Retail Dogma

# GMROI: Gross Margin Return on Investment

What is GMROI?

GMROI stands for Gross Margin Return on Investment (aka. Gross Margin Return on Inventory Investment) and is used to measure the amount returned on every dollar invested in inventory. For example if GMROI= 3\$ it means that for every dollar invested on inventory the return is 3\$.

It can be used to improve inventory management or improve buying decisions by comparing different SKUs, departments or product categories and measure their respective ROI.

## GMROI Formula

GMROI = Gross Profit (\$) ÷ Average Inventory at cost (\$)

#### Example

You sell products for 100,000 \$ in a year at a gross margin of 45% and the average inventory at cost value is 35,000 \$

Gross Profit (\$) = 100,000 x 0.45 = 45,000 \$

GMROI = 45,000 \$ ÷ 35,000 \$ = 1.285

This means that for every 1 \$ you invest in inventory you make 1.285 \$

## GMROI Benchmarks

GMROI differs from one retail segment to the other, due to the differences in gross margins and in how many times these businesses turn their inventory. So when you are trying to set a benchmark for your business, look at the relevant retail segment or product category you belong to.

Check out our annually updated list of Retail Benchmarks

## How to Increase Gross Margin Return on Investment

As we have seen from the GMROI formula, it comes down to two things: Gross Profit & Average Inventory

GMROI = Gross Profit ÷ Average Inventory

So improving GMROI can be done by:

### 2. Reducing Average Inventory

• Improving Inventory Turnover
• Optimizing your buying, so that you don’t carry more inventory than necessary
• Analyzing your inventory reports to know what is performing and what isn’t and take action accordingly.