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Margin Calls

Gone are the days of consumer loyalty. Today, relentless retail promotion has made it tough for consumers to be monogamous. As a result, serial shoppers are always looking for the best deal. Profit margins can suffer in this environment where the...

Gone are the days of consumer loyalty. Today, relentless retail promotion has made it tough for consumers to be monogamous. As a result, serial shoppers are always looking for the best deal. Profit margins can suffer in this environment where the consumer rallying cry is “never pay retail.” Below, estimated annual gross margins as a percentage of sales by category of business.

1

MEN’S CLOTHING STORES

Annual gross margin as a percentage of sales in 2000: 44.5; Annual gross margin as a percentage of sales in 1993: 42.3

Men’s clothing stores enjoy high margins for a variety of reasons, including the fact that the men’s business is slightly less promotional than the women’s. In addition, retailers take fewer markdowns on men’s clothing, while markups tend to be somewhat higher.

2

FURNITURE AND HOME FURNISHINGS STORES

2000: 44.1; 1993: 42.2

Because furniture commands higher price points and there are substantially fewer returns than, say, apparel, retailers tend to achieve high gross margins. Furniture companies have also become adept at setting optimal price points — gauging how much consumers will pay for a product —which leads to fewer sales and markdowns.

3

WOMEN’S CLOTHING STORES

2000: 43.7; 1993: 36.9

Women’s fashion is usually subject to more volatility than men’s because of the trend factor, but sizable markups, especially on luxury items, keep margins healthy. When merchandise offerings click with consumers, some women’s clothing chains put on stellar performances. Take Ann Taylor, which in the third quarter of this year saw gross margins grow to 57.7 percent from 54 percent over the same period in 2001.

4

SPECIALTY FOOD STORES

2000: 41.9; 1993: 40.2

Specialty and organic food stores create the impression of selling premium products. The category is not overly developed, so the need for competitive pricing isn’t an issue. Customers willingly pay higher prices based on their belief that the quality of the product is better.

5

FAMILY CLOTHING STORES

2000: 40.8; 1993: 38.7

Products rarely sell at regular price at family clothing stores and shoppers feel compelled to visit during sales events. Kohl’s, for example, has created an impression, through in-store signage and advertising, that encourages consumers to believe they’re getting a good deal. As a result, shoppers are less likely to do a lot of comparative analysis on products. The chain drives gross margin by virtue of volume and sells through on many products.

6

SHOE STORES

2000: 40; 1993: 42.9

A substantial portion of the shoe business consists of basics. Think tennis shoes and pumps, which are basically timeless and seasonless. These are the items within the overall category that sustain the growth of profit margins. While the fashion element can create volatility, it keeps customers coming back for something new.

7

SPORTING GOODS STORES

2000: 37.8; 1993: 38.1

Brands such as Nike and Adidas are considered power brands, which means there’s premium pricing associated with their names. Sporting goods stores carry a limited number of such brands, so there’s not a huge amount of competition within the store, but among individual chains the business has grown increasingly promotional.

8

BOOK AND MUSIC STORES

2000: 37.8; 1993: 38.1

Margins at book and music stores are declining. Books can be bought anywhere — online, at the airport, the local independent bookstore (if it hasn’t gone out of business) and megachains such as Barnes & Noble. Meanwhile, music is becoming increasingly digitized, allowing customers to download it from the Internet or copy it from friends.

9

DEPARTMENT STORES

2000: 31.4; 1993: 29.5

Department stores are almost like an index fund of categories, selling men’s wear, women’s wear, kids’ clothing and shoes, among other things. Because they sell competitive, branded products, shoppers look for the best buys. Department stores are trying to boost margins by introducing private labels such as Federated’s INC and are doing deals like Penney’s pact to sell Bisou Bisou exclusively.

10

HEALTH AND PERSONAL CARE STORES

2000: 30.3; 1993: 30.9

When it comes to health and hygiene, customers are frugal, but never cheap, because the products are so personal. Skin care and cosmetics have high profit margins and consumers replenish them on a regular basis.

11

DISCOUNT DEPARTMENT STORES

2000: 27.5; 1993: 22.5

Wal-Mart, the world’s largest retailer with $218 billion in sales, and, to a lesser extent, Target and Kmart, drive huge amounts of volume. Even though Kmart is in Chapter 11, it’s doing $38 billion in sales. Target does $40 billion. There’s a volume-margin trade-off for the discount retailer. Of course, when Kmart decided to battle Wal-Mart on pricing, its margins came under pressure, and Wal-Mart inevitably crushed the smaller discounter.

12

ELECTRONICS AND APPLIANCE STORES

2000: 27.2; 1993: 28.8

Best Buy and Circuit City have been successful at managing the cost of goods, which keeps profit margins relatively high. The two companies are also good at understanding how to allocate labor costs. The reason for depressed margins is that products are increasingly becoming commoditized. One simple gauge: By the time a product reaches Wal-Mart, it’s a commodity.

13

GROCERY STORES

2000: 27.1; 1993: 24.4

Grocery stores are renowned for their razor-thin margins. Some of the strategies they use to boost profits include introducing organic and specialty products, an area where consumers are less likely to comparison shop. A number of supermarkets have also launched successful private labels, which allows stores to increase their profit margins.

14

GENERAL MERCHANDISE STORES

2000: 26.6; 1993: 27.9

Chains such as Goody’s and Dollar General don’t have a huge amount of purchasing power, so they sell extremely commoditized products. General merchandise customers are very price conscious and not very brand oriented, which can lead to depressed margins.

15

WAREHOUSE CLUBS AND SUPERSTORES

2000: 16.7; 1993: 17.1

Warehouse clubs and superstores can offer low prices because they have lower operating expenses. The bare-bones big boxes are piled high with bulk products displayed in no-frills settings. These retailers also keep a tight lid on labor costs and have sophisticated technology in place for managing inventory.

SOURCES: Annual Benchmark Report for Retail Trade and Food Services, U.S. Department of Commerce, U.S. Census Bureau. Angie Selden, North American managing partner and Steven Skinner, partner, retail industry group at Accenture, a management consulting and technology services organization with offices in 47 countries.

*Entries with the Same Gross margin LISTED IN NO PARTICULAR ORDER.