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Retail Industry Analysis 2016 - Cost & Trends

Retail Industry Analysis 2016 - Cost & Trends

Retail Industry in 2016 at a Glance

The retail sector is enormous – within the United States it includes one million stores and accounts for four trillion dollars in revenue in 2013.  Within retail are numerous categories, covering everything from internet catalog sales, to auto dealers, to convenience stores, to vending machines, to clothing. Fragmentation in the industry depends strongly on the specific sub-field – some, such as grocery stores are highly concentrated, while others, like convenience stores, are highly fragmented.

Retail Industry Background

Retail is rife with different categories – amongst them, motor vehicle dealers are responsible for 20 percent of total sales, food and beverage stores for 14 percent and drug and cosmetic stores for 10 percent.  The retail sector is the largest employer in the United States, consisting of over fifteen million jobs. Retail sales tend to be driven by personal income, consumer confidence and interest rates, as retail sales trends tend to resemble that of the economy at large. Large chains and stores have advantages of superior merchandising, marketing, and supply chain management - three things a franchise owner can take advantage of. Margins generally average between 30 and 40 percent, though it depends on the industry – some, like grocery stores, have far lower margins, but rely on volume to make up the difference, while others sell far lower volumes, but rely on higher profit margins.

Location is a particularly important factor when operating a brick and mortar retail store – the success or failure of the store may well depend on it. The business owner must choose whether to locate the store by itself, in a shopping mall, or in a strip mall, and important factors to choose where to place the store include the local demographics, traffic in the area, whether foot or vehicular, proximity to competitive and complimentary retailers, and lifestyle.

Seasonality is a general issue retailers must contend with – most retailers experience a large bump in revenue during the winter holiday season, with smaller bumps coming at, depending on the sector, the back-to-school period, Easter, and Mother's Day. Another potential issue is inventory turnover – in some areas, like grocery stores, inventory lasts a very limited amount of time. Crime related losses are a continuing problem in retail, both from shoplifters and from employees – sectors with above average losses include gifts, books and magazines and food items. Keeping up with trends is essential in this business in many sectors – what's popular one day can be out of vogue the next, and poor forecasting can result in unsellable merchandise.

Retail Industry Issues in the Future

Because retail depends so vitally on the streghth of the economy, and factors like job growth and interest rates, the economy in general will have to become healthy again before the retail sector can rebound fully. Particularly, retail sales related to homes, home improvement services and furniture need a rebound in the real estate market in order to turn around. As demographics change, retailers will have to keep up with the changing needs of the populations in their locations. Ethnic minorities, such as hispanics, are estimated to account for 30 percent of the United States' population by the middle of the century and this may affect the success of some stores and the desirability of different products in these stores.

Identity theft and credit card fraud are concerns that retailers must deal with. Updating security technology can be costly, and particularly slow for older companies with outdated systems. Internet sales are rapidly growing – worth 5 billion in 1999, they were worth 140 billion in 2008 and will likely continue to grow in the future, so it is important for brick and mortar retailers to have online presences.

Types of Retailers

Franchises are offered in numerous categories within retail. Here are just a few of the many options.

Convenience stores are a popular retail store group, accounting for 350 billion dollars in annual revenue from 120,000 stores.  Stores sell a limited variety of food, cigarettes, groceries, candy and magazines, and sometimes also fuel, and are an average of 2,000 to 3,000 square feet.  High traffic locations are especially important. 

Vending machines are a popular growing type of retail franchise. There are 5,000 machines which last year produced an annual revenue of 6 billion dollars.  Soda, candy and snacks are the most popular types of vending machines but other options include coffee, ice cream, sandwiches, and more. Companies must rent space in a high traffic area – most popularly in office space or other commercial buildings. Gross margins in this business are about 50 percent, and there is typically a 7 percent commission paid from the owner of the machine to the owner of the space.  Machines tend to cost from about 2,500 to 7,500 dollars, depending on the type of machine, with beverages being on the cheaper end.  U-Turn-Vending and Naturals 2 Go are two vending machine franchises.

The coffee shop industry is worth about 10 billion dollars and has 20,000 stores in the United States.  Coffee shops tend to sell coffee, tea, espresso and other drinks and sell pastries, other dessert items and sometimes sandwiches. Coffee shops market to a particularly well-educated and affluent market, skewing younger, from 25 to 45. Service and atmosphere are important factors for success as is the price of coffee beans, of which coffee shops generally employ the more expensive arabica variety. More young people are drinking coffee than ever, as 40 percent of adults age 18-24 say they drink coffee daily.  Arabica Coffeehouse, Bearclaw Coffee and PJ's Coffee of New Orleans are three franchise coffee shops.

Beer and liquor stores are another potential retail franchise opportunity. There were 30,000 stores selling these products in the United States last year, which brought in revenue of 40 billion dollars.  Liquor accounted for 40 percent of sales, wine for 30 percent, and beer for 25 percent. Each state has its own alcohol sales laws, limiting who can sell and what can be sold, which is important to research for those interested in this type of franchise. Gross margins in this industry are about 25 percent.  Examples of liquor franchises include The Connoisseur, Vinter's Cellar and Winestyles.

There were 20,000 drug stores last year with a combined annual revenue of 220 billion dollars and the industry was particularly concentrated with the largest 50 companies accounting for 70 percent of the total revenue.  Drug stores sell both prescription drugs and “front store” products which include greeting cards, candy, over the counter drugs and health and beauty products. Pharmacitsts are regulated by state. Gross margins in the industry average between 25 and 30 percent. Medicap Pharmacy and Good Neighbor Pharmacy are two franchises in this area.

Retail trade accounts for many consumer needs and will continue to in the future; the industry is expected to grow by an annual compounded rate of 5% from 2010 to 2015.

Apparel retail, or clothing sales, is a large sector, generating 304,906 million dollars in revenue in 2009, with a compounded annual growth rate of 3.2 percent from 2005 to 2009.  Sales of women's clothing is the most profitable area in this sector - accounting for 53 percent of the total revenue.  The industry is moderately concentrated and bigger stores have advantages of getting better deals from suppliers, but the individualized nature in which stores compete not simply on price but on type and style, of which there are many, leaves room for smaller stores to succeed as well.  In addition, because of the nature of clothing, many stores exist marketing to specific demographcis based on price and style.  Trends are also particularly important here - being behind on what's hot can lead to losing sales, reputation, and leftover inventory.  Franchises within this field include Hut no. 8 and Clothes Mentor.

Retail franchises are expanding in your local area, including some that require as little as $30,000 to start. Click here to choose from 100s of franchise opportunities.

Andrew Weber is an Analyst for and is a graduate of New York University and New York University School of Law.

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