The National Grocers Association this week became the latest group of retailers to reject a proposed settlement agreement to litigation over credit-card fees, and new data from Sageworks Inc., a financial information company, shows why some merchants might be more inclined to balk at the deal than others.
The proposed settlement would create a fund of up to $7.25 billion to settle claims that Visa, MasterCard and other large banks conspired to restrain competition, according to the law firm representing plaintiffs in the suit. The card companies also would be required to reduce interchange fees on Visa and MasterCard credit card transactions over eight months while implementing new rules allowing retailers more leeway to encourage consumers to use cheaper payment forms.
Sageworks conducted a financial statement analysis of privately held companies across several major retail categories and found that owners of gas stations and grocery stores have some of the slimmest net profit margins in retailing. For every dollar of sales they generate, they earn less in profit, on average, than other types of retailers, such as clothing stores and health and beauty shops.
That leaves less padding to absorb so-called swipe fees when they rise, and consumer spending is shaky enough that many retailers are skittish about the alternative: passing the fees along to customers.
“There are certain industries that should show extra caution when it comes to credit card swipe fees—those retail industries with already-slim net profit margins,” Sageworks analyst Libby Bierman said. ”They don’t have as much wiggle room as other industries to bear the additional fees.”
Grocers have historically made their money on volume, making only a few cents on the dollar, Bierman noted. “If these grocery stores are unable to pass increased credit card fees on to consumers, they could risk their profitability — a particular concern now, when their food costs from suppliers are inching higher thanks to this summer’s drought,” she said.
“Gas stations, too, have slim margins, and my guess is that, given their pay-at-the-pump setup, many gas station customers rely on credit card payments,” she said. “The outcome of this settlement and future negotiations could be the difference between staying in the black or not.”
The National Association of Convenience Stores, another plaintiff in the lawsuit, earlier this month rejected the settlement, saying the deal doesn’t “introduce competition and transparency into the broken credit card swipe fee market.” More than 80 percent of convenience stores sell gasoline, and it’s often the only purchase customers make. Wal-mart Stores Inc. and Target Corp. have also criticized the agreement, which must still receive court approval.
Gas stations had an average net profit margin of 1.57 percent over the last 12 months, Sageworks’ data shows. Grocery stores’ net margin was 1.62 percent in the same time period. On the other hand, clothing stores’ net margins averaged 3.70 percent, and sporting goods, hobby shops and musical instrument stores in Sageworks’ database generated an average net profit margin of 3 percent.
For private companies across all types of industries, net profit margins over the last 12 months averaged about 9 percent, according to the Sageworks Private Company Indicator, higher than that of most small retailers.
Mary Ellen Biery is a research specialist at Sageworks, which collects financial statements for private companies and aggregates the data at an approximate rate of 1,000 statements a day. Net profit margin has been adjusted to exclude taxes and include owner compensation in excess of their market-rate salaries. These adjustments are commonly made to private-company financials in order to provide a more accurate picture of the companies’ operational performance.
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