Factors Affecting Growth & Profitability of the Retail Industry

Long-term success in the retail business depends on company performance on key variables that ultimately determine prospects for growth and profitability. Retailers of all sizes rise and fall on their ability to control the costs of producing and selling goods, maintain healthy markups on pricing, optimize inventory and distribution and ultimately make sales to consumers.

For a retailer, the cost of goods sold is a key variable in long-term profitability. This takes into account direct and indirect costs that ultimately affect bottom-line profits. A retailer figures these costs by including the value of inventory at the start of a given period, adding in new purchases made during the period and also calculating costs such as labor and shipping. Costs to sell goods can be lowered based on factors such as the goods’ country of origin and automated and online processes the business can use to obtain materials, track shipments and otherwise keep inventory closely matched with demand.

Markup is the amount a the seller can charge on top of the actual cost of delivering the product to market in order to make a profit. Markup is a key part of a company’s competitive strategy because it needs to be figured in a way that covers current costs but also allows for future contingencies, such as having to mark down an item when sales slow down and inventories need to be cleared. The markup decision is based on factors including the product category, how unique the item is, how fast it needs to be sold and how the markup will impact the retailer against competitive sellers.

Online technology is steadily raising speed, increasing real-time accuracy and dropping the costs of tracking inventory to ultimately get it into buyers’ hands. According to "Forbes," retailer Macy’s posted a 40 percent rise in online sales in 2011, while its brick-and-mortar store sales grew just 5.3 percent. The popularity of online shopping has prompted Macy’s and other retailers to convert some stores into distribution centers to fulfill online orders or to install kiosks in stores allowing shoppers to compare prices and place orders online for delivery to the store or to their homes.

Retailers selling similar products differentiate themselves via customer service strategies aimed at encouraging buyer loyalty and repeat sales, such as free shipping or free returns. "Forbes" cites 2012 research by Washington and Lee University indicating that online shoppers given free returns tend to increase their spending at the same commerce site for future purchases by between 50 and 350 percent, depending on the type of item. When consumers have to pay for return shipping, the value of purchases declines. Smaller firms ultimately must weigh the potential loyalty benefits against their own costs to provide customer service at that level.