GMROII in The Retail Industry
GMROII is particularly important in the retail industry where stock turn (i.e. sales units divided by average inventory units) and Gross Margin Percent (simply called margin) can vary heavily by item, location, and week. GMROII can act as the main driver for retailers to analyze their product and store offering. This metric does not suffer from the major disadvantages some of the other main performance metrics do.
For example:
- Products or stores with high sales often have lower margin or excessive inventory
- Products with a high stock turn often have a low margin
- High margin items are often slow sellers and thus produce low profits
- High profit products often have low margin, high volume sales but also high inventory levels that prevent other products from being displayed and sold
Retailers usually drive their business based on sales or margin. In a retailer where budgets and bonuses are based on sales, employees often achieve that by lowering the margin or putting too much stock in their stores. A high GMROII indicates a good balance of sales, margin, and inventory cost.
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