We know that retailers spend a lot of time watching sales because we see it every day in our client meetings. But sales are only part of the story. The bigger question is: How hard is your inventory working for you?
That is whereGMROI, or Gross Margin Return on Inventory Investment, comes in as an important metric in our analyses.
Just to review, GMROI = Gross Margin Dollars ÷ Average Inventory at Cost
If you have $100,000 invested in inventory and generate $300,000 in gross margin, your GMROI is 3.0. This is often seen in simple terms: every dollar you have invested in inventory is generating three dollars in gross margin. This isn’t wrong, but it’s not the full picture.
Why 2.0 Matters
We like to think of a 2.0 GMROI as the basic break-even point.
Here’s why: If you invest $1 in inventory and generate $2 in gross margin, one dollar goes back into replacing the inventory you sold (your investment). The other dollar goes to your overhead, including rent, payroll, utilities, insurance and other expenses.
Once your GMROI gets above 2.0, your inventory is working harder and contributing more toward profitability.
Of course, every business has a different overhead structure, so 2.0 is not a universal profitability number. But it is a useful benchmark for understanding whether your inventory investment is producing enough return.
Look Beyond the Store Total
Your overall GMROI is important, but don’t stop there. Look at GMROI by department, class and even at the vendor level.
You may find that one class has a great margin but turns too slowly, while another has a lower margin but turns quickly and produces a much better return on your inventory investment.
That is the value of GMROI. It brings margin and inventory turn together and shows you where your inventory dollars are working hardest.
Remember, inventory is cash sitting on the floor. The goal isn’t simply to sell more, because time and again we’ve seen our stores make more money with less inventory. The goal is to make every inventory dollar produce the greatest possible return, and that’s where GMROI becomes a great indicator.
