Grocery store profit margins: They’re the number one factor in your small business’ success.
Offering the freshest products, friendliest customer service, and most well-organized shelves in the neighborhood is certainly worth bragging about — but it doesn’t matter if you aren’t making more than you’re spending.
That’s why we’ve created this quick guide to grocery store profit margins. We’ll cover the basics of grocery store profitability, share how to calculate your store’s unique profit margins, and explore our top four tips for grocery store success.
Grocery Store Profit Margins: The Basics
Before we explore your grocery store’s unique potential for profitability, let’s cover the basics.
In simple terms, your profit margin is the amount of revenue you make when you sell an item, minus the cost to stock it. For example, if you buy a bag of potato chips from your supplier for $1.50 and then charge your customer $2, you’ll earn $.50 in profit.
Grocery stores have notoriously thin profit margins — usually ranging between 1 and 5%.
These profit margins depend on several factors, including:
- Current economic conditions like inflation and the supply chain
- Your store’s location, nearby competitors, and customers’ buying power
- Your store’s specialty and the types of products you sell
While some of these elements are outside of your control, the good news is that you can adopt smart stocking, customer service, and marketing strategies to boost your chances of profitability.
Calculating Your Grocery Store Profit Margins
We have a plan to improve your grocery store profit margins — but first, let’s find your starting point.
There are three key metrics you should know how to calculate: your profit margin by item, your gross profit margin, and your net profit margin.
Profit Margin By Item
To calculate your profit margin by item, simply subtract its wholesale cost from the price you charge in your grocery store.
For example, if you charge $6/pound of ground beef in your meat department and get it from your supplier for $5/pound, you’ll earn $1 in profit, resulting in a 17% profit margin.
Calculating the profit margin for each item in your inventory is a tedious task, so we recommend investing in a grocery point of sale (POS) system with powerful reporting features. This tool lets you input wholesale costs, makes it easy to adjust prices, and automatically calculates your profit margin per item.
Gross Profit Margin
The next number you need to know is your gross profit margin.
To calculate your gross profit, subtract the cost of goods sold (COGS) from your overall revenue. To get your gross profit margin, take this figure and divide it by your total revenue figure, then multiply by 100.
Let’s look at an example. Your grocery store’s monthly revenue is $15,000, and you spent $7,000 on inventory. Your gross profit is $5,000.
To calculate your gross profit margin, divide $7,000 by $15,000, then multiply by 100 to get a percentage.
Your gross profit margin would be 46%.
Net Profit Margin
Unfortunately, a good gross profit margin doesn’t always lead to grocery store success.
That’s why you also need to know your net profit margin, which includes your total operating costs and provides a more accurate look at whether or not your grocery store is profitable.
To calculate your net profit, subtract your total operating expenses from your revenue. Then divide this figure by your revenue and multiply by 100 for a percentage.
For our example, let’s stick with the same numbers. Your grocery store’s revenue is $15,000, and you spent $7,000 on inventory, plus an extra $5,000 on rent, utilities, payroll, and more.
After subtracting $12,000 from $15,000, you’re left with a net profit of $3,000. Divide $3,000 by $15,000 and multiply by 100 to reveal a net profit margin of 20%.
How To Improve Your Grocery Store Profit Margins
Now that you have a benchmark, let’s look at some specific ways to improve your grocery store profit margins.
1. Keep Grocery Store Costs Low
One often overlooked ingredient for high grocery store profit margins is low costs.
Uncontrolled expenses can wreak havoc on your bottom line. Even if you’re raking in revenue, you still might be in danger of spending more than you’re making.
Here are three best practices to keep your costs in check.
- Manage your inventory: Every wilted vegetable or spoiled steak is money down the drain — which is why you need an effective grocery inventory approach. Invest in a POS system with real-time stock tracking and perishable inventory management to minimize waste and prevent stockouts.
- Negotiate vendor contracts: Regularly review your purchasing agreements and negotiate with suppliers to keep inventory costs low. Keep a close eye on your expenses by relying on a grocery POS system with vendor management, purchase order creation, and automated receiving.
- Embrace self-checkout technology: If you’re dealing with a tight budget or long checkout lines, self-checkout is worth considering. You can cut your operation expenses by hiring fewer cashiers — and you can check out more customers in less time.
These tips will help you save money and secure larger profits while still providing your customers with the freshest products and best service.
2. Expand Your Product Selection
Grocery store profit margins depend wildly on what you’re selling. Shelf-stable products tend to have the lowest margins, while meats, produce, and prepared and baked goods are the most profitable.
That’s why investing into your grocery store’s specialty departments is one of the best ways to boost profits.
Here are three product categories to consider adding to your shelves.
- Specialized items: Farm-fresh meats and produce, sustainable options, and artisan snacks are great additions to your grocery store shelves. Customers will immediately recognize that these are luxury products — and they’ll be willing to pay higher prices for them.
- Private label products: Looking to help your customers save while boosting profits? Consider starting a private label. These items are more affordable to stock, which means you can charge lower prices while still bringing in larger profits.
- Made-to-order meals: Embracing the grocerant trend is a unique way to increase your grocery store profit margins. Consider offering made-to-order meals like sandwiches, wraps, and salads, and charge a higher price for the convenience.
Getting creative with your grocery store’s inventory will delight your customers and help you achieve higher profits.
Many customers are willing to pay a luxury price for a luxury shopping trip — which is why investing in your grocery store’s customer experience is a must.
Here’s how to justify higher prices and become a premium grocery store.
- Update your space: Evaluate your grocery store’s layout, invest in clear signage, and install high-quality lighting. While expensive upfront, these elements will help customers feel comfortable, encourage them to spend more time in your store, and lead to bigger purchases.
- Train your employees: Your employees are the most important ingredient for a great grocery shopping trip. Train them to greet customers warmly, make product recommendations, and ensure a smooth experience from start to finish.
- Go above and beyond: Invest in something that makes your grocery store special. Whether it’s promising organic products or offering a free cookie from the bakery, craft a memorable shopping experience for customers that makes them want to come back.
These strategies will make customers want to pay premium prices to shop at your store.
4. Spruce Up Your Marketing Strategy
Our next profit-boosting grocery store approach is to up your marketing game.
A well-rounded marketing strategy is a low-cost way to bring in more revenue.
Let’s look at how to attract more customers and make more sales:
- Launch a customer loyalty program: Since it’s much cheaper to keep a customer than to attract a new one, a grocery store loyalty program is a must. Encourage customers to visit more often and spend more during each trip with rewards points and discounts.
- Stay in touch: Stay at the top of your customers’ minds by sending email and SMS messages about your new arrivals and upcoming promotions. To simplify communications, use a POS system with email and SMS marketing integrations.
- Offer promotions: While it might sound counterintuitive, offering deals can boost your revenue and make it easier to turn a profit. We recommend launching bulk deals to increase basket sizes or discounting less popular and near-expiry products.
These marketing techniques will keep your customers happy and your revenue healthy.
Grow Your Grocery Profits With POS Nation
Along with the right strategies, boosting your grocery store profit margins also requires the right tools.
A powerful grocery store POS solution can help you monitor your revenue and profits, launch promotions, manage marketing campaigns, track inventory, expand your product selection, and learn more about your customers.
Schedule a personalized demo today to see our grocery POS software in action.