Question

Describe what causes the differences in markup. What product category in a meat department tends to have the highest markups and profit? Explain why this is the case?

Answer 1

A markup is the difference between an investment's lowest current offering price among broker-dealers and the price charged to the customer for said investment. Markups occur when brokers act as principals, buying and selling securities from their own accounts at their own risk rather than receiving a fee for facilitating a transaction. Most dealers are brokers, and vice versa, and so the term broker-dealer is common. Markups also appear in retail settings, where retailers mark-up the selling price of merchandise by a certain amount or percentage in order to earn a profit. A pricing method whereby a retailer establishes a selling price by adding a markup to total variable costs is called the variable cost-plus pricing method. Mark up refers to the value that a player adds to the cost price of a product. The value added is called the mark-up. The mark-up added to the cost price usually equals retail price.
For example, a FMCG company sells a bar of soap to the retailer at Rs 10. This is the cost price. The retailer adds Rs 2 as his value and sells the soap to the final consumer at Rs 10. The margin of Rs 2 between the cost price and MRP is the mark-up. In this case, the mark up on the cost price is (2/8= 25%) and on the MRP is 2/10 = 20%.
Markup refers to the cost; margins to the price. In the example, what is the significance of mark up.The amount of markup allowed to the retailer determines the money he makes from selling every unit of the product.  Higher the markup, greater the cost to the consumer, and greater the money the retailer makes. In FMCG, typically, the MRP is low and the retailer is allowed a lower markup, from anywhere between 5 and 8%. Low margins means a retailer makes less money on every unit, but the number of units sold is very high in FMCG. So overall, the amount of money made evens out. The price that the market can bear usually determines the selling price, or in India, the Maximum Retail Price (MRP). Companies work backwards and after accounting for production and marketing costs, arrive at values for the players in the FMCG industry- the transport, distributors and retailers. Strength in the market place also determines the markup and margins allowed. A well-established FMCG company like Hindustan Lever can give less margins to the retailers because the volume of sales of its wide range of products is very high. On the other hand, a new and unknown product and company will need to pay more margins to the retailers to entice them to stock the product in the first place.

It's important to keep in mind that the markup is the ratio of gross profit to sales price, not net profit to sales price. In some circumstances, overhead and other costs not included in the net cost calculation can mean that even a high markup percentage will generate only a modest net profit. A fashion designer, for instance, may sell a dress for $5,000, and it has direct costs – materials and sewing labor, for example – of only $400. But the advertising, fashion shows and expensive presence in a fashionable district in a major city necessary to make an impact that will generate sales may add indirect costs of $3,000 or $4,000 to the dress. The gross profit of $4,600 on a sale of $5,000 seems outlandishly high, as does the markup percentage of 920 percent. In reality, however, the net profit margin is relatively modest because the indirect costs of marketing in the world of high fashion are extremely high. Although there is no universal "normal" markup, within a given industry sector, indirect costs are relatively consistent, and where indirect costs are generally low, markups will tend to be low as well. Retail grocers, for example, typically have markups of less than 15 percent. In the restaurant industry, on the other hand, food is generally marked up about 60 percent, and some beverages may be marked up as much as 500 percent. Nevertheless, because restaurant overhead costs are high, profits in the industry are extremely low compared to other industries, averaging less than 5 percent of sales and in some specific sectors, such as retail fast food, dipping as low as 2.5 percent. You'll find similar markup disparities among other retail sectors. Jewelry is regularly marked up 50 percent, which in the trade is known as "keystone." Clothing in general, not just high-fashion clothing, is marked up from 100 percent to 300 percent. Cell-phones, on the contrary, have thin markups of 8 to 10 percent. In that industry, profits come from service contracts and usage fees. Pharmaceutical companies, which have been criticized for their high profit percentages, have markups that can exceed 5,000 percent. Even generic pharmaceuticals commonly have markups of more than 1,000 percent.