GROSS MARGIN RETURN ON INVENTORY INVESTMENT (GMROII)
What it is
Completing the math as above and obtaining the Gross Profit from the Year-End Income Statement, the calculation would be 435,000 / 153,000 or 2.84. Some on-line sources recommend for GMROI in a retail store to be 3.2 or higher so that all occupancy and employee costs and profits are covered.
It is important to mention that the answer must be significantly greater than 1.0 to produce a profit for the business. An answer of 1.0 means that an item is only covering the cost of the item but it contributes nothing to the day to day operation of the store. In other words, the store is losing money selling the item. It goes without saying that a calculation of less than 1.0 means that the store is losing money.
Keep in mind that there are times when merchandise is brought into the store with the intention of a loss. These items would include merchandise given away free of charge for promotions, BOGOs, or merchandise gifts. According to some on-line reference guides, a store must achieve a GMROI of 3.2 to hit the break even point.
The Finer Points
If you just glanced at the table, you may answer that Category 1 is the most profitable because it has produced the most sales with a nice high Gross Margin %. Unfortunately, this may not be the case. Perhaps there is a large amount of merchandise that is outdated or damaged. Stored merchandise brings down the profitability performance of the entire category—and the performance of the store as a whole. In the example, the “best,” most profitable performer is Category 4. Although it has the lowest Gross Margin, it moves regularly requiring a smaller financial investment and giving a much better return on that investment.
A short-coming of GMROI analysis is that items with high sell-offs (i.e. the final stock level falls towards zero at the end of the season) may appear to perform better than items with more consistent inventory levels. Fashion items that totally sold off in-season will appear more favorably than basic items that are replenished by frequent reorders. This is particularly evident when analyzing shorter time periods or item level information rather than department information. While the calculation can be performed with fewer than twelve months of data, it is not normally recommend. The Open-To-Buy is calculated over a year’s performance; it is planned that way, so check category performances annually also.
What it is not
Ways to Improve GMROI
I believe that the best way to improve GMROI is by using an Open-To-Buy. An Open-To-Buy, the retail store’s written plan for profit, that is used and revised as needed during the year will help the buyer adjust to practical purchasing for the business. Additionally, by holding some money back each season, you will be able to make in-season adjustments to fit your customers’ needs and wants which increase your profit.
Our Open-To-Buy is priced for small and mid-sized, independent retail establishments. If your profit is not as much as you’d like, consider using The Retail Management Advisor’s Open-To-Buy Service. For an emailed, no-obligation service quote click here.