GMROI : Retail's Heatbeat And How to Keep It In Check !

In the previous article, I have talked about the Bermuda Triangle of Retail Business. Those Magic Numbers in business which determines its fate in terms of success or failure. I have tried to explain the

concepts in that post in a simplified manner so that even if you are not familiar with them from before, you

will be able to get the zest of it and it might tickle you as well to learn more about them. If you want to get to

the nerve of your business and want to turn your trashes into treasure, you ought to be well-versed with

those numbers. As they say 'Telling is not Selling'; similarly 'Reading is not Learning' and in order to

master a subject, you need to dig deep into it and understand it. As I always say, in retail business never be

scared of jumping into the mud; that's where you will get deep secrets which will guide you to swing around

the profitability of your business.

Sometimes when I discuss the market movements with managers, they always try to convince me that market

is dull these days; numbers are down; we are not making profits; too much inventory is in the warehouse;

need to reduce headcount and so on and so forth. I believe that most of you hear similar phrases on a daily or

weekly basis and I am not arguing on its verity. My question here is that "What do you do when you face such

a situation?"

Lets break down the answers and analyse it individually in terms of buying and merchandising point of you. (I

will not consider marketing activities in order to stay to our subject)

Market is dull; Customers are not buying. Can you turn the tide? Marketing team will do their part but what

input can you provide here? Answer is NONE. Numbers are down (it is a rhetorical point though); Operations team will do their part but you cannot go and

start closing sales on shop floor.

Not making profits; Inventory is overflowing. Can you turn the tide? YES, you can, atleast try here! How can you turn your inventory so that business start generating profit? As I have mentioned above, every business analyst knows that the only way to turn things around is to dig

deep into details - DCS level (Department, Classes and Subclasses). Success and failure of a decision is

directly proportional to analyst level of detailing and accuracy. What is already bought cannot be returned but

good decisions can still be made on future purchases. Some managers look into higher margin categories and

some support categories with higher turn. However, true analysis and judgment comes when we combine both of these parameters together and identify a winner. To do so, retailers follow a decision making tool call GMROI.

What Is GMROI?

Gross Margin Return On Inventory is a business tool which acts as a measure of profitability. It takes Gross

Margin and Inventory into consideration and the result is the indicator of your categories success or failure.

Higher the GMROI, higher the inventory productivity.

How Do We Calculate GMROI?

As mentioned above that it takes two parameters into consideration; gross margin and inventory; the easiest

way to determine your GMROI is: Gross Margin $ /Average Inventory @ Cost OR Gross Margin % / Inventory Turn (You can also calculate GMROI by considering your week's cover but I will discuss that formula when I will

talk about week's cover in future posts.)

What Is An Ideal GMROI Figure?

It depends from business to business and the needs and goals of that business. However higher the number, the

better it is as you need to pay bills from the margin you generate. Usually there are two types of category scenarios while analyzing GMROI.

Higher margin and slow inventory turn. Lower margin and high inventory turn.

Both these categories might be profitable though depending upon the GMROI number they produce.

Points to Remember: While calculating GMROI; always take Gross Margin and NOT Net Margin. You can calculate GMROI at all levels in your product's hierarchy but I suggest to analyse at Class level as it

will be a close to ideal indicator of your business. (Calculating at SKU level is the ideal scenario but not every retailer can afford to analyse at that level as it time consuming and at times SKU's varies as per season)

How Can GMROI Help?

GMROI will help you determine your profit generating and non profit generating categories. I have tried to

combine BCG matrix parameters with GMROI scenario inorder to better explain the subject.

GMROI will help assist you in identifying your:

STARS - high margin and high inventory turn CASH COWS - low margin and high inventory turn QUESTION MARKS - high margin and low inventory turn DOGS - low margin and low inventory turn

How To Improve GMROI?

According to me there are 3 important areas which will allow you to improve your GMROI and hence

profitability. Price Points : Higher the margin, better your profitability but higher margins will come from higher price

points. Question which you have to ask is that "Can I afford product based pricing? OR "Should I

follow competition based pricing?" In this dynamic market where customers are flooded with options, prices plays a major role. A drifting customer is a lost customer. Hence you should analyse the price point factors of

various categories and if you are increasing prices of any category, support it with marketing activities. Reduce Markdowns : Wrong pricing will lead to heavy markdown and will affect the bottom line of the

business. A dedicated team with clear brand identity and target customers can pull of this job for you. Easier

said than done; you can afford to falter here. Reduce Cost : If you cannot manage to increase your price point due to increasing competition, then pick and

choose your suppliers. If you can reduce the cost of your products it will eventually increase your margins and

hence profitability.

What Else Does GMROI Affects?

According to me there are many areas which are directly or indirectly related to a GMROI figure. I have tried

to list down few which I take into consideration:

Bonuses : Do you decide staff bonuses on sales or profitability? Expansion plans : Do have money in the bank after paying for the inventory?

Refurbishments and Closures If you are a retailer/manager/employee and you have still not worked on your GMROI figure, then time is

running. Get the act straight and start examining your business from a profitability angle.

For any queries and/or suggestions, drop me an email.

Happy Selling !