The Industry Standard for Gross Margin in Groceries
For a very long time, the grocery business has maintained extremely low profit margins. While parts of a larger supermarket differ in their margins, the main aisles remain at about 1 percent, the lowest in the economy. The result of these low margins has been consolidation, since the economies of scale demand that, given low margins, efficiency and centralization can provide some economic reward. Therefore, the industry, for several decades at least, has been in the process of consolidation. New store formats in the industry have squeezed margins even lower as competition becomes fiercer.
Economies of scale refer to cost savings due to larger operations. Groceries are a textbook example of larger scale efficiency. Since margins are very low per item, groceries are tightly consolidated, with those firms that have more than five stores controlling about 80 percent of the market. For the larger chains, revenue per employee is about $150,000. For the smaller stores, it is about $130,000, which is another example of scale economies in this field. In other words, the larger the store, the more gross revenue per employee. Labor remains the highest single expense of the industry.
The average grocery store is a large supermarket. It averages about 45,000 square feet and brings in about $14 million a year, which comes out to about $500 per square foot of sales industry-wide. The industry as a whole earns about $400 billion yearly. The development of newer platforms since the 1990s is changing the industry. Specialty chains like Whole Foods are carrying margins of about 3.2 percent and higher, far above the industry average. The “wholesale clubs” like Price Club are also undercutting the larger grocery store, putting pressure on an already struggling industry.
Since the industry-standard margin is abut 1 percent, the industry has several options open to it. First, a grocery business can offer alternative services like prepared foods, delis, bakeries and film-processing centers. This focus has brought chains like Weis Markets to about 2.5-percent margins, while 1 percent remains for its normal market aisle section. Second, a store can lay out its floor plan to funnel customers to the bakery and deli, which are the higher-margin areas. Bakeries are the highest, at about 40 percent, and delis have about 38-percent margins overall, so these can provide a large percentage of grocery store profits. Third, grocers can focus on buying directly from the manufacturers, and construct centralized distribution centers to take advantage of economies of scale. Finally, a supermarket can revamp its operation to specialty goods like organic foods or ethnic dishes. The strategy is always to squeeze as much out of large size and diversity as possible. The industry is not profitable otherwise.
The supermarket business model is not prospering. Only about 40 percent of American food is bought at a typical supermarket grocery store, and that is falling slowly. With such low margins for typical items, further consolidation is expected, as well as diversifying the services offered by the markets themselves to include things like salad bars and video rental stores within the facility.
Source: Houston Chronicle