Chapter II Gross Margins, Prices, In addition to obtaining information on the use of installment credit, the Commission survey requested financial statement data as well as wholesale and retail prices on popular appliance and furniture items. This information was classified by type of retailer and indicated that operating results for low-income market retailers differed significantly from general market retailers in a number of important respects. GROSS MARGINS Gross margins represent the difference between the wholesale cost of goods and total revenue derived from their sale at retail as a percent, of selling price. Gross margin is the amount remaining to the retailer to cover operating expenses, including salaries, commissions, rent, equipment, other overhead expenses, and net profit. Though gross margins for different types of retailers in the survey sample varied, the most significant variation was found when margins of low-income market retailers were compared with those of general market retailers (table II-1). The 18 low-income market retailers had an average gross margin of 60.8 percent. The average for general market retailers was 37 percent, ranging from a low of 30 percent for appliance, radio, and TV stores to a high of 41 percent for furniture and home-furnishings stores.1 Obviously, the higher the gross margin on a particular product, the higher will be its retail price. On the average, goods purchased for $100 at wholesale sold for $255 in low-income market stores, whereas the retail price was $159 in general market stores (see fig. II-1).2 Thus, low-income market retailers marked up their cost 21⁄2 times to 1 Subjecting these differences to statistical analysis indicated that there was only one chance in 100 that they reflected simple random variation. In other words, there is every reason to believe that differences in gross margins of low-income market retailers and general market retailers are systematic. 10 These are cash prices and do not include separately imposed finance charges. GROSS MARGINS, PRICES, AND PROFITS 11 determine their selling price. This was the average for the 18 lowincome market retailers in the sample. The retailer with the largest volume of sales in this group had a gross margin of 67.9 percent of selling price, which means that he marked up his merchandise on the average to more than three times its cost. General market retailers that used no installment contracts were also contacted in the survey and their gross margins, as indicated in table II-1, did not differ significantly from the average for general market retailers as a whole. One appliance, radio, and TV dealer, who sold on a strictly cash basis, reported a gross margin of 7.2 percent. This meant that any appliance selling at wholesale for $100 was resold at retail for only $107. This case is very exceptional, of course. TABLE II-1.-Net sales and gross margins of District of Columbia retailers, 1966 1 Gross margins reported by different types of retailers may not be strictly comparable. One low-income market retailer included finance charges and one general market appliance retailer included service charges in their net sales. Adjustments were made in these instances, but other retailers in the sample may have included such charges in their net sales and not reported their inclusion. To the extent that finance, service, and other charges might have been included in net sales and no corresponding adjustment made in cost of goods sold, gross margins for these retailers would be slightly overstated. However, every effort was made to calculate gross margins in this study net of finance and other charges. A number of substantial general market furniture stores reported that they relied on revolving credit accounts and used no installment contracts. The gross margins of these retailers were somewhat higher than those that used installment contracts, averaging 46.6 percent of sales. Likewise, there were three department store companies that reported no installment contract sales, employing instead revolving charge account plans. Their average gross margin of 34.9 percent of sales was somewhat lower than the average gross margin of 37.7 percent shown in table II-1 for those department stores using installment contracts.3 These margins for department stores in our survey conform very closely to the national averages compiled by the National Retail Merchants Association, which reported that in 1964 average gross profit margin for department stores with sales over $1 million per year was 35.3 percent of sales. Operating Results of Department and Specialty Stores in 1964, Controllers' Congress, National Retail Merchants Association, 1965, p. ii. FIGURE II-1.-Average Selling Price, Assuming $100 Wholesale Cost, by Type of Retailer. GROSS MARGINS ON SPECIFIC MERCHANDISE Retailers surveyed were asked to select two "best-selling" items in each appliance and furniture line of merchandise and report their wholesale costs and selling prices. The difference between these figures (selling price minus cost of goods) represented the gross margin, which was expressed as a percent of selling price. Table II-2 gives the average gross margins on each merchandise item for each type GROSS MARGINS, PRICES, AND PROFITS 13 of retailer surveyed. In some instances the gross margins given were for items especially reduced in price for volume sales. Consequently, the averages of these gross margins are somewhat lower than the average gross margins shown for each type of retailer in table II-1. TABLE II-2.-Average gross margins of District of Columbia retailers on best-selling items of appliances and furniture, 1966 Appliance and furniture stores have been classified on the basis of their principal merchandise lines. Furniture stores carry appliances as a substantial secondary merchandise line, and for this reason average gross margins of appliances sold by furniture stores are included in this table. Source: FTC Survey. For every merchandise item specified, low-income market retailers had the highest average gross margins reported-ranging from 66.3 percent on sewing machines, to 51 percent on washing machines, and down to 46.4 percent on television sets. General market appliance retailers had the lowest gross margins for 9 of the 11 merchandise items. Certain merchandise items showed some consistency as to the market level of gross margins. Television sets were sold by all three types of general market retailers at gross margins below 29 percent, and this item sold at the lowest (46.4 percent) average gross margin reported by low-income market retailers. Furniture had relatively high gross margins for all types of retailers. There were some items, however, on which there was no consistency between types of retailers. For instance, radios were the second highest gross margin item (60 percent) for low-income market retailers and the lowest gross margin item (23.4 percent) for general market appliance retailers. Thus, a consumer who would have paid $250 for a radio from a low-income market retailer could have purchased a radio of comparable wholesale value at a general market appliance store for $130. Table II-3 converts these gross margins to a comparative price basis. Since the cost of the merchandise has been arbitrarily held constant, the "retail prices" shown in table II-3 directly reflect absolute differences in average gross margins by the type of store and make |