How Much Do Retail Stores Make?

How Much Do Retail Stores Make? (Retail Store Profit Margin)

Though retail stores come in all sizes and industries, most of these businesses operate on very slim profit margins.

In fact, data from NYU’s Stern School of Business indicates that retailers have an average net profit margin of around 3%. Depending on the retail category, these margins can be as small as 1.62% or as high as 20.35%. 

However, regardless of your industry, it’s key that you reduce costs and boost revenue to maximize profits.

So, in this article, we’ll take a look at the challenges and expenses of operating a profitable business. We’ll also explore the best strategies for boosting retail store revenue and reducing costs so you can increase overall profitability.

Key Takeaways

• Retail stores typically operate on small profit margins, averaging about 3%. However, these margins can vary significantly based on your industry. For example, the average profit margin for auto parts retailers is just 1.62%, while computer retailers average 17.47%.

• Maximizing your retail store’s profits requires a two-pronged approach: reducing costs while boosting revenue.

• The most expensive costs for retailers to manage are typically cost of goods sold (COGS), rent and utilities, and labor.

• Key strategies for reducing retail store costs include improving inventory management, optimizing labor efficiency, reviewing supplier relationships, and streamlining operations.

• Some of the best ways to improve retail store revenue are investing in marketing and technology, encouraging customers to spend more on each visit, and improving customer retention and purchase frequency.

Are Retail Stores Profitable?

Retail stores can definitely be profitable if you manage your business well. However, determining the potential profitability of your retail store requires balancing revenue generation with effective cost management strategies.

As we mentioned above, the typical retail store has an average net profit margin of around 3%. This means that for every dollar in revenue, your store can expect to earn about $0.03 in profit after deducting all expenses, such as:

• Rent

• Inventory and material cost of goods

• Labor

• Marketing

• Taxes

• Other costs

However, since “retail” encompasses many different categories of products, profit margins can vary. While most categories tend to fall in the 3% to 10% range, others can be as low as 1% or as high as 20%.

Overall, maintaining a healthy net profit margin requires meticulous cost management and strategic resource allocation. By optimizing expenses and implementing efficient operational practices, you can enhance profitability and ensure sustainable business growth.

Monthly Revenue and Profit Expectations By Retail Store Category

Revenue is equal to your total sales volume, which is your primary source of profitability. However, profit margins can vary significantly depending on the types of products you sell.

So, let’s use the profit margin data from NYU’s Stern School of Business and take a look at how much you might expect to make for several different retail categories. 

Apparel and Clothing Stores

The average net profit for apparel and clothing store retailers is 3.15%. Dojo Business reports that the average monthly revenue for retail stores in this category typically falls between $7,000 and $100,000.

Therefore, by multiplying the profit margin percentage by average monthly revenue, your apparel and clothing store can expect to make between $220 and $3,150 in net profit per month.

This translates to yearly net profits of between $2,640 and $37,800.

Shoe Stores

On average, shoe stores tend to have a much higher net profit margin compared to other apparel retailers at 9.49%. According to Dojo Business, the average shoe retailer generates anywhere from $10,000 to $50,000 per month.

So, the average shoe store can expect to make between $950 and $4,745 in monthly net profits.

Over the course of a year, this is equal to net profits between $11,400 and $56,940.

Auto Parts Stores

Auto parts retailers have one of the lowest net profit percentages at just 1.62%. 

However, Sharp Sheets reports that the average auto parts store generates a staggering $1,783,000 per year, or $148,583 per month.

This means that, on average, these retailers can expect to make about $2,400 per month, or $28,884 per year.

Computer and Peripheral Stores

The retail category of computers and peripherals not only includes desktops and laptops, but also other devices, like monitors, keyboards, hard drives, and more. 

The average net profit margin on these items is 17.47%. Additionally, FinModelsLab reports that “franchise-owned Computer and IT Hardware Stores typically see an annual revenue of around $1.5 million to $3 million.”

So, based on these numbers, the typical computer and peripheral retail store may expect to make between $262,050 and $524,100 in yearly net profits. This translates to monthly net profits between $21,838 and $43,675.

Software Retailers

Finally, let’s take a look at the software retail category. NYU’s data breaks this into multiple categories, including “entertainment” and “system and application.”

The entertainment software category encompasses products like video games and consoles, while system and application software consists of products like antivirus software, Microsoft Office, and Adobe Creative Cloud.

These two software categories have similar profit margins: Entertainment software has an average net profit percentage of 20.35%, while system and application software has an average net profit percentage of 19.14%.

Unfortunately, we were unable to find average revenue data for these categories. However, with some of the highest profit margins in retail, this could be a lucrative category to look into.

Challenges Affecting Retail Store Profits

Retail store profit margins are often slim because retailers face several operational challenges that can eat away at revenue. Some key difficulties include:

• High Fixed Costs: Excessive rent or lease expenses relative to sales volume can strain profitability, especially in slower economic periods.

• Overstocking or Understocking: Poor inventory management leads to tied-up capital in excess inventory or lost sales due to stockouts, impacting cash flow and profitability.

• Labor Inefficiencies: Underutilized staff or excessive overtime costs can inflate payroll expenses without corresponding sales increases.

• Ineffective Pricing Strategies: Incorrect pricing strategies, such as setting prices too low to compete or too high to attract customers, can adversely affect profit margins.

• Wastage and Theft: Losses due to theft, spoilage, or damage can erode profitability if you don’t manage them through security measures and inventory controls.

Fortunately, however, by understanding the challenges your retail store will face in maximizing profitability, you’ll be better prepared to come up with solutions.

Breakdown of Retail Store Costs By Category

Understanding the monthly costs of operating your retail store is crucial for effective profitability management.

So, let’s explore a breakdown of the monthly costs you’ll need to consider when developing a financial plan for your business.

We’ll also provide an estimated cost range for each category based on the average retail store revenue which, according to Solink, is about $910,000 per year, or just under $76,000 per month. 

While average revenue will vary a lot based on your business’ offerings, location, and other factors, this will give you a better idea of how to budget for your own retail store. 

However, be sure to substitute your own revenue numbers when projecting monthly expenses for your business.

Rent and Utilities

If you run a brick-and-mortar retail business, one of your most significant expenses will likely be rent and utilities. However, these costs can vary significantly based on the size of your store and where it’s located.

For example, rent and utilities will be a bigger expense in high cost of living areas, like San Francisco, CA, compared to lower cost of living areas, like Fort Wayne, IN. 

Even retail stores located in the same city can have much different rent costs depending on their specific location.

For instance, the annual retail rent asking rate on 5th Ave in New York City was $2,750 per square foot during the first half of 2023. Meanwhile, Broadway and 7th Ave, the second-highest rent asking rate among Manhattan corridors, was $980 per square foot.

Additionally, utility costs will differ based on the types of products you sell. For instance, if you sell food products requiring refrigeration, you can expect to pay more for utilities. 

The size of your store can also make a huge difference in utility expenses. According to National Grid, the average retail store in the United States spends a yearly average of $1.21 per square foot on electricity and 14 cents per square foot on natural gas.

Overall, Commercial One Brokers suggests that you spend between 5% to 10% of your total retail store revenue on rent and utilities.

• Total Monthly Cost of Rent and Utilities: $3,800 to $7,600 or more, depending on store size, location, and other factors

Cost of Goods Sold (COGS)/Inventory

Cost of Goods Sold (COGS) is the total amount of direct costs to manufacture and produce the products you sell. It includes the cost of raw materials and manufacturing overhead, as well as initial inventory and restocking.

This expense helps you determine your gross margin, which is equal to the difference between your total revenue and COGS. You then use the amount that’s left over to pay your operational expenses, which finally leaves you with your net profit.

For example, if it costs $10 to manufacture a shirt and you sell it for $20, your gross margin is $10, or 50% on each shirt. If operational costs and taxes add up to another $5 per shirt, your net profit is $5, or 25%.

Just as average net profit can vary a lot from category to category, so can gross margin. Here are the average gross margins for the categories we looked at earlier according to the NYU data:

• Apparel and Clothing Stores: 51.93%

• Shoe Stores: 45.36%

• Auto Parts Stores: 15.01%

• Computer and Peripheral Stores: 37.54%

• Entertainment Software: 63.43%

• Systems and Applications Software: 71.52%

This means the average auto parts store would spend $64,592 on $76,000 of revenue on material goods. Meanwhile, the average systems and applications software retailer would spend just $21,645 on the same amount of revenue.

Ultimately, the higher your gross margin is, the bigger the difference between your manufacturing price and retail price.

• Total Monthly Cost of Goods Sold: The average gross margin for general retailers is 30.86%, meaning $52,546 of $76,000 in revenue would go towards COGS. However, gross margin is highly-dependent on your industry category.

Labor Costs

Another large expense for most retail stores is the cost of labor. This not only includes salary and wages, but also factors in:

• Benefits, like health insurance

• Commissions and bonuses

• Paid time off

According to NetSuite, a good payroll percentage for retail businesses typically falls between 10% and 20%. This means 10% to 20% of your gross revenue goes to paying employee salaries and benefits.

However, keep in mind that some industries may be more labor-intensive than others. 

For example, a high-end fashion boutique may offer more personalized services, and thus require a larger payroll percentage. 

Meanwhile, a grocery store will likely need less labor, relying on customer self-service and automated checkout systems. In fact, the median labor cost percentage for supermarkets is just 9%, falling below the target retail payroll percentage.

• Total Monthly Cost of Labor: $7,600 to $15,200, depending on the level of service you offer customers

Marketing and Advertising

Marketing and advertising is key to attracting customers, so it’s important that you budget for promotional activities. Depending on your industry and target audience, this can involve:

• Digital marketing strategies, like social media, SEO, pay-per-click advertising, and email marketing

• Local advertising, like circulars

• In-store signage and promotions

According to HubSpot, the average company spent 9.1% of total revenue on marketing in 2023, compared to just 6.4% in 2021.

Furthermore, they report that B2B businesses should aim to spend about 2% to 5% of revenue on marketing. Meanwhile, B2C companies should aim to spend about 5% to 10% of revenue on marketing.

• Total Monthly Cost of Marketing: $1,520 to $3,800 for B2B retailers, or $3,800 to $7,600 for B2C retailers

Insurance

You should also be sure to secure insurance for your retail business. According to Insureon, there are a few types of retail insurance coverage you’ll likely need.

For example, General Liability Insurance provides financial protection for third-party bodily injuries and property damage. Most plans cost less than $800 per year, with many costing less than $400 per year.

You should also think about Workers’ Compensation Insurance. This helps cover medical bills and partial lost wages if an employee gets injured on the job. Some states mandate this type of coverage, and it typically costs about $700 to $1,400 per year.

Some other types of insurance to consider include:

• Commercial Property Insurance

• Commercial Auto Insurance

• Liquor Liability Insurance

• Cyber Insurance

Ultimately, your total monthly insurance costs will depend on the type of coverage you need and the type of business you operate. For example, a small mom-and-pop boutique in a low-crime area will likely pay less than a 24/7 convenience store in a high-crime area.

• Total Monthly Insurance Costs: $100 to $500 per month, though this expense can vary significantly

Other Operational Expenses

Finally, there are several other operational expenses you may need to think about as you develop your budget. Some of these include:

• Office supplies

• Maintenance and repairs

• Banking and transaction fees

• Professional services, like accounting and legal counsel

• Technology, like POS systems and CRM software

Ultimately, the miscellaneous operational expenses you need to account for will depend on your own unique circumstances. Be sure to give careful thought to all the expenses you may encounter so you can budget accordingly.

• Total Monthly Miscellaneous Costs: $2,000 to $15,000 or more, depending on the specific needs of your retail store

How To Reduce Retail Store Costs

There are two key components of maximizing your retail store revenue: minimizing costs and increasing total sales.

Below, we explore some strategies for reducing your costs so you can improve the profitability of your business.

Improve Inventory Management

Improving your inventory management is one of the best strategies for reducing your operating costs. 

After all, this helps you minimize the risk of overstocking, which can lead to high holdover costs. Additionally, it decreases the risk of stockouts, which can hurt sales and create a poor customer experience.

So, use the following advice to optimize your use of capital and warehouse space:

• Implement Inventory Management Systems: Use advanced software to track inventory levels in real-time, automate reorder points, and predict demand more accurately.

• Regular Audits and Reviews: Conduct regular physical inventory counts and reconcile them with your records to identify discrepancies and prevent shrinkage.

• Optimize Order Quantities: Use techniques, like Just-In-Time (JIT) inventory, to reduce excess stock and minimize storage costs, ensuring you only hold what is necessary.

Optimize Labor Efficiency

As we mentioned earlier, labor costs often eat up as much as 10% to 20% of your total retail store revenue.

However, by aligning staffing levels with demand fluctuations, you can avoid unnecessary labor costs while maintaining excellent customer service standards.

Be sure to consider the following tactics when optimizing your labor efficiency:

• Flexible Scheduling: Use data-driven scheduling tools to match staffing levels with peak and off-peak hours, reducing idle time and overtime costs.

• Cross-Training Employees: Train employees to handle multiple roles, increasing flexibility and ensuring that your staff can cover for each other during busy periods or absences.

• Performance Monitoring: Regularly assess employee performance and productivity to identify areas for improvement and provide targeted training.

Review Supplier Relationships

Your biggest expense as a retailer will likely be your cost of goods sold. Since you're reliant on your suppliers for keeping this expense manageable, be sure to consistently review your relationships with them, as well as explore new suppliers.

By negotiating more favorable terms and exploring bulk purchasing discounts, you may be able to improve your gross margins, and therefore boost your profitability.

Additionally, consider making use of the following strategies:

• Negotiate Favorable Contracts: Regularly renegotiate contracts with suppliers to secure better pricing, payment terms, and discounts for bulk purchases.

• Diversify Suppliers: Avoid relying on a single supplier by diversifying your supplier base, which can provide competitive pricing and mitigate risks related to supply chain disruptions.

• Perform Supplier Reviews: Conduct regular reviews of supplier performance to ensure they meet your quality and delivery standards. You should also hold them accountable, and consider switching suppliers if necessary to maintain cost-effectiveness.

Enhance Operational Efficiency

One more way to reduce the costs of running your retail store is to enhance overall operational efficiency.

For example, it’s often a good idea to invest in technology for automation and streamlining processes. Additionally, be sure to conduct regular audits to identify and eliminate inefficiencies.

Finally, be sure to consider the following as you look for ways to improve operational efficiency:

• Process Optimization: Map out and analyze your business processes to identify bottlenecks and areas for improvement.

• Invest in Technology: Adopt technologies like point-of-sale (POS) systems and customer relationship management (CRM) software to reduce manual labor and improve accuracy.

• Regular Audits and Continuous Improvement: Conduct regular operational audits to identify areas for cost savings.

How To Boost Retail Store Revenue

While reducing costs is one way to improve your profitability, you should also think about ways to boost your retail store’s revenue. By implementing tactics to both reduce costs and increase sales, you can maximize your overall profits.

Below we explore some key strategies for increasing your retail store revenue.

Invest In Marketing Strategies

Implementing effective marketing strategies is vital for both attracting and retaining customers. 

While there are tons of different approaches you can take, consider the following advice as you think about what may work best for your business.

• Data-Driven Targeting: Use advanced analytics to segment customers based on demographics, behavior, and preferences. Tailor marketing campaigns to resonate with each segment's interests and buying habits.

• Omni-channel Presence: Establish a cohesive brand presence across multiple channels, including social media, online platforms, and physical store experiences. Ensure consistency in messaging and customer engagement across all touchpoints.

• Content Marketing: Create compelling content that educates, entertains, or solves customer problems. This could include product demonstrations, user-generated content campaigns, or informative blog posts that drive organic traffic and engage potential customers.

Although marketing and advertising may require an initial investment upfront, you can see big returns if you’re able to connect with the right customers.

Increase Productivity With Technology

Although we already touched on the ways technology can help you reduce costs, it can also help you boost revenue.

In fact, investing in technology is key to keeping up with the competition and creating long-term sustainability for your business. John Furner, President and CEO of Walmart U.S., said it’s vital to look ahead to the future:

“Everything around you is changing and to succeed you must stay out in front of change.”

So, consider harnessing technology to streamline operations and boost productivity by using the following ideas:

• Advanced Inventory Management: Implement robust inventory management systems that offer real-time data on your most popular products so you can see what works best and forecast future demand and trends.

• Integrated POS Solutions: Upgrade to integrated POS systems that not only process transactions, but also capture valuable customer data. Use this data to personalize customer interactions, offer tailored promotions, and track purchasing patterns.

• CRM Utilization: Leverage customer relationship management (CRM) tools to build detailed customer profiles, track interactions across channels, and nurture relationships through targeted marketing campaigns and personalized communication.

Increase Customer Spending Value

Another effective way to boost your sales revenue is by encouraging your customers to spend more each time they visit your store.

Now, this doesn’t mean you should raise the prices on all your products. After all, this could make you less competitive in the market and drive customers away.

However, there are several strategies you can implement to enhance the value perception of your offerings:

• Premium Product Offerings: Introduce exclusive or higher-margin products that cater to specific customer segments. Position these products as premium offerings, emphasizing their unique features, quality, and value proposition.

• Cross-Selling and Upselling: Train staff to recommend complementary products or upgrades during customer interactions. Utilize data insights to suggest relevant add-ons or upgrades that enhance the overall purchase experience and increase basket size.

• Bundling: Give customers a discount if they purchase certain products together. This can encourage them to spend more than they originally intended in order to get the deal.

Just keep in mind that some of these tactics will work better than others depending on your brand. For example, if your retail store concept emphasizes savings and affordability, you’ll likely have more success with bundling than premium offers.

Increase Customer Purchase Frequency

One more way to increase your retail store’s revenue is to foster repeat business and customer loyalty. After all, getting customers to come back after their first visit is key to the long-term success of your business.

So, to encourage customer retention, consider implementing the following tactics:

• Loyalty Programs: Design tiered loyalty programs that reward customers for repeat purchases, referrals, and engagement with exclusive perks, discounts, or early access to new products.

• Personalized Recommendations: Implement personalized marketing campaigns based on customer behavior and purchase history. Use automation and AI-driven recommendations to deliver relevant product suggestions, promotions, and reminders that encourage repeat purchases.

Email Marketing Strategies: Develop targeted email marketing campaigns that deliver value to customers. This can include personalized offers, product recommendations, and curated content. Also, use A/B testing to optimize email content and timing for maximum engagement and conversions.

Increase Retail Store Revenue and Reduce Costs To Maximize Profits

As we’ve mentioned throughout this article, maximizing retail store revenue and reducing costs are the two key components of increasing profitability.

Since retailers operate on very thin profit margins, it’s vital that you consider how you can implement some of the strategies we discussed above.

One of the most important tactics for staying ahead of the competition and creating long-term success for your business is using effective technology tools. Fortunately, Toast has a robust suite of features that can take your retail store revenue to the next level.

Related Resources

• Best Retail POS Systems
• Retail Store Business Plan
• How to Open a Retail Store
• Retail Store Equipment
• Retail POS Software
• Retail Store Marketing Ideas
• How to Design a Retail Store
• Retail Store Ideas and Concepts
• Retail Store Inventory Management
• Cost to Open a Retail Store
• How to Run a Retail Store