Retail Metrics That Matter: GMROI – What Is It and Why Is It Important?

Gross Margin Return on Investment (GMROI) is a measure used by retail and e-commerce businesses to assess the profitability of their inventory. GMROI is calculated by dividing the gross margin (sales minus the cost of goods sold) by the total investment in inventory. Here is a more in-depth look at GMROI in the retail and e-commerce industry:

How is GMROI calculated?

The formula for GMROI is: GMROI = (Gross Margin / Investment in Inventory) x 100.

For example, if a business has $100,000 in sales and $50,000 in the cost of goods sold, its gross margin would be $50,000 ($100,000 – $50,000). If the business has $25,000 invested in inventory, its GMROI would be 200% (($50,000 / $25,000) x 100).

Why is GMROI important?

GMROI is important for retail and e-commerce businesses because it helps them to assess the profitability of their inventory and make informed decisions about how to allocate their resources. By understanding their GMROI, businesses can identify which products are the most profitable and allocate their resources accordingly.

How can GMROI be used to segment and manage inventory?

Businesses can use GMROI to segment and manage their inventory in several ways, including:

Identifying slow-moving or unprofitable products: By analyzing their GMROI, businesses can identify which products have low or negative GMROI and take corrective action. This might involve reducing the quantity of these products in inventory, offering promotions to move them off the shelves, or discontinuing them altogether.

Allocating resources to high-performing products: By identifying which products have high GMROI, businesses can allocate more resources to these products and focus on maximizing their sales. This might involve investing in additional inventory, running promotions, or increasing marketing efforts.

Balancing inventory levels: By understanding their GMROI, businesses can ensure that they have the right balance of high- and low-performing products in their inventory. This can help them to optimize their inventory levels and reduce the risk of excess inventory.

Examples of GMROI calculations:

Here are a few examples of how GMROI can be calculated:

Example 1: A retailer has $500,000 in sales, $250,000 in the cost of goods sold, and $100,000 invested in inventory. Its GMROI would be 250% (($250,000 / $100,000) x 100).

Example 2: An e-commerce company has $1 million in sales, $600,000 in the cost of goods sold, and $400,000 invested in inventory. Its GMROI would be 150% (($400,000 / $400,000) x 100).

Strategies for managing inventory using GMROI

There are several strategies that retail and e-commerce companies can use to manage their inventory using GMROI:

Segment inventory: By segmenting inventory based on GMROI, businesses can prioritize the products that are most profitable and allocate resources accordingly. For example, a company might choose to focus on products with a GMROI of 3 or higher, and allocate more resources to these products.

Analyze sales trends: By analyzing sales trends, businesses can identify products that are underperforming and consider whether to continue stocking them. This might involve analyzing data on demand patterns, customer preferences, and other factors to identify products with low GMROI and take corrective action.

Optimize inventory levels: By optimizing inventory levels, businesses can reduce excess inventory and improve their GMROI. This might involve using data analytics to forecast demand and adjust inventory levels accordingly, or implementing real-time tracking systems to more accurately monitor inventory levels.

Collaborate with suppliers: Working closely with suppliers can help businesses to optimize their inventory management and improve their GMROI. This might involve negotiating longer payment terms, aligning production schedules, or implementing just-in-time inventory systems.

Use technology to optimize inventory management: Technology such as omnithink.ai can help businesses to better track and manage their inventory, which can help them to optimize their GMROI. This might involve using inventory management software, implementing real-time tracking systems, or using data analytics to forecast demand.

By following these strategies, businesses can better manage their inventory using GMROI and improve their profitability.