. Offer a loyalty program to give exclusive coupons and discounts to repeat customers – it’s easier to keep current customers than to win new ones. If you offer discounts for certain items through your loyalty program, shout about it! List prices next to each other on those items to encourage customers to sign up and reap the rewards.
Lastly, track customer trends to stay informed about top sellers and make sure they never go out of stock. If customers always get what they come in for, they’ll keep coming back.
Grocery Store Profit Margins Aren’t Set in Stone
Although the average grocery store profit margin is 2.2 percent, it’s not the rule.
A modern grocery store POS system helps you reduce expenses and increase profits by speeding up the checkout process, managing inventory simply, and providing data and reports that drive your business forward.