If you ever wandered into your local grocery store and thought how profitable is the grocery store business then this is the article for you. In this article, I will take an in-depth look at the finance of owning a grocery store and answer the question “Is owning a grocery store profitable?”
Typically, yes, grocery stores are profitable. But grocery store profits depend on a lot of things. Grocery store owners can make between 1 – 4% bottom line profits. The monetary value of the profits can vary widely anywhere between $60,000 to $300,000. More in some cases.
That is not the whole story though. The profits in owning a grocery store depends on a lot of factors. There is the process efficiency, location, demands, management and also the economy as well. Keep on reading to know more about the profitability in owning a grocery store.
Is Owning a Grocery Store Profitable?
If you are running a business well, owning a grocery store is profitable. With every other thing staying constant, that is true for most businesses in most circumstances. Most grocery stores can make anywhere between 1 – 4% bottom line profits.
That is a pretty good margin, for some. Many grocery store owners are earning upwards of $300,000 annually. On the flip side of the coin, you have those who are earning around the $60,000 mark.
The answer really is, it depends. Many small grocery stores can make it work with 1 – 2% profit margins. For those stores, these are acceptable figures. For others, it might not be so acceptable. If you are the single owner of a store, the profit the store makes and the amount you can pay yourself can vary too.
In fact, there are a couple of things that can affect the profitability of your store. Things like the economy, the demand, staffing, size of the store and whether or not it is a franchise – all these can come into play. And many times, they do.
If your grocery store is located at a prime location and you see heavy foot traffic, you might end up having quite a lot of sales. This can also skew the profitability. Also, if you happen to run a small store with a few staff, you can reduce your costs and command a higher margin, thus increasing profitability.
Owning a franchise grocery store has some nuances though. You might need to end up paying a franchise fee but also see more sales thanks to the established brand name.
Other factors like the amount you spend on marketing, fixed costs like rent and/expenses like electricity, etc. have some effect on the margins.
Another key factor to consider is the margins on different items also vary. Milk and bread, for example, have quite low margins. So, you need to be selling a lot more of them to start earning a sizable profit.
Specialty items can have a higher margin. Generally, a small grocery store can have more specialty items or more commodity items depending on the market demand and other factors.
Keep in mind that a smaller grocery store can somewhat run on lower margins. This is just because they do not offer extras like the big chains. They want to sell more at an affordable price for all.
So, if some of the margins might seem low to you, it is also important to keep in mind the size of the store and expenses they have – which will undoubtedly be lower than the big grocery store chains.
Smaller stores can go by just fine with a smaller margin, whereas big grocery store chains with many complex operations cannot. They tend to have larger sizes and more staffing as well. Big chains can also sometimes have higher profit margins because of their market power.
Having said that, grocery stores can be profitable but not always.
Grocery Store Costs
Opening or owning a grocery store does have some costs associated with it. Which naturally will have an impact on the profitability of the costs. Let’s look at some of the costs you, as a grocery owner might need to take into consideration.
Location and Premises
The location is one of the most important things about a grocery store. It also tends to be the costliest aspect of owning a grocery store. Rent is a fixed cost if you are renting the premises.
So, no matter how good or poor your sales are, you will have to pay this amount. You can either rent a storefront, buy it or even build it yourself. There are advantages and disadvantages to all the choices.
Renting is a good way to go if you do not want to spend a large amount upfront. Besides, renting a small place for a grocery store does not always mean you have to get the biggest place you can get.
Many popular grocery store chains operate within a 12000 square feet space. When it comes to renting a space, you need to make sure that each area of your store is doing its bit to bring in revenue.
Space management becomes a big part of the whole process. You can expect to pay around $12,000 for a place like this. If you start with a smaller store, rent will be lower.
Buying a storefront is great since you do not have to pay rent. It is an asset. However, the upfront cost can be quite large. Especially commercial spaces can cost in the range of millions. If you are thinking of buying in the rural side, it can still cost you around half a million mark.
There are pros and cons to both. You do a rent vs buying analysis to know which suits best. The cost is also dependent on the location.
Building a storefront is the most expensive and time-consuming option of the three I mentioned here. You need to calculate the cost of building a storefront per square inch. There are also costs for the architect, contractors as well as pay for permits.
Starting a small grocery store? Then renting can be a good choice initially.
Permits, Licensing and Insurance
To operate a grocery business, you are legally required to have a permit. More so for a food business. Depending on what you plan on selling, there might be other licensing costs as well. For example, selling alcohol will require another license.
The exact business license you will need will depend from state to state. So, I advise you to check out your government's website for the licenses that are specific to you.
Then you will also need insurance. The last thing you want is something to go and you have no insurance to cover the damages. General liability insurance should work for most grocery stores.
Many grocery store owners pay up to $600 annually for insurance. But it can be lower too.
Buying Equipment and Inventory
Buying inventory and equipment will also be a part of your costs. You need inventory to sell right? Also, you will need equipment to run the grocery store. Equipment will be a one-time cost though.
So, you do not have to worry about repeat purchases. These are not fixed costs. You can even buy some things used. Shopping carts for example. As a general rule of thumb, buying high-quality equipment right from the start is always a good investment.
You can be sure it will not break down after a couple of months forcing you to buy again. You will need general equipment like shopping baskets, carts, shelves, cleaning products, refrigerators, coolers.
Also, a POS system and a website as well for facilitating product sales.
The inventory of products will depend on what you plan on selling. A typical small grocery store can have around 500 hundred items.
There might be different variations of the items as well. This will depend from store to store, but it is always a good idea to stock up on fast-moving and in-demand items at the very least.
Until or unless robots are advanced enough to do retail work, you will need to hire staffing to help you run your grocery store business. Staffing is also one of the highest expenses depending on the number of workers you have.
If you have a small store, you can easily go by hiring a few full-time workers and a manager. Or you can take on the manager role yourself if the store is sole ownership. There might be a need for cleaning staff, cashiers and baggers as well.
As you can see some of the expenses are one-time expenses. Some are also even before you open the store itself. Others are recurring. For example, electricity bill, staff salary, buying inventory and rent if you decide to rent a storefront.
Grocery Store Profit Margins
Grocery store profit margins are quite low. Although some well-known and large grocery stores can command a higher margin. Conventional grocery store margins are as low as 2%. Sometimes just over 2%.
Grocery stores make up for that by moving more products. The quantity sold is one of the biggest factors in generating revenue when margins are so low. There are other ways a grocery store makes up for small margins.
A larger store can make it work with smaller margins. They can distribute the costs amongst other stores. Small stores might need to charge a little bit higher margin.
If you can distribute the costs of administration or make your business process more efficient, that is still a good way to capitalize on low margins. And of course, as mentioned before, sheer sales volume also helps to offset the small margins.
Efficient staffing reduces costs as well. Some stores are self-service. This means that there are little costs for employee salary.
Finding the correct margins must include you having to figure out how much it costs for you to keep the store running. That way you can target a specific margin and try to work on that.
The goal here is to know how much you need to mark up a product to get to your desired margin.
To calculate, express your desired margin as a decimal. So, if you want a 30% margin, it should be 100 - 30. That will give you 70. Now turn it into a decimal, this gives you .7
You will divide your cost of a product by this decimal to come up with the retail price to hit your targeted margin.
If the cost of buying a product is $2. Then, $2 / .7 will give you 2.86. You should sell your product at $2.86 to hit a 30% margin.
Ways to Improve Your Grocery Profit Margins
There are actually some things you can do to improve your profit margins. Here are some things to note:
- Improve your brand. A better brand presence will allow you to command higher margins
- Be creative with prices and price increases – use psychological tactics in pricing
- Make your process more efficient. This will reduce costs overall
- Increase your AOV. AOV is the average order value. By getting the customer to pay more for each order you can increase your margins. For example, offering complementary goods.
Grocery Store Business Best Practices
Here are some best practices and tips to help you further increase the profitability of your grocery store.
- Improve the supply chain
- Avoid bottlenecks in the process
- Organize your store to allow for more sales. For example, high impulse items at the counters. Fresh products in the front and center
- Embrace technology. Technology can greatly improve efficiency and reduce costs. This will in turn give you higher profitability overall.
- Follow retail guidelines set by the government. The last thing you want is to be in hot waters with the authority when running a grocery store or food business.
So, is owning a grocery store profitable? Yes, if you know what you’re doing. There are a lot of moving parts and there are certainly ways to make it a very profitable business. But just like any other business it is going to take time, money and dedication.
With the right passion and know-how, you can open a grocery store and turn it into a profitable business. The key here is to go on about it strategically.