Benchmarking Company Performance
I was asked the following question by a company refining its business model for a retail product: "What gross margin percentage should we aim for?" There are a number of different ways to tackle this.
- What is your competitor pricing at? How much higher or lower is your product?
- What is your current cost of goods sold? How efficient is your supply chain? Have you made a decision on outsourcing production - quality vs. control tradeoff?
- What is the industry average?
Let's answer the original question by looking at #3... As is often the case, there is no "direct" peer, so we will look at peer (retail and consumer) industry averages. To find the industry average, I downloaded and analyzed public company data. Here is how I selected the group and calculated the gross margin percentage:
- SIC group code: 10212 (Manufacturing - Apparel & Furniture) & 10217 (Retail - Apparel & Specialty)
- Companies with market cap greater than $25 million
- Eliminated companies in the business of licensing or with royalty driven sales models, which would skew the gross margin percentage higher
- Eliminated convenience stores/gas stations, which were captured in SIC group code 10217
- Revenue and gross profit are calculated on a last twelve months or LTM basis to eliminate seasonality. Gross profit is then divided by revenue to arrive at the gross margin number.
I ended up with 157 companies. The lowest gross margin was 19.5% for Blue Nile and the highest gross margin was 67.9% for Coach. The left side includes retailers with little pricing power such as TJ Maxx, Staples and Best Buy whose gross margins are between 23-28% and are in highly competitive markets. In the middle, two notable companies in consumer technology are Apple and GoPro which have gross margins of 39.5% and 46.3%, respectively. The largest toy company by revenues Mattel has a gross margin of 47.2%. On the right are premium branded consumer companies such as Coach, Michael Kors and Tiffany’s.
So to answer the original question what should be our target gross margin, I would say aim for 40% to 45%, and you will be performing above average using the operating metrics of larger, more mature businesses as your guide.