GMROII (Gross Margin Return on Inventory Investment) is one of those terms that is bandied about a lot, but yet is surprisingly poorly understood. The reason it is referred to regularly is because if well integrated into the thinking process, it is one of the most powerful KPIs by which to manage a retail business. However, the fact that there are so many different definitions of GMROII has contributed to a general confusion about how to measure it and use it as a tool for driving value.
So why is it that one of the most useful metrics is hardly used? It is rare, both in the US and abroad, to find a retailer actively using it as a KPI.
Fundamentally, GMROII is a measure of how efficiently you manage your stock and your markdowns. While there are many variations on the theme, it basically tells you what return you are receiving (in each category) for every dollar you have invested in stock. It does not measure volume – just efficiency.
The most common formula used is:
Gross Profit after markdowns / Average Monthly Stock at Cost
The period used is usually 12 months which can be a rolling 12 months.
Let’s see how this translates to other metrics that we are more familiar with.
If you plan an input margin of 80%, and plan markdowns at 20%, and you are working on 3 months stock, your GMROII is 12. In other words you are planning on returning $12 per annum for every dollar invested in stock. Not a bad result!
If you plan an input margin of 50%, plan on no markdowns, and are working on 4 months stock, your GMROII is 3, or $3 returned for every dollar invested in stock. Not a great result.
Therefore to calculate your planned GMROII you only require three numbers:
- Input margin %
- Markdown %
(To calculate actual GMROII you will need actual GP after markdowns and actual average stock at cost).
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And of course you can work it backwards. Calculate how much gross profit you want or need to make and what you want or need to invest in stock.
One of the reasons this metric is not widely used is simply that it is not really understood.
Here is an example of a GMROII calculation.
Input margin 80%
Work in GMROII into your company, and your buying and inventory control will take on a new dimension.