This may be dangerously close to random stuff, but here’s some quick grocery store economics:
Overall, gross profit margin is usually something like the 30% range (i.e. buy for 70 cents, sell for $1.00). Other costs (labor, facilities, etc.) make up another 28% or more (i.e. it costs 28 cents to sell that $1.00 item). So grocery stores usually are making about 1-2 pennies per dollar sold. However, they’re turning over their inventory 10 or more times per year, so don’t feel too sorry for them.
These are overall averages. There are of course lots of loss leaders – on sale at or below cost, or even regularly at very low margins to get people in to the store where they’ll buy gourmet cheese or other higher margin stuff.
For a grocery store, Coke is usually very LOW profit, because that’s one thing people notice and remember the price of, so stores keep the prices as low as they can. Generally, gourmet/exotic stuff and non-food goods will have higher mark-ups, and staples and items people tend to compare or remember prices for will have lower mark-ups.
Yummy, time for an inventory dance and ritual sacrifice of a sales rep
That amount is in line with restaraunt pricing. 400% markup would be 20% food/drink cost which is actually not an extravagant markup. They still pay employees, facility, power, taxes, napkins, repairs, etc out of that.
I would imagine its a hell of a lot less labor intensive to sell a bottle of beer for $3.00 than to cook an order of fries. This could be where the “big profit” idea comes from. I know in my pizza days one of the killers was beer inventory vs. sales. The range the managers had to maintain beer cost was brutal (like 18.5%-19%) so if we didn’t average out selling as much beer as we used managers bonuses would get hit hard. Food cost was like 18.5%-21.5% a little more breathing room.
Lets apply my formula to McDonalds
Its sunday so I order my 10 $.39 cheeseburgers. 3.90 plus tax. 20% food cost, 20% labor, 20% facilities, 20% misc others, 20% profit. Yup .78 in profit! Also note some managers like to make a scene about food cost to try and keep the employees on their toes about waste and such. If mickey d’s was losing money on this deal they wouldn’t do it. They might be breaking even to draw bodies and market share but they dont have the spectrum or products to do alot of high markup, low markup games like a grocery store can.
Granted grocery stores are famous for “living on the edge” when it comes to turning a profit. I always wondered about the pricing structures in grocery stores. With the excellent inventory tracking they have these days they could easily have a trick update query zip through and adjust other prices to compensate for “the managers special”
(hijack begins) Well, I manage to cut down into that some by refilling my black ink cartridges. Each cartridge will last through 5-6 refills, in my printer, but your mileage may vary.
Also, I’ve bought refilling containers that you can open up and refill. What I do is fill these containers with black fountain pen ink (which is about a third, or less, of the cost of printer ink) and then put that ink in the printer cartridges. It saves quite a bit of money, and the printer still seems to work fine. I print out a lot of material for my job, so it does help a bit.
Either that…or I am too thrifty for my own good :)(hijack ends)
In our hotel our profit per room on a sold house is $29.00. In otherwords if we sold every room in the hotel for $29.00 we’d come out with a profit. Abet only a few cents, but we routinely sell rooms for $179 (group) to $229 (Transient).
Our pop in the hotel runs us higher it is 4¢ a cup. We are a large downtown convention hotel on the gold coast.
But we as a company lose money hand over fist on our luxury hotels. (There is no option to cut service during slow times, example whether there is one room or 700 sold in a luxury class you must keep a concierge on staff 24 hours - a real one not a desk clerk pretending - or else you lose your stars and diamonds etc) Thus as a whole the corp isn’t doing well
In an international airline I once worked at, the rule of thumb was that if you could fill up the economy class (say 75% of the seats) without discounting, the flight would just break even. The profit came from relatively small numbers of business and first class passengers. In terms of value for money, first class is a total rip-off (we used to call it “Staff Class” )
Two recent articles I read, neither of which I can find online, addressed these issues. One broke down the costs of a New York - London flight and showed that economy class passengers make only a few dollars profit each for the airline and first/business class passengers subsidise them. The other was about very rittzy restaurants and explained that the profit on a main course is often only $3-4. 30-40% of the price of the meal is used up in the purchase of top quality ingredients.
I’m trying to remember back to my training at McD’s, we had a big markup. It cost us about 40 cents to make a big mac, we sold it for $3. I don’t remember how all the labor factors, etc tied in though
I’ve worked for a supermarket chain the past 12 years, and it never ceases to amaze me how he price structure differs from store to store, as well as department to department.
The general rule seems to be a markup on most grocery items – say, $.05-.25 in stores located in “wealthy” areas. In lower socioeconomic areas, there is very little markup, if at all. Only the savvier customers notice this, and when they do…well, I don’t blame them for throwing fits! Understand that I’m not implying that this is the general formula for all supermarkets, but it’s what I’ve noticed within the chain I work for.
As for profit margins within departments…a store’s In-Store Bake Shop has probably the lowest profit margin, followed closely by Grocery. Deli and Produce are middling. The highest profit margins are in Meat, Seafood, and General Merchandise (i.e., health/beauty aids, seasonal items, etc.). The high profit margin cuts both ways, as in not only are items in these departments generally expensive for the consumer, but the corporate office must spend more to purchase said items…unless, of course, they cut a deal with the distributor somewhere down the line…
“Loss leaders” are just that – something advertised for a lower-than-normal price which entices you to go to that particular store. The supermarket is counting on you to do ALL your shopping there, not just to purchase what’s on sale. If you add up the total number of customers in a given day, along with how much they spent…depending on the sale, the store itself, and other factors, the store can make quite a tidy profit.
It is true that a business makes the bottom line on sales, but its only partially true- its a precarious balance of equity and debt depending on the industry.
Really it comes down to a question of liquidity, or how easy it is for companies to borrow to pay debt and not so much profitability. If the debt becomes disproportionate to assets credit rating agencies degrade bond value, as an indicator of how easily debt can be paid. The more a companies bond gets derated against par the less liquid a company becomes. Ultimately if things dont get turned around it will not be able to pay debt and go bankrupt (happened to Kmart). If you look at Enron they projected future projected earnings into current profits while hiding debt in subsidiaries. Once everyone figured out what happened they knew that Enron did not carry enough assets to borrow against and then they could not pay their bills, going bankrupt.
In a nutshell, the larger a company becomes the more imaginary it is. For an example, take a look at GM’s financial statement to see figures rounded to the nearest million. It is true that they depend on cars sold, and that they respond to consumer behavior, but GM’s goal is not “profitability” per se. It comes naturally as a byproduct of good asset leverage.
When you say that a burger costs $0.30 or a soft drink $0.04, it isn’t really true. You’re just looking at a few of the factor costs. You’re neglecting at least two of the factor costs (the labour required to sell the drink/burger and rent on the property) and also the opportunity cost of erecting a drinks machine/burger grill rather than a high-profit-per-item stall such as jewellry.
The actual ingredients are a minor part of the costs, I should have thought. The fact that they cost 4 or 30 cents is a small part of the story.
Saying that, one Christmas I worked in Tandy (I think it’s called Radio Shack in the states. Bloody awful store anyway). We were strongly encouraged to sell as many batteries as possible. A radio controlled car would be sold at pretty much cost price ($30, say) but then we’d sell $40 worth of batteries with it at a profit of $30+! Batteries are a total rip-off.
Same with the product warranties. They’re only worth a fraction of what they are sold for. Now working as an actuary in general insurance, I can confirm that this is true.
Investment banks make their money on either IPO’s or difficult to understand derivative instruments. They barely make anything just executing trades (buying and selling for customers, even big players like Fidelity).
I remember about 5 years ago at Lehman Brothers, an institutional salesman selling regular old treasury bonds had to sell USD200 million per day to provide a return high enough to justify him sitting on the trading floor. BTW, that was not a typo, but really two hundred million dollars each and every day the market was open, and that was years ago so the bar is probably even higher today.
IPO’s are high margin business as well (and new bond’s as well). Sales commission was something like 25 basis points for a regular secondary stock transaction in HK (and much lower in markets like the US) but several hundred basis points for an IPO.
IIRC, slaughter houses make almost nothing on meat sales, but get their margin on teriary products like the hides.
When I was at a pharmacy conference about two weeks ago I spoke with an exec with a prominent regional grocery chain. I mentioned what I’d heard about the standard 1-2% margin - he replied that I was correct, except for the 2% part. Apparently it almost never gets that high. He said the CFO of his chain had just issued a companywide memorandum, entitled “What a Margin Increase of .01% Means to Our Company.”
They don’t, over here in the UK anyway. I worked at a shell garage for a year and a bit, they literally are making a penny or two per litre they sell. Nearly all of our profit came from the shop on the site.
I don’t think I’m telling tales out of school to reveal that the money you spend on subscriptions or at the newstand buying a paper or magazine doesn’t come anywhere close to covering the cost to produce that item.
But you gotta love advertising. Without it the Post would cost $5 a day or some such.
(No foolin’. I did the breakdown on one magazine I worked at. We charges $29/year for a subscription (a bit more on the newstand). Had we not received the bulk of our income from advertising our break even on subscription would have been $240/year.)
When I worked for a pizza place, I was told that most of the money was made on toppings. We are a part of a small local chain, so our prices weren’t as high for basic pizzas, but toppings would be at $1+ per topping. For cheap things (like onions) that’s a huge markup.
Pizzas were not too bad, but we also offered other things at much less profit – such as mozzerella sticks, chicken wings, and canned sodas – because having a bigger selection gave us an edge (we couldn’t compete with the marketing of Pizza Hut and Domino’s, so we made up for it on service). We also had other low-cost items, such as sandwiches and cheese bread. We even had a deal with the Dairy Queen to deliver cups of ice cream with orders.
This was a franchise, and they were getting by, but not making out like demons. The owner/manager (a couple) live in a very modest house and work insane hours. The restaurant industry is tough.
You can learn a lot from minimum deliveries – ours was higher if you ordered stuff from the fryer, and extras like soda didn’t count towards the minimum delivery. It wasn’t to be unfriendly to the customer, but rather because our delivery area was HUGE and you need to pay the drivers, maintain vehicles (5 little Hondas were available to drivers – it was cheaper than paying mileage in the long run), and so on.
My sister worked in a hotel – I never knew this, but you can haggle the cost of a hotel room. If the hotel room is likely going to be empty, it’s better for them to put someone in at a discount (if it covers cost of cleaning and such) than to let it sit empty. We got great deals when we travelled, because she’d call multiple hotels. In the end, we got a great suite for 4 in Denver for $90 a night, which is really good, in a new hotel with indoor pool and all that – because we called a budget hotel, and they offered us that price, and we said we’d stay if they price-matched. This was during the summer, too.
I never, but never, buy sodapop. I have always had an instinctual awareness that it’s nothing but a frickin’ waste of my hard-earned money. I drink water if I’m thirsty. If I want sweetness and flavor, I pay a little more for 100% fruit juice and get some actual nutrition for my expense.
I never drink alcoholic beverages, either. The theater and restaurant owners must hate me.
Amazing. <shaking head> It’s like saying that big business success is a matter of Magick (as Aleister Crowley would define it) rather than actually producing a product or providing services. Persuading the kingpins of finance that your “mojo” is powerful.
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