Gross Margin: An Indicator of Market Power
What America's Oldest Jeweler Can Teach Us About the Value of Bling
One of the most quintessentially American experiences is wandering the shopping mall. The scintillating scent of Cinnabon wafts across the linoleum floors. Angsty youths spill out of the theater, chattering about the latest Marvel movie. Foot Locker sales staff judge you by your level of sneaker heat as you walk in. You can picture it right? In my current home of Salt Lake City, the crème de la crème of consumer excess is City Creek Mall. With a literal creek stocked with local trout running through the facility, it is the nicest shopping experience in the state. This is where you go to spend money.
As my partner and I meander from store to store we get a variety of experiences. At Tiffany & Co (62.5% gross margin) we are met by a burly security guard in a black suit gently opening a glass door. Inside we are treated like royalty with attendants attuned to our every need. Note: In other Tiffany locations they will often offer champagne as you shop but not here, this is Utah after all. Four stores down at Lululemon (56% gross margin) the attendants are more astute to our status in life. They sense we are too poor to shop there (an occupational hazard of being writers) and promptly ignore us the entire time. H&M is a screaming horde of hormones, with cluttered $10 t-shirts everywhere (50% gross margin). The Gap is a sad place no one goes (44.1% gross margin).
Despite the contrast in goods and quality of service, all of these stores are somewhat close in gross margin. That variance is the focus of today’s explainer. How can it be that ultra-luxurious experiences have similar financial profiles to terrible ones?
This is the third piece in an ongoing series for Napkin Math where we work our way down the income statement. The goal is to help you not just vaguely understand the fundamentals but to help you move past the boring/impenetrable terminology to real-life application. If this is your first time joining us, you should check out my previous two pieces on revenue and cost of goods sold. Today we are moving one line down the income statement to gross margin. As with all things finance, the definition is simple but the application is nuanced and important.
Gross Margin Fundamentals
Accounting was invented for the discovery of nuance. The more intimately you understand the patterns of a businesses’ financial movements, the more accurately you can assess risk or decide what to do. Gross Margin was invented for just such a purpose.
Last time we chatted I showed you this chart.