>Margins are the difference between what it cost, and what you earned. But what I would call "profitability" is your actual return versus capital deployed.
>For example, I know a retailer that earns a 1% margin...terrible? No. They turn over their inventory every week (roughly), so they earn that 1% 56x times a year...that is a very profitable business. Similarly, I can earn a 90% margin but if I can only turn my assets over every ten years (some business are like this) then that business isn't very profitable.
I do not know what most of this is supposed to mean, but that is not what profit margins indicate on a company's 10-K. A 1% profit margin indicates little room for error, and given that most retailers pay bottom tier wages, it means they have intense competition and little pricing power. Very few at the very top might get rich in retail.
>Retail provides massive utility.
I specified that retail does not provide much utility compared to other retailers.
>I am not clear what your point is.
My point was that I disagree with your original comment
>They strip all the difference out of their product, usually compete solely on price, and (ofc) someone eventually comes in and undercuts them. That is a failure of incentives and management.
There is no failure of management or incentives. There is customers willing to shop somewhere else for 5 cents less. A few retailers, that I mentioned, will succeed catering the the top 1 or 2 quintiles who can afford to pay a little extra, but most retailers will be competing on mostly price alone.
Okay, to make this clear: the company that I am talking about earned a 67% return on investment...does this sound high or low level of profitability? Margin tells you nothing, businesses are not valued on margin but by return on capital (of which margin is a component but not the only component).
Also, your points about margin are all wrong...supermarkets control both the price they charge and the price they pay. To give a simpler example (you are confusing lots of things like having low-paid staff) is HFT a profitable business? Margins are the lowest of possibly any business known to man, these firms are usually making significantly under 1% or even 0.01% on each trade...that ignores two things: they don't take an opportunity unless it is profitable (gas stations are another example, margins are low but essentially fixed), and they turn their portfolio over thousands of times per day. If you earn 0.01% that isn't a lot, if you earn 100 000x per day then that is very profitable.
And I explained why retail does. If retailers aren't necessary, why is Amazon so large? Are Chinese factories just choosing to set fire to money? You explaining it does not make it true.
Again, Trader Joe's is a perfect example. Because people care about price does not mean they don't care about anything else. This is the mistake that MBAs at retailers made, they chose to compete at a game they would lose. Again, the reason why consumers perceive their choices in that way is because that is how retailers have chosen to compete. There are lots of other models (you named one, Trader Joe's grew by competing on price AND also choosing to narrow their range significantly...the same model was actually used by dollar stores, they actively chose to run against competitors who tried to carry everything...competing on price does not mean that you have to compete on price alone).
> If you earn 0.01% that isn't a lot, if you earn 100 000x per day then that is very profitable.
My point about profit margins is that they are low profit margins per employee (which I should have made explicit). Retail companies do not have room to hire better managers and workers.
The low margins show that customers are only willing pay so much and that it is a basically all optimizations have been wrung out. At least until a game changer comes along like the internet, which provides even further optimizations, but those are about lowering costs, generally including payroll.
> And I explained why retail does. If retailers aren't necessary, why is Amazon so large? Are Chinese factories just choosing to set fire to money? You explaining it does not make it true.
I never wrote retailers are not necessary. I explained why most retailers cannot be differentiated from one another. And the answer is because for most things, the customer does not care for much other than low prices.
Trader Joe’s is a good example of there being a little bit of opportunity serving the richer households. Trader Joe’s are always only in the richer parts of town, like Costco. But Trader Joe’s is certainly not cheaper than a mainstream grocery store like Kroger or Winco or Aldi, and won’t be able to compete with them in neighborhoods with poorer demographics.
>For example, I know a retailer that earns a 1% margin...terrible? No. They turn over their inventory every week (roughly), so they earn that 1% 56x times a year...that is a very profitable business. Similarly, I can earn a 90% margin but if I can only turn my assets over every ten years (some business are like this) then that business isn't very profitable.
I do not know what most of this is supposed to mean, but that is not what profit margins indicate on a company's 10-K. A 1% profit margin indicates little room for error, and given that most retailers pay bottom tier wages, it means they have intense competition and little pricing power. Very few at the very top might get rich in retail.
>Retail provides massive utility.
I specified that retail does not provide much utility compared to other retailers.
>I am not clear what your point is.
My point was that I disagree with your original comment
>They strip all the difference out of their product, usually compete solely on price, and (ofc) someone eventually comes in and undercuts them. That is a failure of incentives and management.
There is no failure of management or incentives. There is customers willing to shop somewhere else for 5 cents less. A few retailers, that I mentioned, will succeed catering the the top 1 or 2 quintiles who can afford to pay a little extra, but most retailers will be competing on mostly price alone.