How retail works and makes money
The four main store formats, the value chain from supplier to shopper, the revenue sources beyond selling goods, and an approximate cost breakdown.
Industry brief, with a one-minute summary: RetailFirm processes and online tests change from year to year and differ by office. Use this to prepare, and confirm the exact current steps on the firm's own careers page.
Key takeaways
- A retailer buys goods from suppliers, holds them for a short time, and sells them to shoppers at a higher price.
- Retail profit comes from three things multiplied together: enough shoppers, a healthy margin on what they buy, and low cost to serve them.
- Grocery: supermarkets (medium stores, full range of food), hypermarkets (very large stores that also sell electronics and clothes), and discounters (small range, low prices, many own-brand products).
- Apparel (clothing and shoes): fashion chains and brand stores. Products change every season, so unsold stock loses value fast and must be sold at a discount (a markdown).
- Department stores: large stores with many categories (clothes, beauty, home) under one roof.
Key idea
A retailer buys goods from suppliers, holds them for a short time, and sells them to shoppers at a higher price. Each sale earns a small margin, so profit comes from selling a lot, wasting little, and turning stock into cash quickly.
Retail is the last step before the shopper. The retailer does not usually make the product. Its job is to choose the right products (the range), put them in the right place (stores, website, app), at the right price, and keep the shelves full. Before you read this module, the Industry fundamentals module explains value chains and unit economics in general. Here we apply those ideas to stores.
Four formats you will meet in cases
- Grocery: supermarkets (medium stores, full range of food), hypermarkets (very large stores that also sell electronics and clothes), and discounters (small range, low prices, many own-brand products). Shoppers visit often, sometimes several times a week.
- Apparel (clothing and shoes): fashion chains and brand stores. Products change every season, so unsold stock loses value fast and must be sold at a discount (a markdown).
- Department stores: large stores with many categories (clothes, beauty, home) under one roof. Many products are sold by brands that rent space inside the store (a concession) and pay the store a share of sales.
- Convenience: small stores near homes, offices, or fuel stations, open long hours. Baskets are small, prices are higher, and many stores are run by franchisees (local owners who pay the brand a fee).
- Retail value chain
- BuyingChoose the range, negotiate price and supplier support (rebates, promotion funding)
- LogisticsSupplier to distribution centre (a large warehouse) to store, or supplier direct to store
- Key: Store operationsStaff, rent, energy, shelf filling, checkout, loss from theft and waste (shrink)
- Selling and marketingPrice, promotions, loyalty programme, store layout, online channel
- After the saleReturns, customer service, data from the loyalty card
Each box is a step where a retail case can find its problem.
How retailers make money
- The trading margin: the gap between the price the shopper pays and the price paid to the supplier. This is the main source of profit.
- Supplier income: suppliers pay for good shelf space, for being listed, and for promotions. These payments can be a large part of a grocer's profit.
- Own-brand products (private label): products sold under the retailer's own name. They usually give the retailer a higher margin than a famous brand at a lower shelf price.
- Retail media: selling advertising to brands on the retailer's website, app, and store screens, using the retailer's shopper data.
- Services and fees: franchise fees in convenience, rent from concessions in department stores, and sometimes financial services such as store credit cards.
| Format | Typical gross margin | Typical operating margin | What decides profit |
|---|---|---|---|
| Grocery supermarket | 20 to 30 percent of sales | 2 to 5 percent | Volume, waste of fresh food, staff productivity |
| Grocery discounter | Lower than supermarkets | 2 to 5 percent | Small range, very high sales per store, low cost |
| Apparel chain | 50 to 65 percent of sales | 8 to 20 percent for strong players (Inditex about 20 percent and H&M about 8 percent in 2025) | Selling at full price before the season ends |
| Department store | 35 to 45 percent of sales | Often low, 0 to 5 percent | Large rents and staff cost against falling visits |
| Convenience store | 25 to 35 percent of sales | 3 to 6 percent | Location, opening hours, fresh food and coffee |
So-what
A high gross margin does not mean a high profit. Apparel keeps more per sale but carries markdown risk; grocery keeps little per sale but sells every day.
| Line | Approximate share of sales | Comment |
|---|---|---|
| Cost of goods sold | 70 to 78 percent | What the retailer paid suppliers, after rebates |
| Store staff | 8 to 12 percent | The largest cost the retailer controls |
| Rent and occupancy | 3 to 6 percent | Lower if the retailer owns its buildings |
| Logistics | 2 to 4 percent | Warehouses and trucks to stores |
| Other store costs | 2 to 4 percent | Energy, cleaning, card fees, shrink |
| Head office and marketing | 2 to 3 percent | Buying teams, IT, advertising |
| Operating profit | 2 to 5 percent | What is left |
So-what
With a 3 percent profit margin, a cost change of 1 percent of sales changes profit by about one third. Small levers matter a lot in grocery.
The metrics retailers watch
- Like-for-like (LFL) sales growth: sales growth only from stores open in both periods, usually at least a year. It removes the effect of new and closed stores. In the US it is often called comparable or "comp" sales.
- Sales per square metre (sales density): yearly sales divided by the selling area. It shows how well a store uses its space.
- Footfall, conversion, and basket: visitors to the store, the share who buy, and the average amount spent per purchase. Sales = footfall x conversion x average basket.
- Gross margin: sales minus cost of goods, as a share of sales.
- Shrink: stock that is lost and never sold, through theft, damage, spoiled fresh food, or errors. Usually shown as a percentage of sales.
- Inventory turns: cost of goods sold in a year divided by average inventory. It shows how many times stock is sold and replaced each year.
Retail profit comes from three things multiplied together: enough shoppers, a healthy margin on what they buy, and low cost to serve them. When a retailer's profit falls, one of these three moved.
A grocer and a clothing chain both have an operating margin of 4 percent. Which statement is most likely true?
Sources for this lesson (3)
- Recognized public explanations of case-interview concepts and frameworks
- Inditex: FY2025 results, 1 February 2025 to 31 January 2026 (March 2026)
- H&M Group: full-year report 2025 (January 2026)
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