High overhead worries retailers, survey shows

High overhead costs have the potential to offset strong gross margins, according to a PwC survey of retailers across the grocery, apparel and specialty categories.

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The survey found that while larger retailers may have several advantages due to their size, the benefits of the economies of scale are often offset by the complexities and duplication of functions that exist within these companies.

The survey also found that retailers with higher gross margins are also more likely to have higher costs, especially in marketing and merchandising. While this has a cyclical effect, the data shows that cost management is a stronger factor in determining net margins than gross margins.

The nature of costs can differ between regions as well. For example, while Canadian retailers enjoy higher sales and margins per square foot than their U.S. counterparts, Canadian businesses also face higher labour and occupancy costs.

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Other highlights from the survey include:

• Of the three retail categories surveyed, grocery has the highest sales per square foot—a median of $510, compared to $336 for apparel and $325 for specialty.
• Driven by unique fashion products (as opposed to the relative homogeneity of grocery merchandise), apparel retailers enjoy the highest gross margin (median of 58%)—well above the 30% for grocery and 41% for specialty. However, apparel also sees higher store expenses than the other two categories due to significantly greater occupancy costs.
• Grocery spends the least on head office expenses, with a median of 5.8% compared to 15.8% for apparel and 11.5% for speciality. This is likely due to pressure from lower margins. Overall, across all three categories, marketing and supply chain costs represent the largest portions of these expenses.

Read: Retail sales key to U.S. growth

Staff

The staff of Advisor.ca have been covering news for financial advisors since 1998.