Sources of Profit in Retail

Incentive drives behaviour. If you have ever wondered why (brick-and-mortar) grocery retailers historically don’t pay much attention to understanding customer preferences — it’s getting better but things are still moving slowly — then you only have to look at how most of them make their money. It turns out that the main sources of supermarket profits are, in order of importance,

  1. Trade and promotional allowances from brand suppliers
  2. Interest on cash float
  3. Real estate
  4. Margin on sales

Note that shoppers often contribute the least to retailers’ bottom lines. In fact, it has been noted that supermarkets make their money by buying (from suppliers), not by selling (to shoppers)!!

When these sources of profit and the inherent nature of self-service, or passive retailing, are made clear, it is little wonder that many retailers don’t know or don’t care a lot about the actual behaviour of shoppers in their stores.


One thought on “Sources of Profit in Retail

  1. That’s a very interesting observation. From my limited knowledge and observation, buy-side ( buying from producers) has three teams helping them out, I.e. one for determining pricing , another team for hardball negotiating (in person) and another team for marketing/sourcing alternatives (in person). Whereas sell-side only has marketing team that does product placement and promotions. I have always thought that was weird but could not get a explanation why. Your observation gives me a better explanation 🙂

    Liked by 1 person

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