© 2000 John Petroff

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6)- Net vs. gross profit margins

In the following four graphs we combine aggregate data on gross margins from Table T-9.4, Gross Margin in four US sectors by size of sales in 1999, operating expenses from Table T-13.17, Operating expense % of sales in eight US sectors by size in 1999, and net profit margin from Table T-13.12, Net Profit Margin % averages in eight US sectors by size of sales in 1999. First graph G-13.3 is that of the retail industry

The four graphs tell the same story. The larger the firm and the lower the gross profit margin. Presumably the lower gross margin is attributable to aggressive price strategies to increase sales. The larger the firm and the lower the % operating cost relative to sales. The saving in operating cost offsets the lower margin of larger firms to produce higher net margins. This verifies that economies of scale have a powerful effect and are greater that the lower prices charged by larger firms.

See review question Q-13D6.1.