Factors Affecting Growth & Profitability of the Retail Industry

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Interior of a retail clothing store.
Interior of a retail clothing store. (Image: ExcellentPhoto/iStock/Getty Images)

The retail industry isn't a monolith but rather a collection of a numerous types of businesses that sell services and products directly to consumers. For example, clothing, grocery and pet stores are all retail businesses. While retail as a whole might do well when economic circumstances are right, it's more typical for some sectors of the retail economy to lag as others become highly profitable. The choices an individual retailer makes can affect finances as much or more than the factors affecting the industry as a whole.

Retail Sector

The specific retail sector in which a business is involved can greatly affect its growth and profitability. For example, when the economy struggles, discount stores tend to do well, and providers of basic goods -- such as food and inexpensive clothing -- may not see the nosedive in profits that luxury providers do. Factors that affect certain types of businesses -- such as the availability of coffee beans or the price of silk -- will affect those businesses' profitability.

Economy and Consumer Behavior

The broader economy affects consumer behavior, which then affects retailers. Taken as a whole, the retail industry struggles more when the economy is slow. Retailers that target specific types of consumers -- such as middle-class women -- will also see changes in their profitability as outcomes for that consumer group change. If middle-class women are losing jobs in an otherwise stable economy, retailers that target them often lose money.

Costs and Inventory

For an individual retailer, the costs required to build or maintain inventory are major elements in the business's profitability and growth. Inventory needs to move quickly to maximize profitability. For businesses with high costs, profits also have to be high if the business is to grow. Changes in the cost of goods -- including goods indirectly related to retail sales, such as gasoline -- can suddenly affect how profitable a business can be and how quickly it can grow.

Productivity and Distribution

A business's productivity affects its ability to grow. If workers are sluggish in creating or marketing products, both growth and profits can slow. Likewise, a business's ability to distribute its products or services is essential to generating revenue. When a retailer's distribution system is interrupted by a natural disaster, for example, profits can be driven down if time-sensitive shipments have to be rerouted by costlier means.

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