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Understanding Retailer Profit Margins: What Is Considered Good?

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Updated October 17, 2025

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The retail sector is one of the most diverse industries in the U.S., encompassing everything from agriculture to automobiles to fashion accessories. Some retail sub-sectors, such as high-end clothing and personal-care retailers, have high gross profit margins, but net margins for the industry tend to be low compared to other sectors. However, not all retail sub-sectors are the same. For example, building supply retailers have higher margins than online retailers.

But what really is a good profit margin for retailers? Price competition and changing consumer preferences are among the factors that influence profit margins, and some successful retailers use a high-volume approach to boost profits.

Key Takeaways

Retail profit margins are generally low compared to other industries, due to high competition and discretionary spending.
Building supply retailers typically have higher net margins, averaging 8.40%, compared to other retail sub-sectors.
Successful retailers like Walmart utilize a low-margin, high-volume sales strategy to maintain profitability.
Online retailers often experience higher margins than brick-and-mortar stores because they have fewer overhead costs.
Volatility in retail is common as consumer tastes and spending patterns frequently change.

Profit Margins Across Retail Sub-Sectors

The most profitable retail sub-sector by net margin is usually the building supply retailers. Companies in these sectors often achieve average net margins of 8.40%, more than the average for the online retail sub-sector, which on average is 6%, which is still higher than many other retail sectors.

Fast Fact

Walmart, Amazon, and Costco are the top three retailers in the world by revenue.

Certain markets, such as retail electronics and retail clothing, have to adapt to constant changes in consumer tastes. Due to cyclical consumer spending patterns, a company might be very profitable in the first quarter of the year and struggle during the fourth quarter.

Factors Contributing to Low Retail Margins

The Internet has made it easier than ever to compare prices and shop from around the world. Low-cost foreign competition has also made it tough for retailers; however, one of the major reasons retail margins are relatively low is most retail spending is purely discretionary.

Consumers can afford to be frugal and picky when it comes to discretionary items, as they make decisions quickly, and can often change their minds and return purchases without consequence. This means there is a relatively high price elasticity of demand for retail goods, which makes it difficult to raise prices.

Understanding the Impact of Low Retail Margins

Most major retailers that hope to be successful need to have a high sales volume. A low-margin, high-volume sales strategy has proved successful for companies like Walmart (WMT) and Target (TGT).

Walmart had a net margin of just 2.55% in October 2023, but it still generated an income of more than $16 billion by being one of the largest retailers in the world.

At the same time, if a retailer can’t achieve some sort of scale and advantage that allows them to be profitable, like Walmart, they’ll ultimately go out of business, as so many companies have, including RadioShack, Nine West, Payless Shoes, and Toys R Us.

What Is the Average Markup Percentage?

The average markup percentage for small businesses is generally 50%. This means that a business will charge 50% more for a product than the cost of making that product. Companies do this to ensure they are covering their costs and earning a profit.

How Can I Increase My Profit Margins?

Ways to increase your profit margins are by improving your inventory methods in order to avoid markdowns to sell-off extra inventory; improving your brand image to be one of more quality and worth; reducing operating expenses; increasing the order value of customers in the store; negotiating better terms with suppliers, and increasing your prices if it makes sense.

Why Is Buying Wholesale Cheaper Than Retail?

Buying wholesale is cheaper than retail because wholesale products are purchased directly from the manufacturer, cutting out middlemen costs, and in bulk so that discounts are offered.

The Bottom Line

Retailers generally have low profit margins due to the nature of their businesses. Online retailers tend to have higher profit margins than brick-and-mortar retailers due to lower costs. In order to generate respectable profit margins, companies need to generate high sales, known as a low-margin/high-volume sales strategy.

Article Sources

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CSI Market. "Internet, Mail Order & Online Shops Industry Profitability."
Stern School of Business. "Margins by Sector (US)."
Deloitte. "Deloitte Retail Volatility Index." Pages 23-25. Download PDF.
National Retail Federation. "Top 50 Global Retailers 2023."
Macrotrends. "Walmart Net Profit Margin 2010-2023 | WMT."
Retail Dive. "The Running List of Major Retail Bankruptcies."
LibreTexts Business. "Retail Management (Lumen): 12.21: Retail Pricing Strategies."

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