Grocery margins are low is a frequently rehashed point to argue against Mamdani’s public grocery stores.
Grocery is indeed a low margin business. But its median return on invested capital is above that for all firms, so it is NOT a low profitability business.
Let me explain. 🧵
Grocery is an unusual business in that large parts of its costs are intermediate costs. A grocer buys products and sells them and basically just adds the service of retailing. 2/So, the real question is what return grocery gets on their service not on the goods that they intermediate between producers and consumers. But the cost of the products they buy enter into their revenues which reduces margins, as margins are measured as revenue minus costs whichWhat really matters from a profitability standpoint is the return on capital. The outlay to buy products that are pretty much immediately resold, is not really part of the capital invested since it is very quickly recouped. (Grocers often even only pay for the products they haveCapital invested would be for example stores, warehouses, distribution infrastructure etc., so everything they need to actually perform their retailing service. 5/To demonstrate this point empirically consider the attached figure. On the x-axis we have the profit margin, and on the y-axis the return on invested capital. The annual observations for all firms (N= 39,863) are in grey and for the grocery sector (N=1,984, NAICS 445110 plusThe solid black and red lines show by how much the return on investment is higher for an increase by one unit in the profit margin for all firms and grocery respectively on average across the whole period. 7/You can see that margins for grocers are relatively low compared to all firms but that the return on investment is quite high. If we consider the median return on invested capital for all firms (dashed blue line) and for grocery (dashed red line), we can also see that the medianSimply put, grocery is a relatively high return on investment business even though margins are low because of the nature of the business of reselling the products that others have produced. Thanks to Ellis Scharfenaker (University of Utah) for the chart! END
A low margin business cannot cut product prices by any significant magnitude and make it, no matter what it’s scale. You are either being deliberately obtuse or have no business sense.
