What the heck is GMROI? and why it’s important for retailers.

GMROI (pronouned Gymroy) is NOT something you go to the Doctor to get removed.

GMROI is Gross Margin Return on Investment.

Since Inventory held for sale is a retailer’s largest “Investment” GMROI measures how hard that the dollars you have invested in inventory is working for you.

Retailers work hard, so making the dollars invested in inventory work as hard or harder than you is critical to a retailer thriving. GMROI is a measure of the gross margin you receive for every dollar invested in Inventory.

By tracking GMROI for a specific department, line or category, you can make better decisions about what to stock.

We have a customer who was selling bath products and then started to add jewelry and clothing as a sideline.  Over time and GMROI analysis, she has become a women’s boutique.  Here is the formula: Gross Margin dollars divided by Average inventory costs.  Let’s assume my client’s casual dress department had annual sales of $150, 000 and Cost of Goods Sold of $75,000 with the average inventory at cost of $50,000.  So to get the Gross Margin Dollars, we subtract Sales from COGS to get $75,000.  Divide that by the average cost of inventory of $50,000 for a GMROI of 1.5.  Said another way, every dollar invested in Inventory earned $1.50 in gross margin.  Now consider that her Fancy dress department had annual sales of $50,000 with a Cost of Goods Sold of $30,000 and the average cost of inventory of $25,000.  So Gross Margin is $20,000 divided by $25,000 is .80 or for every dollar invested in fancy dresses, she received .80 back.  Time to clear the racks of those fancy dresses and order more casual dresses.  There maybe specific reasons why she may have to carry the fancier dresses, for example, perhaps a designer will not let her order the casual line without committing to a certain dollar amount of the higher end line, but a thoughtful analysis of how hard your inventory investment is working for you is the first step in becoming a better retailer.  I know that this was a lot of math in this post, but hey it is better than having to go to the doctor to get your Gymroy removed.

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