It should be comforting to know that if you’re struggling to find out what’s going with your business, you only need to look at your data. By that, we mean, look at your retail metrics. And, if you’ve chosen well, you’ll be on your way to not only understanding what’s happening but also know what to do to improve.
Are retail metrics worth measuring at all?
There shouldn’t need to be any discussion or argument about the role that retail metrics play in your business. After all, you only need to consider its definition. They are “quantifiable measures used to gauge [your] performance or progress”.
Therein lies the need for them.
Of course, on that, it’s easy to assume then that you should measure as much as possible. The belief is that the more you know about your store, the better. From one angle, that makes sense. However, it's not entirely accurate. It’s also where many stores go wrong. And it’s not just us saying this. KPI and Big Data expert, Bernard Marr says it too.
In this book, 25 Need-to-Know Key Performance Indicators, he states that its high risk to go this route since you could quickly find yourself measuring things that don’t matter. Or, measuring too much, and thus losing sight of what you want to achieve.
As Marr goes on to explain, you need first to lay down the groundwork before you begin measuring anything. That includes deciding on the strategies for your categories and then matching them to your metrics.
For example, if you're selling Baby Diapers and your strategy is to move as many units as possible, you'd want to look at a metric such as Unit Movement or even Stock Turns. But we're getting ahead of ourselves. Suffice it to say; you need to choose a category strategy or goal first and then find the measurable metric that will help the category meet that goal.
Also, keep in mind that there are no shortcuts here. The retail metrics that work for your competitor won’t necessarily work for you so you shouldn’t copy them outright.
So then, that begs the question: how many metrics should you monitor? It’s best practice to pick between three and five (seven at a push). Any more, though, and you’ll stretch yourself too thin.
As a side note, if you’re currently at that stage where you need to pick your metrics and you’re afraid of choosing the wrong one, don’t be. There is no “Golden Metric”. So long as you keep your strategy in mind when selecting your parameters, you’ll be safe.
Unpacking retail metrics that are worth monitoring in your business
The retail metrics you choose have a dual purpose. On the one hand, they need to answer questions about your business.
At the same time, they need to provide you with more insights so that you can dig deeper. In this way, the metrics you choose help you to drill into the granular details of what’s happening in-store.
Below, you’ll find a selection of metrics that are worth monitoring in your retail business today. That said, it’s worth reiterating that whichever parameters you do decide on must speak to the strategy for the category.
Also, you shouldn’t measure any of these metrics on their own. You should rather measure them either in conjunction with each other or alongside other parameters that you’ve chosen.
GMROI - Gross Margin Return on Investment - is a popular retail metric that you’ll no doubt have heard thrown about in retail circles. That’s because this is a critical one to monitor for your long-term success.
In short, GMROI determines the profitability of your stock. More than that, it informs you of how efficient you are when it comes to both buying and selling your inventory. That’s why you’re also likely to hear it described as GMROII - Gross Margin Return on Inventory Investment.
As for its importance, again it shouldn’t be up for debate. Since your inventory is one of the most significant investments you’ll ever make as a retailer, you need to do everything in your power to control it. Fail to do that, and the consequences will be devastating for your business.
So how do you calculate GMROI? Simple: You divide your Annual Gross Margin by your Average Inventory at Cost.
If you don’t have a year’s worth of data, you can annualise your stock performance. To do that, take the sales data that you have for a product since it entered your store, divide it by that period and multiply by 12. This calculation provides you with an expected average over the months ahead.
We’ve written a more detailed article about the importance of GMROI as a metric to measure and how you can use it to track the effectiveness of your inventory. You can read that piece here.
In short, it’s best used at a category level or lower where through careful analysis, you can see which lines, departments and product groupings in your stores are the most profitable for your inventory investment. More importantly, which of your lines are the least attractive.
2. Stock Turn
As much as GMROI is a critical metric to monitor, so too is your stock turn.
Stock turn, also known as “Inventory Turn” or “Inventory Turnover” is a ratio that shows you how many times your inventory is either sold or replaced over a particular period. In other words, it’s a measure that will help you to understand how your products are performing in-store.
In that, it’s closely linked to GMROI.
As for how you calculate it, it’s this simple: You divide your Annualised Sales by your Average Stock on Hand.
In practical terms, let’s say that your business has annual sales of 2000 and stock of 1000. Your stock turn is 2. That’s good since it’s higher than one. On the other hand, if you were to switch this around so that your sales are sitting at 1000 while your stock is 2000, you can quite clearly see that you have too much inventory.
Whenever monitoring your stock turns, you need to aim for a number higher than one. That’ll essentially mean you have more sales than stock, which means that your turnover ratio is positive.
Another way to put it (and to show how your metrics are connected) is thus: if you reduce your stocks turns, you’re upping your stock holding, which means you decrease your GMROI.
Of course, it does depend on your category. For example, Toiletries and General Merchandise usually have a higher gross margin, and therefore you can get away with a lower stock turn and higher Days of Supply on shelf. However, you can't say the same for your Dairy category.
We wrote a more in-depth piece around stock turns and how you can boost it if you’re struggling to achieve a stock ratio over one. You can read that piece here.
3. Days of Supply
While GMROI and Stock Turns are two important retail metrics that everyone should know about, there is another parameter that is just as important but may not always get the spotlight. As the sub-heading points out, we’re talking specifically about Days of Supply.
Often shortened to DOS, your Days of Supply refers to the number of days a product is expected to last on your shelf before you need to restock it. In that way, just as GMROI is connected to Stock Turn, so too is your DOS.
That’s because as much as this metric informs you of when to restock, it’ll also tell you how often your inventory turns over. This is accurate since it considers various factors such as unit movement and your product and fixture dimensions.
So how do you calculate your DOS? In short, you divide your Capacity by your Units Sold Per Day. In this context, ‘Capacity’ refers to the number of units of a product on your planogram.
With this formula, you’re able to measure many aspects of your business, including your DOS for individual products as well as the average DOS for your shelf and gondola.
As a side note, when setting up the DOS for your products on a planogram, it’s crucial that you spread it out as evenly as possible so that all of your products sell out at the same rate.
There is no doubt about the damage that inventory shrinkage can do to your business. In this instance, we’re talking about the long-term damage rather than short-term, although time isn’t always of consequence.
Before we go any further, shrinkage or shrink refers to any goods that have either gone missing or are damaged between the time they left the manufacturers floor and arrived at your checkout counter.
As for why it happens, there are many reasons. A few include customer and staff theft and vendor fraud. You can read about the other reasons as well as how to stop or prevent shrinkage from happening in this piece.
That said, the calculation isn’t as complicated as the other metrics that we’ve mentioned above.
To calculate your shrinkage, you take your listed inventory and minus the actual amount of stock that you have on hand, which includes stock on shelf and your storeroom. Then, you express this as a percentage.
For example, let’s assume that you’re a small retailer and your listed inventory totals $200 000. After conducting a stock count, you find that your actual undamaged amount of inventory on hand is $195 000. In monetary terms, your shrinkage is $5 000. You’d divide this number by $200 000 and multiply the answer by 100 to reach your shrinkage percentage. In this case, it’s 2.5%.
As a side note, while this is only an example, 2.5% is far too high. You’d be better off aiming for a shrinkage level of 2% or below. It’s also worth noting that there is never a moment where you can’t monitor your retail shrinkage.
It’s worth reiterating that all of the above metrics shouldn’t be monitored in isolation. That’s because they are all related to each other in some way. More importantly, it’s how you should use metrics to drive your business forward.