NAICS and IBISWorld Industry Research

  • IBISWorld
  • January 04, 20219 minute read

What is NAICS?

The North American Industry Classification System (NAICS) is an arrangement between Canada, Mexico and the United States by which businesses are designated based on their type of economic activity. The system uses a six-digit coding system where each additional digit narrows the scope of the business grouping.


According to NAICS, the first two digits designate the largest business sector, the third digit specifies the subsector, the fourth digit designates the industry group and the fifth digit specifies the NAICS industries. The international NAICS agreement fixes the first five digits of the code, so they are standardized across countries. The sixth designates the national industries or the more granular industry product or service, thus, 6-digit U.S. codes may differ from counterparts in Canada or Mexico.


naics code structure

Breakdown of NAICS Codes

At the two-digit NAICS level, businesses are grouped into sectors, which are the largest segments of the economy. There are 20 sectors and they include names like Utilities, Retail Trade, Educational Services, and Manufacturing.


A sector can then be designated as either primary, secondary, tertiary or quaternary.

  • Companies classified in the primary sector primarily extract and harvest resources from the earth, like agriculture, mining or forestry.
  • The secondary sector comprises businesses that are involved in processing, manufacturing and construction.
  • Businesses in the tertiary sector provide services, such as retailers or financial companies.
  • Lastly, the quaternary sector is composed of knowledge-oriented businesses, such as educational institutions.

With each additional digit added to a NAICS code, the scope of the group of businesses narrows, leaving the most similar companies classified into industries with the longest codes. At the four-digit NAICS code level, companies receive the designation of industry group, which is subsequently further broken down into specific industries as additional fifth and sixth digits are added. An industry is the narrowest classification in NAICS and comprises companies operating in the same business sphere of the economy, with the most similar attributes.


IBISWorld’s Industry Classification Lookup Tool helps you find the NAICS code for any business. You’ll also find valuable resources to help you understand what NAICS codes are and how they’re structured. Learn how to use NAICS codes to explore new markets, understand your competition and make smart business decisions.


IBISWorld Industry Research and NAICS

IBISWorld industry reports analyze industries at both the five- and six-digit NAICS level, while also offering corresponding sector reports at the two-digit NAICS level.


For example, the Cigarette and Tobacco Manufacturing industry comprises businesses that manufacture cigarettes, cigars, loose pipe tobacco, and smokeless tobacco. This industry is a part of the larger Manufacturing sector, which is made up of all establishments that transform raw materials into new products via mechanical, physical or chemical processes.


ibisworld tobacco report


Understanding the distinction between an industry and its broader overarching sector is vital to discern the value of the level of granularity industry research offers. Analysis of an industry at the five- or six-digit NAICS level can be leveraged by businesses in any industry to both comprehend and strengthen their position within their marketplace.


Compare an Industry to Markets and Sectors

Using IBISWorld industry research reports, a business can conduct a SWOT analysis to determine the opportunities and threats its market faces while also identifying its individual strengths and weaknesses.


Additionally, a company can benchmark financial data averages of its industry against those of the larger corresponding sector using the Cost Structure Benchmarks industry report section to measure how its own spending compares to other similar businesses.


For instance, a business can compare the major costs of an operator in the Cigarette and Tobacco Manufacturing industry with operators in the broader Manufacturing sector in the Cost Structure Benchmark section of the individual reports. The section indicates that the average operator in the Cigarette and Tobacco Manufacturing industry generates much higher profit margins than those in the overall sector. However, the neighboring Market Share Concentration section indicates the industry is highly concentrated, while the broader sector is not.


tobacco cost structure


As a result, a business can see that although the average industry operator experiences greater returns, competition in the industry is much higher than in the overall sector.


By referencing the individual Basis of Competition and Barriers to Entry sections of the industry and sector reports, a business can distill more specific information on such matters, helping them understand the threats and opportunities unique to the industry and the sector.


Compare an Industry Across Countries

Businesses can also use IBISWorld’s database to compare industries across the United States, Mexico and Canada.


For example, an operator in the Breweries industry in the United States might consider expanding their footprint by opening establishments or selling their products in Canada and Mexico. Such businesses can use the Products & Services and Major Markets sections of the individual country reports (Breweries in Canada and Breweries in Mexico) to evaluate key markets and products to invest in.


Referencing the Major Companies section, a business can identify the biggest competitors in the country, along with the potential for smaller or new businesses.


Finally, using the Industry Performance section, businesses can evaluate the current landscape of the industries across North America, along with weighing the opportunities and threats forecast in the near future.


Comprehension of this information and the sections of an IBISWorld report can help a company to successfully navigate its respective market and maximize its profitability leading to overall success.


Evolving NAICS Codes

New industries emerge regularly, resulting from new product innovations, regulatory changes and rising demand from particular markets. As a result, every five years, NAICS codes are reviewed and may be redefined or removed, or new codes may be added to the system. This might be as simple as a particular product or service moving from one industry to another, or the changes could include the introduction of brand-new industries.


NAICS aims to create industries based on companies’ primary production function, grouping entities that produce similar products and services into a single industry. However, because of the rate of new products and services introduced, the NAICS system often lags behind the innovations occurring in real time.


For example, Electronic Computer Manufacturing includes the manufacturing of computers and similar products. However, electronic computer tablets, such as iPads and Amazon Fire Tablets, were not recognized as being part of the industry until a 2017 definition change.


Another example includes the growing, wholesaling and retail sale of marijuana (included in industries 111419, 424590 and 453998, respectively). Prior to US federal and state legality changes, marijuana was considered an illegal substance and no government-recognized industries were connected with its cultivation or distribution. However, over the past 20 years, medical use of the substance has become more commonplace and states across the US have legalized the plant to varying degrees. As a result, the NAICS system was amended in 2017 to accommodate for the new industry activities that emerged.


NAICS Can Lag Behind

While computer tablets and marijuana were fairly quickly identified and included in similar industries, other products and services take some time to be included in their logical industry counterparts.


For example, the market for electronic cigarettes has soared over the past ten years. However, NAICS only began identifying components of electronic cigarettes in its 2017 definitions. While all tobacco products for recreational consumption are included in the Tobacco Manufacturing industry, it contains no components of electronic cigarettes. Instead, the production of e-cigarette liquid is included in an unrelated chemical product manufacturing industry, while the e-cigarette batteries are included in a miscellaneous manufacturing industry.


Instances like these can make considering an industry difficult, as many people would assume e-cigarettes are included in the tobacco manufacturing industry, especially since the industry’s major players are all heavily invested in the product. However, due to the rate in which NAICS adds and redefines codes, new products such as these will likely remain in unrelated industries for some time.


When NAICS is Too Slow, IBISWorld Picks Up the Slack

While the NAICS system has been adjusted and amended to include new products and services over the years, some have remained bundled in ever-expanding industries.


An E-Commerce Example

Perhaps the greatest example is the Electronic Shopping and Mail-Order Houses industry (45411). In 2007 and 2012, NAICS broke this code down further, separating electronic shopping (e-commerce) from electronic auctions and mail-order houses. However, in 2017, NAICS combined these all into one six-digit code (454110). And this issue only scratches the surface.


The scope of e-commerce has grown exponentially over the past twenty years, with virtually all traditionally brick-and-mortar retail products and services sold online. However, NAICS has yet to expand the scope of its reporting. The result is the over-generalized 445110 industry, which contains too many differing establishments to provide real insight into specific online operators.


For example, a business looking to compare the operating costs of a brick-and-mortar home furnishings store with the operating costs of an online home furnishings store would find little help in studying the financials of the 445110 industry.


Reports on Niche and Emerging Industries

As a result of situations like this, IBISWorld offers a collection of niche, specialized and On Demand reports.


We’re able to zoom in on particular industries, providing full-length reports on product and services lines within larger industries. E-commerce provides a wealth of material for such reports given its wide-reaching nature. IBISWorld offers reports such as Online Grocery Sales (OD5085), Online Home Furnishing Sales (OD5072), and Online Women’s Clothing Sales (OD5097), along with many others.


Reports like these allow business to compare niche operations within an industry to overall industry performance, similar to comparing an industry to its larger sector.


This is not specific to e-commerce sales. Businesses can compare the Distilleries industry (31214), which covers the distillation and production of all alcoholic spirits, with production of individual spirits, such as the Whiskey & Bourbon Distilleries industry (OD4290) or the Vodka Distilleries industry (OD4289), among others. In doing so, a business can compare the costs of operating in more granular aspects of a larger industry and answer an array of questions.



ibisworld consumer goods reports


In the Cost Structure Benchmarks section, a business can compare how average profit for vodka distillers differs from average profit of distilleries producing an array of spirits. In the Major Markets section, one can discern differences and similarities in the industries significant downstream channels. Referencing the Major Companies sections of the reports, businesses can see if the largest businesses in the larger industry also dominate the more granular industry.


IBISWorld Industry Research and NAICS

IBISWorld industry reports analyze industries at both the five- and six-digit NAICS level, while also offering corresponding sector reports at the two-digit NAICS level. We offer over 1,300 US Industry Reports, 400+ Canada Industry Reports and 100+ Mexico Industry Reports.


Discover how a subscription to IBISWorld can help you make smarter, faster business decisions.


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