Understanding GMROI

Wouldn’t it be great if there were a wayto improve your profitability withouthaving to increase sales or margins? Iknow the idea sounds like one of thosecommercials that promise you will loseweight without diet or exercise, but ithappens to be true.What’s the magic answer, you ask? It is:“Understanding the concept of GMROI.”GMROI is short for Gross Margin Return on(Inventory) Investment. It is calculated bytaking the gross margin of a store, depart-ment, classification or vendor and divid-ing it by the average cost inventory for thesame period. For every dollar invested ininventory at cost, how many gross margindollars are you getting back? Should $1 Yield 87Cents?Would you be willingto invest $1 knowingyou were only going toget back 87 cents on agiven style, a particularvendor, or in a classifica-tion of merchandise? Icertainly hope not, yetsome stores that do not understand theimpact of GMROI allow this to happenseason after season and year after yearwithout taking corrective action.Consider the chart below. The sales,COGS (Cost of Goods Sold) and grossmargin number are the same for all threeexamples. The only component that hasbeen changed is the turnover. The firstcolumn illustrates the discussion aboveof investing $1 and getting $0.87 inreturn. Column 2 is representative of theaverage NSRA store according to the2006-2007 Business Performance Report.Column 3 shows the effect an improve-ment in turnover can have on cash flowand GMROI.The $0.35improve-mentinG M R O Iamounts to1 9 . 2 % .Where elsecan you ach-ieve such asignificantincrease inprofitability?This is, inmost cases, abest of bothworlds scenario: Improve cash and profitabil-ity while at the same time spending less.Turns Hasten ImprovementAssuming that the gross margin is notuncharacteristically low, improvingturnover is the simplest and quickest wayto improve GMROI. Margins have beenrelatively stable since reaching a recordhigh in 2003, so it seems evident thatthere is not much opportunity for upsidegrowth. The opportunity that is availableto the independent shoe merchant isone of increased turnover.What never ceases to amaze me in dis-cussions with independent shoe mer-chants is how some can agonize over howto control expenses. Let’s use freight costs,which might run about 1.5% of sales, as anexample. The freight costs have retailerswincing—yet the same retailers are rela-tively complacent about a storewideinventory that turns twice annually.As the chart illustrates, an improve-ment of just four weeks of supply onaverage inventory would generate abouta 4% improvement in cash flow. Thisslight improvement would cover thefreight costs for nearly three years. So—which area really deserves the mostattention?Richie SaynerUnderstanding GMROIRitchie Saynercontinued on page 20Increased Turns=Increased Cash FlowAn improvement of only 1 week in annualsell-through increases cash flow byapproximately 1% of annual salesEffect of turnover on average inventory investmentAnnual sales volume$1,000,000Cost of Goods sold %53.5%Gross Margin$465,000> Turnover1.2.12.5> Weeks’supply5224.720.8> Average Investment at Retail$1M$476K$400K> Average Investment Cost$535k$255k$214k> Cash improvement$280k$ 41k> GMROI$0.87$1.82$2.17Page 220SEPT-OCT 07continued from page 13continued from page 9continued from page 14continued from page 15owner went a step further—which he didn’t have to do. Theresult of that extra step is simple: We are now his customers forlife, and we advertise his business at every opportunity.Think about it. The story can and should apply to your busi-ness, although the details will differ. If you start to identify howyou can apply the same thought process to your business andcustomers, and educate your sales associates on your philoso-phy, you’ll be doing something that more and more retailerssay has become impossible: building customer loyalty for life.It’s not impossible, though. Sure, customers want bargains,and look for good value for their money. But they also increas-ingly want the recognition that comes in person-to-personcontact. They can have purely commercial transactions any-where, even without leaving their houses to go to a store.What they can’t get “anywhere”is your genuine regard.What are the ways you show it?sGreg Gorman, principal of St. Louis, MO-based GMG Design, Inc.(www.gmgdesigninc.com)., is an internationally recognized multi-disci-plinary designer, author and speaker specializing in retail business, plan-ning and merchandising development. He can be reached atgreg@gmgdesigninc.com.Hopefully, there is someone in your area who is either flu-ent or well-spoken in one other language and can help youformulate an effective job aid.And remember: Smiles are universal. Use your early andoften, no matter who you’re talking to!sNancy Friedman is president of The Telephone Doctor, a customer serv-ice training company in St. Louis, MO. She can be reached at www.tele-phonedoctor.com. This article is excerpted from The Telephone Doctor’sHow to Handle a Foreign Accent.If you desire an increase in GMROI, then it is vital that you findways in which to improve turnover. I will be happy to share mythoughts on improving turnover with anyone who wishes toemail me about this.sRitchie Sayner is vice president of business development at RMSA RetailSolutions, which works with retailers to improve performance. He can bereached at rsayner@rmsa.com.product in terms of ‘style or comfort.’ Now we’re learning thatwe have to deal with style and comfort.”Both Weilheimer and the audience challenged the execu-tives regarding vendors pushing their own products, often incompetition with retailers. According to the executives, eachcompany plans to invest more in concept shops, partneringwith retailers to build brands and business. Each also sees theinternet as an opportunity, but not an exclusive one.Weilheimer noted that media today includes print, broadcast,online, viral, grassroots, events, public relations and other“message’opportunities which vendors—and retailers—needto explore, understand and use.When Weilheimer asked them to forecast the main con-sumer concerns that will affect business over the next severalmonths, Prince didn’t hesitation: “Discretionary spendingchoices,”he said. “People can find things 24/7 – we need to bewhere they’re looking.”Paterno was equally sure of his answer: “We expect spendingto be relatively flat. So it’s concepts—what we can ‘sell’ that’sunique and tells a story. We’re optimistic that consumers willrespond favorably.”Nelson voiced “cautious optimism. Women’s is our first, sec-ond and third priority. It’s been an up-and-down spring sea-son, but we’re optimistic.