| Behind The Store Front
Prepared for the Retail Council of Canada in partnership with Industry Canada By Jacobson Consulting Inc.
The Retail Sector |
4.1 Sectors
The next chart (Figure 6) highlights the distribution of operating revenue by trade group for 2003. As noted above, stores in a specific sector or trade group occupy a major share of the commodity groups in which they are specialized. However, many store formats in each trade group may also sell commodities traditionally associated with another trade group. In other words, the market share of the trade group shown in the next chart (Figure 6), does not match the market share of the commodities shown in Figure 3.
The automotive and food sectors occupy more than half of retail revenue by sector. After the food, automotive and general merchandise sectors, most retail sectors supply less than 5 per cent of total sales. This reflects both the degree of product specialization and the relative demand for their products.
4.2 Stores
All stores are not the same. Obviously, there is a big difference between a warehouse club store and a small discount or general store or a department store. Yet, the requirements of the statistical classification and the preservation of confidentiality require that those sectors be combined in much of the subsequent analysis in this report.
The amount of revenue generated in a specific location varies both with the physical store format, i.e., its size, and what it sells. The next figure (Figure 7) shows the average revenue per location for Canada. As reported below in Figure 7, the clear winner in terms of revenue per location is probably a new car dealership. In 2003, the average location generated annual sales of $19 million. Supermarkets and General Merchandise stores come next. If it was possible to report the results for the large general stores and warehouse clubs separately from small general stores, the large format stores in the general merchandise would possibly lead the pack rather than car dealers. Store formats such as home furnishings specialist stores generated an average of less than $700 thousand of revenue in 2003.
The actual data underlying this chart are available in the statistical appendix. The data indicate that several sectors have store formats with annual average revenue of less than $800,000 including:
- Home Furnishings Stores
- Computer and Software Stores
- Convenience and Specialty Food Stores
- Clothing Stores
- Shoe, Jewellery and Luggage Stores
- Sporting Goods, Hobby, Book and Music Stores
- Miscellaneous Store Retailers.
This perspective is reinforced when viewed in terms of revenue per square foot in Figure 8 below. The data on revenue per square foot are developed for chain stores only excluding the automotive and gasoline stores.5 The general pattern of the results shows the high ratio for the alcoholic beverage sector. This might be expected from the relatively high value of the product compared to the space required to display it. Data underlying this chart are shown in Table 9 in the statistical appendix. High ratios for computer and home electronics and pharmacies reflect the relative size and value of their products compared to the display space needed.
The relatively high value of sales per square foot for supermarkets is probably reflective of the extent of their turnover relative to the size of their stores. The prior chart showing sales per location (Figure 7) indicated their high turnover relative to other sectors. Retail stores can be classified into chain and non-chain stores. Chain stores are defined by Statistics Canada to be groups of more than 3 stores with common ownership. Statistics Canada attempts to determine the extent of franchise activities in the various sectors but the information is not uniformly consistently reported. However, it is clear that the chain store format dominants many sectors by revenue. The next figure (Figure 9) shows the portion of sector revenue captured by the chain format.
Stores which are identified as non-chain may be stores with a common identification that are part of a buying group, franchise or other organizations. For example, in the chart above, formal chain penetration in the new car sector is shown to be minimal but the dealerships, although independently owned, are always tied closely to a particular automotive supplier. Similarly, some groups of building material stores may be independently owned but retail under a specific banner with supplies purchased only from one wholesale group.
4.3 Margins
Margins present a different picture of store/sector performance than shown by simple revenue measures. The gross margin is the difference between the cost of goods sold and the amount received for them. As a rate, it is often referred to as the return on sales. This margin must cover all the expenses of the business including labour costs, taxes, building maintenance and other expenses as well as profit. As discussed above, the margin is the actual production of the sector. The next figure (Figure 10) highlights the patterns of store gross margins for 2003. These vary significantly by sector and do not follow the pattern of measures such as revenue per location. For example, although the new car sector had one of the highest ratios of revenue to location, it reported a gross margin rate of only 12.3% in 2003. This contrasts with the clothing sector. The average revenue per store was only $783,000 in 2003 but the sector produced margins equivalent to 44.6% of revenue. The margin rate for clothing is only slightly inferior to that of the beer, wine and liquor sector.
Of course, profits, the residual after all input costs are paid, are really the target. It is not surprising that the most profitable sector, by far, is the alcoholic products distribution sector. Unlike sectors such as gasoline distribution, in this sector, many of the government monopolies manage the sector to achieve a high profit for the government rather than simply include significant taxes in the prices to extract government rents. Thus, the profit rate in the alcohol sector is almost three times the rate enjoyed by gasoline distribution, the next best performer in the profit sweepstakes.
The next chart, Figure 11, showing the profit margins by trade group for 2003, indicates that many trade groups are unable to achieve average profit rates exceeding 5 per cent.6 Detail reported in the statistical appendix (Table 13) shows that profit rates are higher for the chain form of retail organization than for the non-chain stores. Notably, the new auto sector has one of the lowest profit rates in retail yet it accounts for a disproportionately large part of the aggregate sales volume. One of the issues for the automotive retail sector may be the relatively high labour costs compared to other retail sectors. This will be demonstrated in subsequent sections on labour costs and compensation.
Looking regionally, profit margins are generally wider in Ontario than in other parts of the country. Notably, the supermarket sector in Ontario enjoyed substantially higher profit rates (7% in 2003) than in other parts of the country (4.2% average).
| High | Low | ||||
| Canada Average | Province | Value | Province | Value | |
| New Car Dealers | 1.5% | NT | 2.7% | NL | -2.0% |
| Used and Recreational Motor Vehicle and Parts Deal | 3.2% | AB | 6.2% | MB | 2.1% |
| Furniture stores | 5.6% | NB | 6.6% | NU | 0.0% |
| Home Furnishings Stores | 6.0% | MB | 7.4% | NU | 0.0% |
| Computer and Software Stores | 1.5% | SK | 3.7% | NS | -3.0% |
| Home Electronics and Appliance Stores | 3.1% | QC | 5.9% | SK | 1.0% |
| Home Centres and Hardware Stores | 9.9% | ON | 13.1% | PE | 0.9% |
| Specialized Building Materials and Garden Stores | 4.0% | AB | 5.0% | NU | 0.0% |
| Supermarkets | 4.2% | ON | 7.0% | NL | 0.4% |
| Convenience and Specialty Food Stores | 3.0% | NU | 16.9% | AB | 2.1% |
| Beer, Wine and Liquor Stores | 31.9% | CA | 31.9% | AB | 3.4% |
| Pharmacies and Personal Care Stores | 4.3% | SK | 6.6% | PE | 2.4% |
| Gasoline Stations | 11.6% | ON | 13.9% | YT | 2.8% |
| Clothing Stores | 4.8% | NS | 6.5% | NU | 0.0% |
| Shoe, Jewellery and Luggage Stores | 6.4% | AB | 7.1% | NL | -0.4% |
| Sporting Goods, Hobby, Book and Music Stores | 4.5% | PE | 6.4% | NS | 2.3% |
| Department Stores & Other General Merchandise Stores | 4.7% | NU | 16.1% | BC | 3.3% |
| Miscellaneous Store Retailers | 6.2% | NS | 7.7% | NB | 2.9% |
| Total | 5.7% | NU | 13.5% | NL | 4.2% |
| Source: Annual Retail Trade Survey |
The stronger performance in Ontario is apparent after 2000. Generally, Ontario is at or near the top of the heap in profit comparisons. Yet, data below will show that sales growth has not been stronger in Ontario than in other regions. Broadly speaking, retail sectors in the Atlantic Provinces appear to have the lowest profit margins.
5Chain stores are explicitly defined by ownership of 4 or more locations. Chain store data will not include data on the franchise or banner stores and thus not provide a complete picture of results for the trade group.
6The profit rates, reported here, are before-tax operating profits. This is the only concept available from the Annual Retail Trade Survey. After-tax profits are available only from taxation-based data sources. Resource limitations precluded their inclusion in this report. The rate is defined as operating revenue less operating expenses.