The magical number is 1

1283045_27074284Having written a couple of articles on GMROII, I continue to be surprised at its lack of acceptance and one may assume that this is due to the requirement for further explanation at various levels.

Just to remind you, one of the more popular GMROII formula is: Gross profit after reductions (e.g. markdowns) divided by average monthly stock at cost.

It does not measure volume but rather efficiency.

It can be measured over any period but a year is typical.

It can also be used at any level from SKU to company level.

Let’s take an SKU stocked by an exclusive jeweller. The cost price is $40,000 and it is marked at a retail price of $100,000.

After a year the jeweller sells the item for $80,000 – an expected discount built into the original retail price.

According to the GMROII formula, the GP after reductions was $40,000 and the average monthly stock at cost was $40,000. Therefore the GMROII is 1. This is not good.

Taking the $40,000 at the beginning of the year and putting it into the bank would have generated more income.

Clearly then anything less than 1 is bad and anything above 1 is better. If GMROII is less than 1 you are losing money and running at a loss.

The same holds good for an item bought at $4, marked $10 and sold after a year at $8.

The GMROII is still 1 and hence the comment above that volume is immaterial.

Incidentally in this case the stock turn is 0.8 which is not as good a measure because stock turn usually uses monthly opening stock at retail.

The essential difference between GMROII and planned stock turn is that stock turn does not factor in markdowns.

If markdowns are zero, stock turn and GMROII should be similar. But of course this doesn’t happen.

Designing an incentive scheme for buyers using GMROII and GP$ keeps things very simple, provided you can inculcate GMROII and provided it is really understood.

Stuart Bennie is a retail consultant at Impact Retailing www.impactretailing.com.au and can be contacted at stuart@impactretailing.com.au or 0414 631 702. 

Comments

2 comments

  1. Avatar

    Brett Stevenson posted on May 29, 2015

    Hi Stuart, a helpful article. I am not sure on your comment that stockturn is normally calculated using stock at retail price at the end of the month. Rather it should be stock at cost. ideally it should be average stock as with GMROI. It is important that the stock used is at cost price, otherwise you are comparing a numerator (cogs) at cost and a denominator (stock at retail) at selling price. This is where many retailers are misled on stockturn. If you want to use retail stock price then you need to change the numerator to sales rather than COGS. Using retail price is not a good basis generally for calculating these kpi's because it fails to take into account discounting. But your article is good Stuart in that it highlights one of the best measures for most retailers on assessing which departments and stock lines are performing well. Stockturn is important but GMROI is better because it focuses on profit. The critical thing is to work out what the average stock level is. That's the management challenge.In other words for a retailer to determine what their stock level should be is the really important thing to do as from that you can pretty much work out what their profit, stockturn, GMROI etc should be and this then enables them to control and monitor it on a regular basis. reply

    • Avatar

      KM posted on October 28, 2015

      I agree with Brett - Good Article from Stuart - highlighting the importance of GMROI - This is not accepted by core finance people who can only look at the dollar earned against the dollar invested - hence when i invest 40000 Dollars and earn 80000 dollars at the end of one year - i am doubling my investment which will not happen when i invest this money in any bank or secure investment. though i could do two or three stock turns to improve profitability - this may not be possible for high value items. reply

Comment Manually

I have read and agree to the Terms and Conditions and Privacy Policy.

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Inside Retail Polls

Does your retail business have a loyalty program?
Vote

Twitter

Following the footsteps of its peers, @DavidJonesStore is cutting head office jobs in an effort to cut costs and be… https://t.co/NW5zR3tds2

9 hours ago

A post-election bump in confidence seems to have waned over the month of June, with #retail continuing GFC-level co… https://t.co/ZcUudSV1Wr

2 weeks ago

Franchisor #RetailFoodGroup has revealed a potential $160m recapitalisation with investment firm Soliton Capital Pa… https://t.co/gF05UyZP1m

2 weeks ago
x

SUBSCRIBE
FREE NEWS BRIEFS Get breaking news delivered