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Mastering GMROI: Boosting Retail Profitability through Inventory Turnover
Mastering GMROI: Boosting Retail Profitability through Inventory Turnover
GMROI- BPR 2012/2013
Understanding GMROI
One of the best tools for measuring and managing the profitability of inventory performance is through the understanding and use of gross margin return on investment or GMROI for short. This quick calculation measures the relationship between inventory turnover and gross margin dollars. Simply put it tells you for each dollar invested in cost inventory how many dollars of gross margin you are earning.
Calculation and Application
The calculation is easy to do and can be used to evaluate a department classification vendor or even an entire company. The formula is as follows: gross margin dollars/average inventory @ cost. It is important to remember to compare apples to apples. If you were calculating GMROI for a particular vendor for example you would use the GM$ from only that vendor for the given time period that you were interested in measuring say spring or fall or perhaps the entire year. Divide the GM$ by the average inventory at cost for only that vendor in the exact same time period. Most POS systems in use now can generate this calculation.
Investment Perspective
Buying inventory is really no different than investing in merchandise. GMROI provides the measurement as to how well your investment performed. If I were to give you a dollar and you gave me a dollar back there is no return on the transaction. If you give me my keyword.50 in return which is certainly better one must remember that .50 of the money returned goes toward operating expenses. A GMROI of $2.00 for the shoe industry should be considered as the absolute minimum.
Example Analysis
Study the charts below. In all three examples the my keyword000000 sales volume is the same and the gross margin remains constant at 47% or $470000. The only difference is the turnover.
- Store A: Turn 1.5 AI@C 353K
- Store B: Turn 2 AI@C 265K
- Store C: Turn 3 AI@C 177K
GMROI=1.33 1.77 2.65
Notice in the examples above that when turnover increases from 2 to 3 times the GMROI jumps by 50%. Not only is the retailer in Store C more profitable based on this example he would most likely be experiencing stronger cash flow due to owning less average inventory which is the lifeblood of all retailers. In addition sales volume in Store C though kept constant for purposes of comparison generally speaking would be higher due to a more continuous flow of new inventory.
Clearly the single most beneficial financial enhancement to any retail business wanting to improve GMROI is to increase inventory turnover.
With gross margin % remaining relatively consistent between past few BPR reports it is easy to surmise that the increase in GMROI to $2.64 in this year’s BPR report is due to an increase in turnover.
Ritchie Sayner
Summary of GMROI- BPR 2012/2013
The article discusses the significance of GMROI (Gross Margin Return on Investment) as a crucial measure for evaluating the profitability of inventory. It explains that GMROI is calculated by dividing gross margin dollars by average inventory at cost and emphasizes that increasing inventory turnover can significantly enhance GMROI as demonstrated by examples showing a 50% increase in GMROI when turnover rises.
“Clearly the single most beneficial financial enhancement to any retail business wanting to improve GMROI is to increase inventory turnover.”
Real-World Examples of GMROI Application
Understanding GMROI and its application can significantly impact inventory management and profitability. Here are some real-world examples illustrating its use:
- A clothing retailer evaluates its various departments using GMROI to determine which sections are most profitable. By calculating the GMROI for the women’s clothing department they discover it has a lower GMROI compared to the men’s section. The retailer decides to increase inventory turnover in the women’s section by introducing faster-selling items and reducing slow-moving stock.
- An electronics store analyzes its vendor partnerships using GMROI. They find that Vendor A despite having high sales volume has a lower GMROI compared to Vendor B. The store decides to renegotiate terms with Vendor A or shift more purchasing to Vendor B to enhance profitability.
- A shoe company uses GMROI to assess its seasonal inventory performance. By comparing GMROI for summer and winter collections the company realizes that summer shoes have a higher turnover and GMROI. This insight prompts the company to adjust its purchasing strategy and allocate more budget to summer inventory.
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