GMROII is one of the most useful metrics in retail. Some weeks back I wrote a column on Open to Buy and amongst the comments I received was one from a CFO of a large retail company who had just returned from a visit to the bank. The bank’s representative advised him that ‘the stock is the stock’, and can’t be controlled… to which he nearly fell over. He commented that on reading my article when he arrived home he realised he was not going mad and it had made his day. Subsequently D
Dr Dennis Price wrote an excellent column ‘Simple is not always smart’ and inter alia pointed out that GMROII is one of the most useful metrics in retail.
In an exchange of emails with the CFO referred to above, I asked whether they use GMROII as a KPI. The answer was that while they do have it in their reporting and while they do push it, it is a constant battle.
So why is it that one of the most useful metrics is hardly used? In my many years in retail I have never found a retailer actively and regularly using it as a KPI.
Dennis did provide some insight into GMROII and also referred readers to an article but I would like to expose and explain it a little differently.
Fundamentally GMROII (Gross Margin Return on Inventory Investment) is a measure of how efficiently you manage your stock and your markdowns. While there are many variations on the theme, it basically tells you what return you are receiving (in each category) for every dollar you have invested in stock. It does not measure volume – just efficiency.
The most common formula used is: Gross Profit after markdowns divided by Average Monthly Stock at Cost. The period used is usually 12 months which can be a rolling 12 months.
Let’s see how this translates to other metrics that we are more familiar with.
If you plan an input margin of 80 per cent and you plan markdowns at 20 per cent and you are working on say three months stock, your GMROII is 12. In other words you are planning on returning $12 per annum for every dollar invested in stock. Not a bad result!!
If you plan an input margin of 50 per cent and plan on no markdowns and you are working on say 4 months stock, your GMROII is 3. Or $3 returned for every $1 invested in stock. Not a great result.
Therefore to calculate your planned GMROII you only require three numbers:
Input margin %
Stockturn
Markdown %
(To calculate actual GMROII you will need actual GP after markdowns and actual average stock at cost).
And of course you can work it backwards. Calculate how much gross profit you want or need to make and what you want or need to invest in stock.
Probably one of the reasons that this metric is not widely used is simply that it is not really understood.
To request a free copy of this worksheet please email enquiries@impactretailing.com.au Once you receive this, you will be able to enter the three numbers shown above in blue and your planned GMROII will calculate instantly.
Add this into your company’s operational discipline and your buying and inventory control will take on a new dimension.
Stuart Bennie is a retail consultant at Impact Retailing. Email Stuart here.
