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article imageExploding Profits: The Mini-Economies of Drug Dealing, Sex Shops and Baseball

By David Silverberg     Jun 6, 2007 in Business
Have you ever wondered if a drug dealer has a higher profit margin than a baseball team? Or how much a department store marks up its most popular items? The economics behind New York’s institutions will highlight who’s in the black or red.
Digital Journal — Most four-star restaurants pocket a dime to every dollar. New York’s Nobu takes home twice that amount, partially thanks to its reputation and low rent on Hudson Street. But robust revenues and potent profits should also be credited to marked-up food, such as black cod with miso — it costs the Asian-fusion resto $7 (all numbers US) per ounce, and they sell it for $20 per ounce to customers.
You can call Nobu rip-off artists or you can call them business professionals. No matter the label, Nobu is an example of how certain sectors of an urban city attain profitability. The issue was analyzed thoroughly in a fascinating feature in New York Magazine, describing how certain sectors of New York make money, lose it and create mini economies that assist others.
Journalist Michael Idov writes in the feature,
We’re all plugged, at different entry points, into the same awesome web. A failing restaurant keeps a printer in the black with its incessant flyering. The sex-toy market rises and falls with the consumer-confidence index. An eight o’clock Nobu reservation provides a cabdriver with his golden hour.
Digital Journal
offers a quick glimpse at the money behind everyday institutions and services — and a black-market criminal, in case you’ve always wanted to know whether drug dealing is a viable business opportunity.
At the Asian restaurant Nubo in New York, 30 per cent of profits come from selling sushi and sashimi, which helps it earn $8.5 million in annual revenues.

Department Store

Example: Macy’s Herald Square
The machine of consumerism motors along quickly at a flagship Macy’s store welcoming 40,000 shoppers daily. It makes $60 million profit on $600 million revenue annually, and its main floor generates a third of the revenue. As NPD chief analyst Marshal Cohen told New York, “The higher up in the store, the lower the margin tends to be.” Items purchased infrequently, like expensive rugs, can be found at higher levels of the store.
When it comes to marking up prices, cosmetics is hiked up 65 per cent from the original cost to Macy’s. Accessories (70 per cent), fashion (54 per cent) and kids clothing (42 per cent) are also popular marked-up goods, which should give pause to every shopper curious about high tag prices.

Diner

Example: Silver Star
Guess what menu item is most profitable for a greasy spoon like the Upper East Side’s Silver Star? Costing the diner $1.75 and selling for $5.75, an ordinary hamburger helps owners enjoy $252,000 in annual profit. The highest overhead cost is payroll, setting back the diner $840,000 to pay 30 full-time employees. Since customers expect affordability at a diner like Silver Star, owners can’t raise menu prices even if food costs skyrocket. All diners’ margins are linked to oil markets, so if transport costs increase so does the Silver Star’s expenditures.
Next time you walk into a mom-and-pop diner, and you’re looking to help out a struggling property, avoid menu items that earn the diner the least profit: Steak costs the diner $15 and sells for $20, and Silver Star only makes $1.45 on every order of lox. Who knew avoiding pricey items could actually help the little diner?

Publishing Company

Example: Random House
What do Dan Brown, Dean Koontz and J.K. Rowling have in common? They help Random House earn $230 million in profit annually, an impressive contribution to New York’s storied publishing industry. As a New York mainstay, Random House accesses the city’s impressive cadre of writers and agents, while also finding success in spreading the word about new authors in the American media capital.
As much as new books like the Harry Potter saga catapults Random House to a financial grand slam, its 33,000-title backlist supplies 80 per cent of its profit. Nothing like Stephen King’s Carrie to propel a publisher to glory.
Finally, let’s break down where the money flows when you buy a $10 retail paperback, according to New York Magazine:
$5 goes to the retailer; $2 covers Random House buildings and staff; $1.50 goes to author payments; $1 goes to paper, printing, and binding; 50 cents is profit.

Yellow-Cab Driver

Example: Samuel Pekoh
The ubiquitous yellow cab in New York is a testament to market demands: Parking is so expensive in New York, grabbing a taxi becomes the next best option. Samuel Pekoh, a cabbie who works 60-hour weeks, takes home $12,000 in profit on $75,000 of income annually. His biggest annual overhead costs? Gas at $18,000 and his car’s license debt payments at $24,000.
Pekoh’s most profitable fares come at 3 p.m. during traffic-free airport runs, which can net him $90 plus tips. He’s no fan of borough trips through traffic or profit-killers such as moving-violation tickets.
Driving a taxi is not for the weak-willed in a competitive city like New York, so vets like Pekoh learn how to get the most value out of each ride. You could say cab companies thrive when car prices and parking costs rise to rates that make the most ardent drivers reconsider their gas-guzzlers.
Taxi drivers in New York can earn $12,000 in profit annually, especially if they fork over the initial $190,000 investment for a taxi licence.

Sex Shop

Example: Babeland
The Mercer Street sex-goods store is a specialized shop finding its niche in a city known for its many vices. An upscale clientele allows Babeland to thrive on an average 63 per cent markup, which earns it $1.75 million annually.
The most marked-up items include slimline vibrators (88 per cent), anal toys (68 per cent) and DVDs (58 per cent). Where there’s demand, there’ll always be supply, and it’s obvious sex stores can profit tremendously if they market themselves as high-end retail. No one likes buying anal beads from seedy stores.

Baseball Team

Example: New York Yankees
The Yanks might be the most well-known sports franchise in the world, but they’re not the most profitable: With annual revenues of $308 million, the team manages to lose $28 million every year. The highest cost is player payroll ($200 million), followed by the $100 million the team pays to Major League Baseball every year. Stadium operations costs $20 million, travel and training tops out at another $20 million and, well, you get the picture — running a major league franchise can drain the wallet faster than a Mariano Rivera fastball.
To offset losses, the Yankees own a third of the YES network, which airs Yankees games to 8.7 million subscribers. The cable network’s profit margin runs at 60 per cent, so some of that money makes it way to the organization. If only the Chicago Cubs could be that business savvy…

Drug Dealer

Example: “Nick”
Imagine buying a quarter-gram of anything for $5 and selling it for $50. Not a bad profit margin, right? But when that item is crystal meth, most people would balk in the face of a high-risk job like drug dealing. In New York, a jailed dealer named “Nick” told the magazine he’d make $1 million annually on 15-hour work weeks with no taxes.
Smart dealers don’t sell in bulk, he says. “If you sell by scoops, you’ll make a couple thousand dollars, but if you break it down into quarter-grams and work for a few days, you’ll make tens of thousands.” Slinging meth incurs high risk, but also high reward. Clients such as wealthy professionals are usually discreet and never short the payments; friends, on the other hands, “don’t have a problem calling at 6 a.m. and expect low prices.”
This drug dealer earns the kind of profit margins most blue-collar workers slobber over, but a huge caveat is worth underlining: prison. There’s nothing more demoralizing for a business, or the human soul, as spending years in a tiny cell, constantly worrying about the next walk-by shanking. Makes your job sounds pretty cozy, doesn’t it?
Drug dealers who work with crystal meth, for example, can earn profit margins up to 500 per cent.
No matter how you look at it, niche economies exist within the broader scope of urban living. Every sector’s twitch and tweak ripples to affect other sectors, thereby creating a cohesive process of profitability and consumerism. It’s too simplistic to simply look at a cab driver solely as an employee; picture him — or a department store or a meth dealer — as a financial ecosystem destined to change the highs and lows of everyday markets.
More about New york, Profit margins, Retail
 
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