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Your Math is Correct, But You Conclusion Is Not

The single company in the world that operates with the lowest gross profit margin is Costco. Their margin is a flat 18% on everything. But look what they have to do to make it work:

1) Stock a limited supply of high demand items that they know can sell quickly.

2) Charge you $120 per year for "membership", whether you buy anything or not.

3) Have low overhead warehouses with concrete floors and no rooms and very low maintenance.

4) Do careful studies to ensure that they only open a store if they know in advance that it can generate X dollars of revenue annually. Perhaps someone else knows, but I would guess that number X is somewhere between $20 million and $50 million.

The closest thing to that model was an old store that became a small chain, Dixie Hi-Fi. When I worked at one of perhaps 10 that existed 40 years ago, their margin on most gear was 29%. Much like Costco they had concrete floors, all the speakers on one wall where you could only listen to your choice of a handful of receivers. No service department, no installation, just cash-and-carry. Still they made much of their money on "house brands" made especially for them. These had margins of 40% to 50% and couldn't be comparison-shopped as they were only available at Dixie. To induce the sales people to push these items, they paid a "spiff" of about 3% or 4% per item.

They took it public and changed the name to Circuit City. Now look at how successful they are.

A real B&M hi-fi shop with nice carpeted listening rooms and a knowledgeable staff needs to maintain a gross profit margin of 38% to stay in business. Most lines have a 40% margin, so they stay in business by only offering small discounts to loyal customers. Some of that can be offset by things like cables, which often have hideous margins. This started because all accessories normally have a 50% margin - when you are selling something for $5 or $10, you lose money on the sale otherwise (after you factor in the cost of ordering, the cost of inventory, the cost of ringing up the sale, et cetera).

When cables started reaching a price of $1000, they should have *lowered* the margins. But instead a handful of companies chose to *raise* their margins so that dealers could afford to give a "system" discount when selling a whole system. This practice was started by Monster, and given a huge boost by MIT and Transparent. Now many of the "big name" cables have margins of 60% to 70%, as otherwise dealers won't carry them.

If you think I'm wrong, go ahead and start your own audio dealership selling products at a 29% margin. Let me know how you are doing next year.

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