GMROI is a powerful tool when used appropriately. In fact, there is even the argument that it’s the most important retail metric out there. That’s a debate for another time. Suffice to say; there is a lot of truth in it if you dig into the details. Especially since it can to lead to improved store performance.
What is GMROI [and why is it essential to measure]?
Before we get into the intricacies of how measuring GMROI can lead to an improvement in your store performance, it’s essential first to understand what it is. More importantly, how you can calculate it so that you can use it appropriately.
GMROI - Gross Margin Return On Investment - refers to how much gross margin you’ll receive for each dollar that you’ve invested in your inventory. It’s also known as GMROII - gross margin return on inventory investment. Another way of putting it is thus: it determines the profitability of your merchandise and measures how efficient you are at both buying and selling stock.
That in itself should be enough of an argument for why it’s essential to measure.
Your inventory is possibly the most important asset of your business, and so you need to have full control of it. More than that, you need to know how it’s performing so that if something does go wrong, you can correct it as soon as possible.
If it’s so essential to measure, then how do you go about calculating it?
In simple terms, you calculate GMROI by dividing your Annual Gross Margin by your Average Inventory at Cost.
The ‘annual’ in this equation is an integral part because GMROI as a measurement is only truly useful when measured over more extended periods of time.
Of course, as Graham Lack of The Retail Consultants points out in an article for InsideRetail, you don’t want to have to wait a year before you analyse your stock performance. If you do, GMROI could quite quickly become an ineffective tool.
Fortunately, you can annualise the result. As Lack points out, you can do that by taking the sales data for a product that you’ve collected since it’s entered your store, divide it by that period and then multiply it by 12.
For example, if you have four months of data for Product A, you’d divide it by four to get its average monthly sales and then multiply by 12. Of course, it’s not an exact science. At best, you’ll get a look at what you can expect to make if everything goes according to plan.
How to track and measure the effectiveness of your inventory
The is no doubt about the fact that calculating GMROI can help you to understand the overall performance of your store. That said, you shouldn’t worry too much about the big picture just yet. Instead, you need first to consider the small details.
After all, to paraphrase the saying, if you take care of the details, everything else will begin to fall into place.
In the case here, since we’re talking about GMROI, the details are, quite obviously, your inventory. If you don’t measure it, you won’t know if you’re performing. More importantly, you won’t know what to do to improve if you’re underperforming.
There are two approaches you can take to measure if your stock is working for, or against you. You can do it at a category level, or you could analyse it at a product level.
Let’s look at it from a category level first.
In looking at the data around your inventory at a category level, you can figure out how your product groupings are performing in-store. For example, you can see if Category A (Dairy) is functioning as it should. Are your customers buying enough from this category to justify the space you’ve given it?
More than that, once you know how this category is performing, you can then compare it to Category B (Meats for example). Is your Dairy category performing on the same level as your Meats category? If not, why not.
As a side note, you do need to keep your category roles in mind when analysing your product groupings.
From there, you can also go about comparing your Dairy category to all of your other product groups. Mind you; you’d need to do the same for each category in-store, comparing each against each other to ensure that at a category level, you’re store is performing optimally.
That said, while calculating GMROI at a category level is meaningful, digging into your product groupings to look at your products is even more so.
In looking at your products, you can pinpoint which are your best sellers and which are performing poorly. More importantly, you can pinpoint where you’ve invested poorly and correct it. This includes re-evaluating and optimising your product assortment as well as reassessing space allocation on the shelf.
What can you do to improve your GMROI?
Since there is power in measuring GMROI, it stands to reason that you need to find appropriate ways to improve it.
There are generally two things you can do to improve it. Firstly, you’d need to increase your inventory turnover. Secondly, you’d need to improve your gross margin.
1. Increase your inventory turnover
Also known as stock turnover, there are a few actions you can take to boost your inventory turnover. As we noted in this piece, it’s not so much about doing one thing as it’s about doing a few.
One such action you can take is to minimise poor selling inventory. Of course, that should be apparent. If you want to increase turnover, you need to stock products that sell quickly.
As a side note, it’s not a good idea to remove your slow movers off the shelf altogether. Instead, let your stock deplete appropriately before removing it from your planogram and place any excess inventory in bargain bins. In doing it so, you’re negating the problem of sitting with merchandise that you can’t sell.
It’s also worth pointing out that improving your GMROI isn’t so much about bringing in more stock so that you can increase your margins. Instead, it’s about running your store with as lean an inventory list as possible but still raising your sales and profits, while pleasing your customers.
On the other hand, you can also look to encourage your customers to buy more. You can do that by focusing on various merchandising techniques, getting your category flow right and even when designing your floor plan.
2. Improve your gross margin
When it comes to looking at ways to improve your gross margin, the most common action to take is to increase your prices.
Of course, you do need to be careful here. There is the real danger of losing customers. That’s especially true if you’re a small retailer. Thus, if you want to offer your products at a higher cost to shoppers, the rule to follow is to create enough value around a product/s to justify the price. It helps if you sell high-end products or items that a shopper can’t get elsewhere.
That said, the rule remains the same regardless of the type of products you sell.
The other route to take is to reduce the cost of goods. That would include sitting down with your suppliers to work out better deals. It’ll help if you have chosen the right suppliers and have a good working relationship with them. Also, if the deal you’re suggested is beneficial to everyone.
Of course, if you’re a supplier, you can also approach a retailer and justify why you need more space for your products. In that case, it’s crucial that you have the right facts and that your suggestion makes sense to the whole category.
