In reality, what is a good net margin in a retail business?

At Tectona we are often asked to comment on margins of our client businesses = especially new clients.  As we work with businesses in many sectors we are in an unenviable position to make such assessments.  So, that said, what are our comments on retail?

The short answer is that there is no uniform margin in retail.  There are many facets to retail trade and margins will be different in Bond Street to Bicester Outlet Village.  One has to refine the question to “what is a good overall margin in a particular retail sector”.  This is ultimately driven by the need to cover all other operating costs and overheads of the business and to allow a net profit after tax that represents a good return for the risk involved.

So if we compare a supermarket to say, Jimmy Choo shoes, which has the better margin?  One thing is for certain the margin on a pair of Jimmy Choo’s far exceeds that on a tin of baked beans!  However looking a little deeper, the supermarket has huge stock with many product lines over which varying margins can be made and a huge customer base to which sales are made.  On the other hand, Jimmy Choo shoes are only affordable to the wealthiest in the world and the product range is limited by comparison.   Looking at recent financials the relative EBITDA (earnings before interest, taxes, depreciation and amortisation) for each business as a percentage of turnover is around 17% for Jimmy Choo and 3.3% for Sainsbury.  That is only part of the story and you might therefore think that Jimmy Choo wins the margin race.  However Sainsbury’s makes around 16 times for absolute EBITDA at c. £790m compared to Jimmy Choo’s £50m.  Whose profit/margin would you prefer?

We at Tectona are skilled in financial analysis and planning, with commercial business knowledge across many sectors.  If you would like to discuss your particular margins further, please contact us.

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