What is retail? - Complete with examples
In this article I'll give you a crash course in retail 101 fundamentals, complete with examples to help you better understand each concept.
Retail 101 -Table of Contents
This Importance of the Retail Industry
It's hard to go out into the hustle and bustle of the world and not see retail in action. From grabbing your morning cup of coffee, to a quick trip to the grocery store, or ordering from your favorite e-tailer online. Retail is a complex and multi-faceted industry. For anyone who dares to be a player in the retail game, it is everchanging and a nonstop race to the top.
Retail is an integral part of the global economy and is especially important to the health of the United State's economy.
As a total sector, retail accounts for 6% of the United State's gross domestic product (GDP). This equates to over $1 trillion! Additionally, retail accounts for over 25% of the country's total employment and in 2022 contributed over 50 million part-time and full-time jobs in the US (Statista, 2024).
Despite its massive size and highly competitive nature, at it's core, retail is centered around one single component, the "consumer".
Retail Definition and How it Works
By definition, retail is the sale of goods to the public in relatively small quantities for use or consumption rather than for resale (Oxford Languages, 2024). In other words, retail is the sale of goods by a retailer to the consumer. It serves as a conduit for the exchange of goods and services. Traditionally, retailers have relied on wholesalers and/or manufacturers to provide a high volume of product that they buy in large quantities to make available to the general public via physical stores and/or a website.
By buying such large amounts, retailers are able to attain these products at significant discounts. Retailers then apply what is called a markup to earn profit on the product being sold. The cost and markup is combined to get what is known as the "retail price", which is the price the product is sold for to the general
public.
However, in recent years, the explosive growth of e-commerce has paved the way for alternative fulfillment methods like drop shop, also known as, direct-vendor-ship. This has shifted the traditional retail model of buying in bulk and then reselling within the e-commerce space.
Though inventory is generally considered an asset, inventory ownership can also serve as one of the biggest financial liabilities for retailers. This is because there is no guarantee that every unit of inventory will sell. As with most investments, there are inherent risks. By leveraging dropship, the retailer does not take on this liability because they never actually own any of the inventory.
Instead, the wholesaler or vendor takes on the liability of inventory ownership. They work with the retailer to make their product available for purchase on the retailer's website. The vendor provides a cost to the retailer for each product sold and the retailer applies a markup to determine the retail price. When a customer places an order on the retailer's website, the vendor receives the order, usually via Electronic Data Interchange (EDI), and fulfills the order, sending it directly to the customer.
E-commerce marketplaces are another consideration that have also seen tremendous growth in recent years. However, they are a whole different beast so I'll save for a future post.
The Role of the Consumer
As mentioned previously, the consumer is at the heart of the retail industry. This is because, it's entire purpose is to offer products based on the needs of the consumer.
Products that don't fit the needs of consumers simply won't sell. In order for retailers to stay in business and make profit, they have to offer products that appeal to their customers at prices they are willing to pay. This means that consumer buying behaviors and patterns constantly shape and evolve the industry as a whole.
For example, think about consumers' desire for convenience. This desire was only amplified during COVID. Prior to the pandemic, few retailers offered fulfillment options like order pickup or same day delivery. Now, nearly every major retailer offers one, if not both fulfillment options. Additionally, retailers continue to site these methods of fulfilment as a source of sales growth.
Making a Profit
Retailers are “for profit” companies. In order to drive profitable sales, they have to offer their customers the right products at the right prices. However, they must also ensure they meet their financial goals. Retailers employ Buyers to select the product to be sold within the stores and on their website, while also ensuring that financial targets are met. When setting retails, Buyers must have an understanding of the market, as well as what their customers are willing to pay for a particular product.
Three of the most impactful components of profit within retail are cost, markup, and retail price.
The cost is the price that the retailer pays the wholesaler or manufacturer for product.
The markup is the amount added to the cost the get the retail price.
The retail price is the price that retailers charge their customers and is a combination of the cost and markup.
Helpful Retail Math Formulas
Markup = Retail – Cost
Retail Price or Selling Price = Cost + Markup
Initial Markup % = 1 – Cost/Retail
Example-Seeing it In Action
R&Rs is a retailer that specializes in selling sporting goods across 500 physical stores and a website.
The Scenario
The Buyer is bringing on a new camping gear vendor (wholesaler) to support the growing needs of her “tents” business. The vendor offers the Buyer a particular tent for a wholesale price of $18 based on a quantity of 2,000. The Buyer knows that based on the features of the tent and similar tents in the market, she can’t sell it for more than $38.
However, the current wholesale price doesn’t allow her to achieve the markup of 60% she needs to hit her profitability goals. She knows that she can sell far more than 2,000 tents if they are priced right.
Solve It:
What cost does the Buyer need the tents to be if the retail is $38 and the markup must at be 60% for her to hit her profitability goal?
There are a few ways to solve this, you can dig waaay back to high school algebra and leverage the known variables using the appropriate formula to determine the unknown, "X", which in this case is the cost.
Or you can use a much simpler method that is grounded in a few basic concepts. To illustrate these concepts we will use a t-chart. Remember, three of the most impactful components of margin are cost, markup, and retail.
T-Chart Method
Solving Using Algebra -The Longer way to solve
I have never been a fan of algebra, but for all you algebra junkies, below is the algebraic equation for the alternate and more drawn out way to solve.
Formula:
Initial Markup % = 1 – Cost/Retail
Known Variables:
Initial Markup% = 60%
Retail = $38
Unknown Variable:
Cost = x
The Equation:
60/100 = 1 - x / $38
Using the the concepts above, the Buyer knows that given her profitability goal, she can't pay more than $15,20 for each tent with the intended retail price of $38. The Buyer negotiates with the vendor, informing the vendor that she can purchase 3,500 units if the vendor sells them to her at a cost of $15.20. The vendor agrees based on the higher quantities.
Conclusion
Retail 101 is far more than just buying and selling. At its core, retail is rooted in meeting the needs and desires of consumers in a dynamic and ever-changing marketplace As technology reshapes the way we shop and social trends redefine our values and preferences, retailers must remain agile, adaptable, and attuned to the ever-changing needs of their audience.
About the Author
Dria J has over 15 years of broad retail experience and has worked for some of the country's largest retailers. Over half of that time has been spent as a retail buyer where she sets retail strategy and determines retailers' assortment.
