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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

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. Retail provides massive utility. Retail is the link between producers and consumers. Most producers do not have the interest or the ability to sell direct to consumers, it is a totally different (and very expensive) business. And barriers to entry are significant: retail is complex, there are huge fixed costs, and you own the link to consumers (that is why distribution is where all the profit is within most value chains). The internet does make information easier but retailers also do that job, Amazon doesn't but product selection a competitive advantage (most consumers trust retailers more than they trust brands...Amazon's return policy is a prime example, retailers need trust). And there is a difference between providing information and distribution: if that wasn't true Consumer Reports would be the biggest retailer in the world (I actually agree with this a huge amount though, this has never made sense to me...but trust is complex, humans aren't totally logical, and the system we have is pretty good). I am not clear what your point is. But one, small proportions are fine, Ferrari doesn't sell to everyone and they do okay. Restoration Hardware is a more modern example. Two, your point about those stores is my point about why distribution is profitable. Three, and the point I made earlier is that most of those stores (but not all) have essentially become derivative of each other...and that is why physical retail isn't competitive. Most physical retailers essentially threw up their hands, and decided to compete on price alone which suited online retailers very well (as I said though, this happened when retailers took more control over supply chains and started sourcing directly from factories in China, and this largely started before Amazon existed but accelerated hugely in the 2000s). I can consolidate these points by mentioning Restoration Hardware again: no-one knew they needed Restoration Hardware before Restoration Hardware existed, their model is ludicrous, it makes no sense...but it is also very successful and gives consumers something they cannot get online. If you asked consumers what they want before cars were invented, they will tell you they want a better horse (btw, Trader Joe's is also the perfect example of this...they did almost everything you shouldn't do in retail, that is how they succeeded).

lotsofpulp 5y ago
>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.
- hogFeast 5y ago
  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).

lotsofpulp 5y ago

>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.

hogFeast 5y ago
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).