What is GMROI?
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 = Gross Profit ($) ÷ Average Inventory at cost ($)
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 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
GMORI by Retail Segment
|Clothing & Accessories||3.3|
|Beauty & Cosmetics||2.8|
|Pharmacies & Drug Stores||5.2|
|Hobby, Toy & Games||2.3|
|Office Supplies & Stationary||6.6|
|Pet & Pet Supplies||4.2|
|Supermarkets & Grocery Stores||5.7|
|Food (Health) Supplements||4.8|
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:
1. Improving Gross Profit
- Optimizing your prices to make the most out of every product
- Optimizing your markdown levels
- Negotiating with your suppliers for better prices
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.
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