Profit margins are difficult to compare across industries, game developers on average have great profit margins in part because all the studios that fail quickly stop counting.
Grocery stores on the other hand are a known as a low margin business, but as people constantly need more food every month it can be really stable. Further as most stock turns over multiple times a month your return on capital can be extremely high. Even better during a downturn when people buy 20% less food you also need to buy 20% less stock and employ fewer people to stock shelves etc, which makes your profits far more resilient.
Suddenly grocery stores are looking like a much better investment than making games.
The point of a profit margin is to be able to compare a seller's pricing power across industries. It invalidates attempts to claim the seller is able unilaterally act in their interests without the customer having recourse. For insurers, not only do customers have a choice to switch to a different insurer, but insurance prices have to be approved by government employees.
And total returns are the end all, be all for measuring investment performance. Just because some volatile video game businesses go bust does not make the grocery business or insurance business attractive. I could just as easily put my money into SP500 and earn far more with far less (almost zero) risk.
> It invalidates attempts to claim the seller is able unilaterally act in their interests without the customer having recourse.
By that logic the cap’s on annual profits by insurance companies suggest significant pricing power by insurers.
As to S&P vs a grocery store, there are grocery chains in the S&P there’s nothing wrong with the business model. As always the arguments for starting a business are more complicated than the alternatives due to the amount of leverage you can get etc. Further a weekly turnover at 2% is a rather insane annual ROI, we’re talking 100% return on investment though obviously actual business don’t just concern themselves with groceries, labor, and rent.
>By that logic the cap’s on annual profits by insurance companies suggest significant pricing power by insurers.
I disagree. If I was a seller, and if I had pricing power, then I would not settle for a 2% profit margin when the cap is 15% or more. The only reason I would settle for 2% is because I cannot sell for my product or service at higher prices or in higher volumes to get more than 2%.
>Further a weekly turnover at 2% is a rather insane annual ROI, we’re talking 100% return on investment
I don't know what definition of return on investment you are using, but it does not match any that I am familiar with based on share price and dividend history of any publicly listed grocer (kroger/albertsons/walmart/target). Obviously, Costco has done well, and Amazon, but those are not strictly due to selling groceries, or retail in general.
A 10% or 20% cap is only relevant if the company is hitting the cap. Operating a subdivision with a lower profit margin is a different matter, that’s no longer an insurance company hell they could be selling porn and it would be equally irrelevant.
Instead what matters here is that insurance companies by your own admission clearly have pricing power and that’s a problem.
> does not match any that I am familiar with based on share price and dividend history of any publicly listed grocer
Return on capital when starting a company is different than return on investment when buying a public company. If a company is kicking off 1 Billion dollars a year it doesn’t matter if it cost 10 million or 10 billion dollars building the company, you pay for the share based on future revenue. When starting a company however it very much matters if it takes 10 million or 10 billion to get off the ground.
Grocery stores on the other hand are a known as a low margin business, but as people constantly need more food every month it can be really stable. Further as most stock turns over multiple times a month your return on capital can be extremely high. Even better during a downturn when people buy 20% less food you also need to buy 20% less stock and employ fewer people to stock shelves etc, which makes your profits far more resilient.
Suddenly grocery stores are looking like a much better investment than making games.