GMROI IS AN INDICATOR OF RETAIL SUCCESS
Inventory for retailers is one of the most significant investments. Because by investing in goods, retailers hope to sell them for the desired profit. This is the essence of the retail business model. Therefore, to assess the success of the chain and the return of all inventory, it is necessary to comprehensively analyze GMROI.
What is GMROI?
GMROI (Gross Margin Return on Investment) is an indicator of the profitability of inventory. It shows how much profit is generated for every 100 monet. units invested in inventory:
GMROI, % = Gross Margin / Average Inventory * 100%
In addition, this indicator most accurately reflects the relationship between turnover rate and margin:
GMROI, % = Turnover ratio x Margin, %
This formula confirms the well-known fact that you can earn due to high margins and fast selling of goods.
The Value of GMROI for a Retail Executive
In general, GMROI reveals whether a retailer can make a profit on their inventory.
You should study GMROI not only in stores but also in the context of goods/categories. This will allow you to:
- determine which product items generate the greatest profit;
- find goods that are "candidates" for withdrawal and only "freeze" invested funds;
- optimize the assortment to provide high profits and return on investment in inventory.
Each chain sets its own optimal GMROI value. At the same time, it should not only cover the costs of acquiring and storing goods but also ensure their profitability.
The sequence of GMROI analysis
GMROI should be analyzed with different details: by stores, categories, products, and brands. However, to better understand how profitable the chain is, we recommend that you follow the steps below.
Step 1: General GMROI Analysis
In the beginning, you should evaluate the profitability of goods (categories, brands). To do this, you can consider the following indicators for each product:
- Cost of sales;
- Gross profit;
- Average inventory in monetary units;
- GMROI, %.
They will show the most and the least profitable products in the chain assortment. Product items with the lowest GMROI values are the first "candidates" for withdrawal in the future.
Step 2: Dynamics of GMROI
To understand the full picture of the goods, you should find out how the GMROI indicator has changed over a certain period.
A positive trend is a growth in dynamics. If a reduction in GMROI is detected, then this is a signal of problem situations for which the causes should be identified and promptly eliminated in the future.
Step 3: GMROI Factor Analysis
The value of GMROI, as already noted, depends on the turnover ratio and margin:
GMROI = Turnover ratio x Margin
That is, it becomes clear that the return on investment in goods depends on:
- how much the product is in demand and sold quickly;
- whether a sufficient amount of profit is included in the price of the goods.
Accordingly, if negative changes in the amount of GMROI are found, it is possible to find out due to what factors (low margin, the slowdown in sales, increase of product stocks) they occurred and correct the situation in the future.
! The best option for retail is to form a product assortment of goods that have both a high turnover ratio and margin.
Products with low margins and minimal turnover ratio should be withdrawn from the assortment because they do not bring the desired profit and are also sold slowly and "freeze" funds in stocks.
How to increase GMROI for the chain?
Increasing the profitability of chain products is an important task for every retailer. This can be achieved in different ways:
Properly organize the delivery of goods. Avoid surplus goods that will lie in warehouses and increase the cost of their storage. Therefore, you should first understand what the minimum allowable (norm) stock should be and competently settle your deliveries (delivery dates, order volumes, etc.).
Optimize prices. The prices at which goods will be sold must be optimal. It means that their value will provide owners with the desired profit and at the same time be attractive to customers and motivate them to shop in this store. To quickly solve this problem, we recommend using a separate Datawiz report, which, based on machine learning algorithms, will generate accurate price recommendations for your chain in seconds.
Remove unsaleable items from the assortment. To increase the overall profitability of the chain, it is necessary to review the entire assortment and remove goods that are not in demand, have big stocks, and do not bring sufficient profit.
Minimize your expenses. Using the right cooperation strategies with suppliers will always allow you to reduce costs (purchase costs, transport costs, and storage costs), and therefore increase the profitability of inventory.
To quickly and accurately conduct such an analysis, we recommend using reports on the BI Datawiz platform for retailers.