Sales versus margins: alternative measures of output and productivity for retail trade

One key measure reflecting how these perceived efficiency gains translate into economic growth is labor productivity. Labor productivity measures economic performance by comparing the amount of goods and services produced (output) with the number of labor hours used to produce those goods and services. Mathematically, it is defined as real output per hour worked, with productivity growth occurring when output increases faster (or decreases more slowly) than hours worked. Historically, productivity growth has led to higher wages for workers and higher profits for businesses, and our improved standard of living depends on gains in overall productivity.

Defining output for the measurement of retail productivity has often attracted the attention of researchers. For example, Brian T. Ratchford has described the demand for retail services as a make-or-buy decision involving the consumer’s time, access to transportation and storage space, and willingness to allow higher retailer margins in exchange for added shopping convenience.² Ratchford has questioned whether recent economies of scale by big-box retailers—economies resulting in lower prices and limited services—truly represent productivity gains. Jack E. Triplett and Barry P. Bosworth have discussed the advantages and disadvantages of defining output by using deflated sales versus margins, concluding that the appropriate definitional choice would require a better taxonomy of retail services.³ Marcel P. Timmer, Robert Inklaar, and Bart van Ark have embraced a margin-based approach to measuring output, yet they have highlighted challenges in constructing experimental measures of margin prices with the use of double deflation, noting that all possible measurement errors in sales and acquisition prices would show up in margin prices.⁴ Marilyn E. Manser has discussed retail output within a production framework, treating goods purchased for resale as an input to the production process and arguing that purchased goods are not separable from the retail services provided to consumers.⁵ Finally, Roger R. Betancourt has pointed out that, in theory, deflated sales and retail margins would measure, respectively, the quantity of goods sold and the value of distributive service.⁶ However, because in reality sales prices partly capture distributive service and economies of scale render margins susceptible to changes in quantity sold, disentangling the concepts of distributive service and quantity sold from aggregate measures is difficult.

In this article, we advance the existing literature in several ways. Rather than debating the relative merits of sales- and margin-based measures of output, we argue that both measures enhance productivity analysis, especially when they are considered as complementary.⁷ We examine these measures for the retail trade sector and its major component industries, finding that sales productivity outpaced margin productivity in most retail industries during the 2007–22 period. We identify the factors affecting differences between sales- and margin-based measures of output, including factors such as prices, nature of product mixes, and industry dynamics. Finally, we focus on three component industries with different productivity trends, examining the role prices may have played in driving the industries’ sales and margin productivity.

Productivity measurement in the retail trade sector

To measure labor productivity, we must first define real output. Unlike goods-producing industries, which create a tangible and observable output, service-providing industries deliver a nontangible output that cannot be held in inventory. The task of defining and measuring the output of service-providing industries is difficult because establishing a measurement unit for service quantity is not always clear. Retail trade is a service-providing sector, yet the physical goods it conveys to customers are tangible. The fact that these goods are bundled with distribution services presents a dilemma for researchers trying to define retail output. Should that output be defined only in terms of distribution services rendered, only in terms of quantity of goods sold, or as a bundle of goods and services purchased by consumers?

The U.S. Bureau of Labor Statistics (BLS) measures labor productivity for retail industries by using a deflated sales revenue measure of output as a proxy for the quantity of goods sold and the value of services rendered. For a given retail industry, real sales output is measured as the industry’s nominal sales revenue deflated by the price changes for products sold outside the industry. Retail sales prices are the final prices paid by consumers and reflect the entire value chain of products sold, from product conception to product delivery to final consumers.⁸ Alternatively, retail output can be defined in terms of services rendered. Retail margins measure revenue by removing the cost of goods—cost paid by retailers to upstream vendors—from the total sales revenue of retail establishments. Margin output reflects the deflated value of services that retail establishments provide to facilitate the sale of goods to consumers, rather than the quantity of goods flowing through the establishments. Real margin output is the nominal margin revenue deflated by the change in margin prices (sales price less acquisition price) and reflects the value of services added by retailers.⁹

Sales output bundles the goods sold with the distribution services provided, whereas margin output attempts to isolate the services component by removing the cost of goods sold (COGS) from sales revenue. To illustrate this composition with actual data, chart 1 breaks down real sales output for the retail trade sector into COGS (bundle of goods) and margins (services provided) for the period from 2007 to 2022. Over this period, real sales output rose by 2.4 percent per year, with real COGS rising faster, at a rate of 2.6 percent per year, and real margins rising more modestly, at a rate of 1.7 percent per year.

Sales-based measure of output

Retail output calculated with real sales revenue provides a broad, inclusive picture of a retailer’s overall operations, reflecting economies of scale, product sales at existing staffing levels, the value of products sold, product variety, and services rendered to prepare items for sale. As noted earlier, BLS uses a deflated sales revenue measure of retail output, which includes both the quantity of goods sold by a retail establishment and the retail services provided to consumers.

Because we do not have a discrete count of items sold and cannot sum quantities of heterogeneous products in a meaningful way, we use the deflated value of sales revenue as a proxy for item quantities. In our calculations, we use sales data from the Annual Retail Trade Survey (ARTS), which is conducted by the U.S. Census Bureau.¹⁰ ARTS provides annual values for total sales revenue and its components (e.g., inventories, purchases, and gross-margin revenue), and these data are available at varying detail between the three- and six-digit North American Industry Classification System (NAICS) industry levels.¹¹

Total sales revenue reflects the final price paid by consumers, excluding sales tax, and is published on a current-dollar basis each year. Although retailers are classified by their primary business activity, they typically sell a large variety of product lines. BLS breaks apart annual nominal sales into revenue values for component product lines by using sales data from the economic census. Published every 5 years, sales data for census product lines are collected less frequently but provide detailed information on the range of products being sold within each industry.

To estimate real sales revenue for an industry, we match revenue for each individual product line with a product-specific price index from the BLS Consumer Price Index (CPI) program.¹² BLS publishes price indexes for a variety of product groupings, with those indexes representing price change over time across the U.S. economy. The estimated annual revenue for each product line is deflated with a matching CPI and then weighted together with revenue estimates for other product lines to produce an industry output index.¹³ The industry-level implicit price deflator (referred to here as the sales output price deflator) is calculated by dividing an index of the nominal annual sales from ARTS by the industry output index.

Margin-based measure of output

Unlike sales-based measures of output, margin-based measures do not include the value of the products moving from retail stores to customers, but rather isolate the value of services provided to those customers. This measurement approach is valuable because retail establishments control only how their goods are curated and sold.

In constructing our new margin-based measures of output and productivity, we measure retail margins as the difference between sales revenue and the cost of goods sold. For this calculation, we use nominal margin revenue for retail industries from ARTS.¹⁴ Nominal margins may be affected by consumer purchases shifting between low- and high-service items, by consumers demanding improved or expanded levels of service, or by retailers exercising pricing power. To remove the effects of price change, we deflate industry-level margin revenue from ARTS with a corresponding industry-level margin price index from the BLS Producer Price Index (PPI) program. The calculation of margin-based PPIs involves a weighted product mix.

For industries in the retail trade sector, price deflator data are readily available at the subsector and industry-group levels, allowing the construction of measures for all (but one) three-digit NAICS subsectors and most four-digit NAICS industry groups. The U.S. Census Bureau publishes measures of retail margins for 33 retail industries (at the three-, four-, and five-digit NAICS levels) from 2004 to 2022. In comparing our sales- and margin-based measures, we limit our analysis to the 2007–22 period and 19 retail industries, covering a complete business cycle and representing trends since the COVID-19 pandemic.

Contrasting sales and margin productivity

Chart 2 compares annual percent changes in sales and margin productivity for the retail trade sector and its major component industries, highlighting the impact of using different output concepts on productivity measurement. For each component industry, the growth rates for sales and margin productivity combine their respective measures of output growth with the same measure of hours worked. As shown in the chart, over the 2007–22 period, sales productivity outpaced margin productivity both for the retail trade sector overall and for most of the sector’s component industries. (See also table 1.)

Productivity trends in three retail industries

In this section, we look more closely at three retail component industries (electronics and appliance stores; beer, wine, and liquor stores; and pharmacies and drug stores), comparing their sales and margin productivity measures to reveal diverse productivity trends, measurement issues, and implications for the ongoing retail transformation. Again, our analysis covers the 2007–22 period. In electronics and appliance stores, sales productivity over this period grew rapidly, whereas margin productivity grew much more slowly. In beer, wine, and liquor stores, the two measures trended closely. In pharmacies and drug stores, margin productivity grew 3 times faster than sales productivity.

Electronics and appliance stores

Electronics and appliance stores (NAICS 4431) sell new, consumer-type electronics and household appliances from point-of-sale locations, often with displays for product demonstrations.¹⁵ In 2017, about 73.3 percent of sales in this industry group came from consumer electronics, 18.5 percent came from household appliances, and the rest came from services and miscellaneous goods.¹⁶ Sales of electronics and household appliances have increasingly shifted from brick-and-mortar retail stores to e‑commerce platforms. In 2022, about 64 percent of sales by electronics and appliance retailers were classified in NAICS 4431 (electronics and appliance stores) and about 36 percent were classified in NAICS 4541 (electronic shopping and mail-order houses); these figures compare with 83 and 17 percent, respectively, in 2015.¹⁷ As in-store sales and the number of physical retail establishments declined over the study period, employment in electronics and appliance stores dropped from 624,400 in 2007 to 450,500 in 2022, a decline of 2.2 percent per year. (See table 1.)

From 2007 to 2022, sales productivity in the industry group soared at a rate of 7.5 percent per year, the highest annual rate among all retail component industries examined, with electronics and appliance stores improving their capacity to move increasingly large product quantities more efficiently. In terms of margins, the industry group’s longer term growth in margin productivity (3.3 percent per year) was concentrated in the 2008–12 period, before leveling off in later years. (See chart 3.) The strong gains in both sales and margin productivity were due to solid real output growth (4.8 percent per year for sales, 0.6 percent per year for margins) coupled with declining hours worked, which dropped at a rate of 2.5 percent per year. (See chart 4.)

Output for electronics and appliance stores, as well as other retail component industries, is affected both by the quantity of goods sold and by changes in the prices and quality of those goods over time. BLS makes quality adjustments to prices for rapidly changing products, such as computers and smartphones.¹⁸ Examining changes in product prices reveals what Timmer, Inklaar, and van Ark have called the “inside-the-box effect,”¹⁹ also elaborated by Triplett and Bosworth: “Electronics stores are in the business of selling boxes (filled with computers) that they obtain from the manufacturer. The fact that the machine inside has experienced dramatic technological improvements should have few implications for efforts to measure the productivity of the workers in the retail establishment. An index that combines the improvements within the box with changes in the number of boxes bears little relationship to the actual activities of the retail store.”²⁰

Between 2007 and 2022, sales prices in electronics and appliance stores fell by 5.6 percent per year, a decline due to dramatic technological improvements in electronics and price competition from online shopping platforms, both of which influenced sales volumes and sales productivity. Further, as shown in chart 5, sales and margin prices in the industry group fell similarly from 2007 to 2012, dropping at annual rates of 6.9 and 6.0 percent, respectively. However, while sales prices continued to decline after 2012, margin prices flattened through 2019 and then increased by 2.3 percent annually through 2022.

Between 2007 and 2022, nominal sales revenue in electronics and appliance stores declined, and the surge in real sales output occurred as prices fell rapidly. Chart 6 illustrates the effects of nominal sales revenue and sales prices on real sales output, showing that prices fell every year from 2007 to 2020 and drove real output growth. Prices during this period changed in response to competition from e-commerce retailers and inside-the-box quality improvements stemming from manufacturing innovations. It was only during the pandemic and recovery years of 2020 and 2021 that nominal sales revenue, rather than prices, drove real output growth.

Because real margin output attempts to isolate the services provided by electronics and appliance stores (e.g., displaying or demonstrating products for sale), the observed modest gains in the industry group’s margin productivity reflect more muted efficiency increases from retail activities involving the sale of electronic products. Given that real sales output offers insight into what retailers are selling (e.g., higher quality products), we conclude that both sales and margin productivity enhance industry analysis when viewed as complementary measures.

Beer, wine, and liquor stores

Beer, wine, and liquor stores (NAICS 4453) sell packaged alcoholic beverages from fixed point-of-sale locations.²¹ Packaged alcoholic beverages made up 90 percent of sales in this industry group in 2017, with spirits accounting for 41 percent, wine for 26 percent, and beer for 23 percent.²² Although alcoholic products are as old as humanity, the idea of retailing alcohol is relatively new.²³ Also, unlike electronics and appliances, which have improved continuously, the products within beer, wine, and liquor stores have remained relatively uniform over time. In terms of employment, this industry group has expanded steadily, with its employment increasing from 154,200 in 2007 to 193,100 in 2022, at a rate of 1.5 percent per year. (See table 1.)

Although productivity in beer, wine, and liquor stores has had its ups and downs, chart 7 shows that the industry group’s sales and margin productivity measures trended similarly between 2007 and 2022. Over the 2019–22 period, however, margin productivity accelerated at a rate of 6.4 percent per year, outpacing the 3.1-percent annual increase in sales productivity.

Output and hours worked in beer, wine, and liquor stores also trended upward from 2007 to 2022. (See chart 8.) The industry group’s margin output moved in tandem with sales output, rising as the quantity of goods sold increased and falling as sales lagged. The two output measures for this industry group also tracked more closely with each other than they did in the case of electronics and appliance stores. From 2007 to 2019, real margin output in beer, wine, and liquor stores grew at 2.4 percent per year, a rate nearly identical to that for sales output (2.3 percent per year). From 2019 to 2022, the industry group’s real margin output grew faster (8.2 percent per year) than real sales output (4.9 percent per year). Over the 2007–22 period, hours worked grew at a more moderate annual rate of 1.5 percent, driving the overall increases in productivity.

Several factors may explain the observed trend similarities. Unlike other industry groups in the food and beverage stores subsector, beer, wine, and liquor stores are less affected by product spoilage and, therefore, face less margin volatility from potential product loss. They also can count on manufacturer advertising to drive traffic to their stores, reducing costs. Lastly, margins and sales in beer, wine, and liquor stores may track more closely with each other because of the general homogeneity of the products sold in the industry group. This homogeneity requires a similar set of skills from workers and store operators.

Pharmacies and drug stores

Pharmacies and drug stores (NAICS 44611) sell prescription and nonprescription drugs and medicines.²⁴ Although these drugs and medicines have remained relatively similar over time, their prices have varied widely by customer, insurance coverage, and establishment size and type. In 2017, prescription and nonprescription medications made up about 76 and 5 percent, respectively, of sales in the industry, with other merchandise such as vitamins, cosmetics, personal hygiene products, and tobacco products accounting for the rest.²⁵ Employment in the industry fluctuated between 2007 and 2016, peaking at 752,000 in 2008, and then began to decline steeply, dropping to 715,200 in 2022 (after a brief interruption caused by the pandemic recovery). (See table 1.)

Sales and margin productivity measures for pharmacies and drug stores tell different stories. From 2007 to 2022, margin productivity increased by 3.7 percent per year, outpacing sales productivity, which grew by 1.3 percent per year. (See chart 9.) Pharmacies and drug stores are one of only four retail industries examined in which growth in margin productivity exceeded growth in sales productivity. The industry’s two measures diverged after 2010, with margin productivity consistently outpacing sales productivity. The long-term gap between the two measures was the greatest among all industries examined.

While hours worked in pharmacies and drug stores slightly declined from 2007 to 2022, falling by 0.5 percent annually, output in the industry exhibited a rising long-term trend. Between 2007 and 2019, margin output grew steadily, at 1.4 percent per year, whereas sales output remained nearly flat. (See chart 10.) From the onset of the COVID‑19 pandemic through 2022, growth accelerated for both measures, although the growth rate for margin output (10.3 percent per year) was more than twice that for sales output (4.5 percent per year). Since 2019, pharmacies and drug stores have been the leading in-store retailers for margin output growth. Businesses in this industry were among the few deemed essential throughout the pandemic, offering convenient locations for COVID-19 tests and vaccinations.

Although the retailing of prescription and nonprescription drugs is increasingly shifting to online sales, pharmacies and drug stores offer an interesting case study of a retail industry with a growing services component. Retail pharmacies served the public during the COVID-19 pandemic, administering more than 307.4 million doses of COVID-19 vaccines through the Federal Retail Pharmacy Program (FRPP).²⁶ Because businesses participating in the FRPP did not bear the cost of goods (tests and vaccines), their compensation counted entirely toward margins.²⁷ Compared with medical practices, retail pharmacies offer extended hours (including weekends) and more store locations, providing wider access to vaccination services to the general public.

Over the 2010–20 decade, the retail pharmacy landscape evolved, undergoing an industry-wide consolidation.²⁸ Census data corroborate this development, showing increased concentration of establishments and sales among the 50 largest pharmacy and drug-store firms between 2007 and 2017.²⁹ Also, the industry has undergone increased vertical and horizontal integration, as well as greater differentiation in retail prescription drug prices by pharmacy type.³⁰ One study shows that independent pharmacies and small pharmacy chains have had the highest cash prices for generic drugs, whereas big-box pharmacies have had the lowest cash prices.³¹ Vertical and horizontal integration can lead to improved economies of scale and lower prices.

Over the 2007–22 study period, sales prices in pharmacies and drug stores increased consistently between 2007 and 2017 (3.7 percent per year) and then slowed their advance considerably through 2022 (0.7 percent per year). (See chart 11.) Although overall retail industry prices soared after the COVID-19 pandemic, pharmacy sales prices changed little.³² The industry’s margin prices, on the other hand, fluctuated over the study period, rising and falling in three cycles (2007–11, 2011–17, and 2017–22). Although margin prices were higher in 2022 than in 2007, they declined by 0.3 percent annually since 2019.

Conclusion

Our results show that, irrespective of the output concept (sales or margins) used in productivity measurement, productivity in the retail trade sector grew over the 2007–22 period, with growth in sales productivity outpacing growth in margin productivity by 0.7 percentage point per year. However, our industry-specific analyses demonstrate that the growth trends for the two productivity measures—and the factors affecting those trends—varied considerably for individual industries within the sector. At one extreme, represented by electronics and appliance stores, growth in sales productivity over the study period exceeded growth in margin productivity by 4.2 percentage points per year. At the other extreme, represented by pharmacies and drug stores, growth in sales productivity trailed growth in margin productivity by 2.4 percentage points per year. Another industry group—beer, wine, and liquor stores—exhibited productivity trends that fell somewhere between those two extremes.

Our analysis also shows that, whether or not one considers goods sold as part of the production process of retail industries, isolating the margin portion of sales revenue as an alternative output concept yields a richer picture of changes in the retail landscape and the mechanisms through which those changes affect sellers, consumers, and the economy. This approach allows us to examine whether, and how much, output and productivity are changing because retailers are selling more goods, offering more services, or both.