Retail is Tough: The Brutality of Retail & Low Profit Margin

Retail Tough: The Brutality of Retail Business and Low Profit Margin

My wife is a Distributor with 2 major FMCGs in Nigeria.

So living in the same house with her and watching her run the business from close range, I have been able to studyvery closely the model of retail businesses and also understand perfectly the brutality that the low profit margin can bear.

Some of the products my wife distributes include custard and sugar. So let me give an example with custard here.

If she sell a carton of Custard for say 10,000 naira her gross profit will be about 200 naira (emphasis on the word ‘gross’). That is 2% profit. So for my wife to make a profit of 20,000 naira she must have to sell products worth 1 million naira. You remember those provision store businesses? When they tell you they sell these things with 50 naira, they aren’t joking, neither are they lying.

So there is absolutely no doubt that the profit margin of retail businesses is quite low. But in today’s post I share more light on how this works and how to survive it.

Table of Contents

First, The Profit Margin For Retail Businesses in Context: Low or High?

Let’s continue with the example of my wife I was sharing above.

Now, imagine if things goes bad and it takes her 1 month to sell up to 1 million naira worth of goods, then it will be 20,000 profit in a month of 30 days.

Hold on a sec!

Now, it gets scaring if you consider that she must have all those products in perfect condition till they are sold out to at least be sure of that 20,000 naira.

But how possible is that?

Imagine she is selling sachet peak milk or sugar or biscuits. Do you think that rat won’t touch any of those in a month or that some of them won’t get damaged along the line?

What about the marketing cost?

She has to fuel her vehicle to go for supply, won’t she? She certainly does. By the time you are done calculating these, you are coming down to a net profit of say 11,895 naira in a month (this is just an illustrative figure).

Menh! I consider that brutal. That is the reality of the low profit margin for retail businesses.

Does Low Profit Margin For Retail Also Apply to Mega Brands?

So, today, I took my magnifying lens and decided to magnify what retail really holds for the big brands.

First, I checked the biggest company in the world in terms of revenue and it is a retail company – Walmart.

Walmart revenue for 2022 is $572.75 billion.

Out of that the profit is $13.67 billion.

That is 2.4%. So I realized that whether as a manufacturer, distributor, wholesaler or retail store, the margin is not too far apart.

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Comparing The Profit Margin of Retail To That of Tech

Then I did a small comparison.

I decided to compare the profit margin of retail businesses to that of tech businesses.

Google been a tech company made a revenue of $257.64 billion in 2022. That is less than half the revenue of Walmart. But guess how much of that is profit?

$76 billion. Yes, $76 billion – that is more than 5x Walmart profit.

And that represents 29.5% of its total sale.

My Piece of Advice if You Must Do Retail

Men and brethren, can I advise you?

1. If you don’t have money, don’t go into retail. And when I say money, I mean real money – in fact, it has to be cash money.

2. In retail, the margin for error is almost zero and any slide can be brutal.

3. The risk in retail can be very high. So your shock absorber had better been Bilstein or Monroe.

4. Of course you already know that for you to stand a chance with retail you need to do volume and do it quickly (something market people call turnover).

But you see tech, well you can go there and gallivant. You may fail, but it won’t be that disastrous.

And if you succeed, you will be among the richest men in the world – go and check the top 10 on Forbes list.

The profit margin for retail business is very low.

On the average, the profit margin for retail business is between 2% to 3%.

Retail business is tough

Retail business is not for the feeble minded ones.

Before you venture into it, think again.

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