How do you calculate GMROI and why is it important for merchandise planning?

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If you are a merchandise planner, you need to know how to measure the performance and profitability of your inventory. One of the most useful metrics for this purpose is GMROI, or gross margin return on investment. GMROI tells you how much gross margin you earn for every dollar invested in inventory. It helps you compare the profitability of different categories, vendors, or locations, and identify the best and worst performers. In this article, you will learn how to calculate GMROI and why it is important for merchandise planning.

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Matthew (Matt) Markland

Director of Merchandise Planning | Personal Financial Guru | Habit Fanatic

1 What is GMROI?

GMROI is a ratio that measures the gross margin generated by your inventory investment. It is calculated by dividing the gross margin by the average inventory at cost. Gross margin is the difference between sales and cost of goods sold, and average inventory at cost is the average value of your inventory at its original purchase price. For example, if your gross margin is $10,000 and your average inventory at cost is $5,000, your GMROI is 2. This means that you earn $2 in gross margin for every $1 invested in inventory.

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Golam Mohiuddin '

Merchandising II Supply Chain II MBA II Sourcing II Process Maker ll Cost Effectiveness ll Leadership Skills ll Team Management ll Critical Thinker ll Relationships Builder ll Strategic Planner ll Innovation ll
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To calculate GMROI (Gross Margin Return on Investment), divide the gross margin by the average inventory cost, and this metric is crucial for merchandise planning as it helps retailers assess the profitability of their inventory investment and make informed decisions about stock levels and product assortment.

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2 How to calculate GMROI?

To calculate GMROI, you need to have the following data: sales, cost of goods sold, and average inventory at cost. You can obtain these data from financial statements, inventory reports, or point-of-sale system. You can calculate GMROI for a specific period, such as a month, quarter, or year, or for a specific category, vendor, or location. To do so, first subtract the cost of goods sold from the sales to calculate the gross margin. Next, add the beginning inventory at cost and the ending inventory at cost, and divide by 2 to calculate the average inventory at cost. Finally, divide the gross margin by the average inventory at cost to get the GMROI.

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3 Why is GMROI important?

GMROI is important because it helps you evaluate the efficiency and effectiveness of your inventory management. It shows you how well you are turning your inventory into profit, and how much return you are getting from your inventory investment. A high GMROI indicates that you are selling your inventory at a high margin and keeping your inventory levels low. A low GMROI indicates that you are selling your inventory at a low margin and holding too much inventory. By comparing the GMROI of different categories, vendors, or locations, you can identify the best and worst performers, and make adjustments to your assortment, pricing, or allocation strategies.

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Matthew (Matt) Markland

Director of Merchandise Planning | Personal Financial Guru | Habit Fanatic
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GMROI is critical to allow you to compare different types of businesses. Low margin, fast turning or high margin slow moving product all truly comparable with GMROI. One of my favorite metrics for judging results across time and merchandise classifications.

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4 How to improve GMROI?

To improve your GMROI, you need to increase your gross margin and decrease your average inventory at cost. This can be accomplished by optimizing your pricing strategy to maximize margin while maintaining sales volume and customer satisfaction. Additionally, analyzing your sales and inventory data can help determine the optimal assortment mix and depth for each category, vendor, or location. Markdown strategies can be employed to clear slow-moving or excess inventory, freeing up cash flow and space for new merchandise. Inventory forecasting and replenishment tools can be used to maintain the right inventory levels and avoid overstocking or understocking. Finally, negotiating better terms and discounts with vendors can reduce cost of goods sold and improve cash flow.

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5 How to monitor GMROI?

To monitor your GMROI, you need to track and report it on a regular basis, such as monthly, quarterly, or yearly. You can use a spreadsheet, a dashboard, or a software tool to calculate and display your GMROI for different time periods, categories, vendors, or locations. You can also benchmark your GMROI against your industry standards, competitors, or historical performance. By monitoring your GMROI, you can identify trends, opportunities, and challenges, and take corrective actions to improve your inventory performance and profitability.

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6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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How do you calculate GMROI and why is it important for merchandise planning?

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1 What is GMROI?

2 How to calculate GMROI?

3 Why is GMROI important?

4 How to improve GMROI?

5 How to monitor GMROI?

6 Here’s what else to consider

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