During a panel discussion at the Faculty of Economics titled “Boycott of Trade – Who Wins and Who Loses?” (organized just before the boycott of a single retail chain in Montenegro), various economic analyses of the operations of retail companies were presented. One of the key topics was the perception of profit margins and the actual profits that retail companies generate. Dr. Milutin Đuranović, President of the Association of Food and Agriculture Industry in the Chamber of Commerce of Montenegro and a former professor at the Faculty of Economics, explained the difference between gross margin and net profit, stressing the importance of correctly understanding economic terms.
Gross margin is not the same as net profit
In public discussions, the terms gross margin and net profit are often confused. According to research conducted by the Faculty of Economics, the average trade gross margin rate for Montenegrin retail companies is between 24% and 25%, where the gross margin represents the percentage difference between the selling price and the net purchase price of a product.
“However, what is crucial to understand is that the gross margin does not represent the company’s profit. When all business costs, including rent, employee salaries, logistics, taxes and other expenses, are deducted from revenue, the net profit is obtained. According to the analysis, the average net profit of retail companies in Montenegro is only 3.2%,” explained Đuranović.
How much do companies actually keep?
Đuranović illustrated this relationship using an example of 100 euros in revenue.
“For every 100 euros in revenue (excluding VAT), the company, on average, only keeps 3.2 euros in net profit. However, this amount doesn’t go directly to the owners because an additional 15% tax is applied to the distributed profit, further reducing the net income for the owners,” he explained.
How much can prices be reduced?
One of the key questions raised during the panel was how much retail prices could be reduced without causing losses for the companies.
Đuranović explained that, on average, retailers could lower prices by 3.2% before their operations would become unsustainable and lead to losses. He illustrated this point by saying that this is one of the basic questions posed to students during the “Balance Sheet Analysis” exam.
“These data show that, although retail margins may seem high, the final earnings of companies are significantly lower after covering all operational costs. The public often misperceives the difference between gross margin and profit, which is why education on these economic concepts is crucial,” he concluded.
