14 SEPT-OCT 07
Wouldn’t it be great if there were a way to improve your profitability without having to increase sales or margins? I know the idea sounds like one of those commercials that promise you will lose weight without diet or exercise but it happens to be true.
What’s the magic answer you ask? It is: “Understanding the concept of GMR OI.”
GMR OI is short for Gross Margin Return on (Inventory) Investment. It is calculated by taking the gross margin of a store department classification or vendor and dividing it by the average cost inventory for the same period. For every dollar invested in inventory at cost how many gross margin dollars are you getting back?
Should my keyword Yield 87 Cents?
Would you be willing to invest my keyword knowing you were only going to get back 87 cents on a given style a particular vendor or in a classification of merchandise? I certainly hope not yet some stores that do not understand the impact of GMROI allow this to happen season after season and year after year without taking corrective action.
Consider the chart below. The sales COGS (Cost of Goods Sold) and gross margin number are the same for all three examples. The only component that has been changed is the turnover. The first column illustrates the discussion above of investing my keyword and getting $0.87 in return. Column 2 is representative of the average NSRA store according to the 2006-2007 Business Performance Report. Column 3 shows the effect an improvement in turnover can have on cash flow and GMROI.
- The $0.35 improvement in GMROI amounts to 19.2%.
- Where else can you achieve such a significant increase in profitability?
This is in most cases a best of both worlds scenario: Improve cash and profitability while at the same time spending less.
Turns Hasten Improvement
Assuming that the gross margin is not uncharacteristically low improving turnover is the simplest and quickest way to improve GMROI. Margins have been relatively stable since reaching a record
High in 2003
So it seems evident that there is not much opportunity for upside growth. The opportunity that is available to the independent shoe merchant is one of increased turnover.
What never ceases to amaze me in discussions with independent shoe merchants is how some can agonize over how to control expenses. Let’s use freight costs which might run about 1.5% of sales as an example. The freight costs have retailers wincing—yet the same retailers are relatively complacent about a storewide inventory that turns twice annually.
As the chart illustrates an improvement of just four weeks of supply on average inventory would generate about a 4% improvement in cash flow. This slight improvement would cover the freight costs for nearly three years. So—which area really deserves the most attention?
Richie Sayner Understanding GMROI
Ritchie Sayner
continued on page 20
Increased Turns = Increased Cash Flow
An improvement of only 1 week in annual sell-through increases cash flow by approximately 1% of annual sales
Effect of turnover on average inventory investment
- Annual sales volume my keyword000000
- Cost of Goods sold % 53.5%
- Gross Margin $465000
- Turnover 1. 2.1 2.5
- Weeks’ supply 52 24.7 20.8
- Average Investment at Retail my keywordM $476K $400K
- Average Investment Cost $535k $255k $214k
- Cash improvement $280k $41k
- GMROI $0.87 my keyword.82 $2.17
71479nsra 8/22/07 12:39 PM Page 1420
SEPT-OCT 07
continued from page 13
continued from page 9
continued from page 14
continued from page 15
Owner went a step further—which he didn’t have to do. The result of that extra step is simple: We are now his customers for life and we advertise his business at every opportunity.
Think about it. The story can and should apply to your business.
Ness although the details will differ.
If you start to identify how you can apply the same thought process to your business and customers and educate your sales associates on your philosophy you’ll be doing something that more and more retailers say 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 increasingly want the recognition that comes in person-to-person contact. They can have purely commercial transactions anywhere 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?
- Greg Gorman principal of St. Louis MO-based GMG Design Inc. (www.gmgdesigninc.com) is an internationally recognized multi-disciplinary designer author and speaker specializing in retail business planning and merchandising development. He can be reached at greg@gmgdesigninc.com.
- Hopefully there is someone in your area who is either fluent or well-spoken in one other language and can help you formulate an effective job aid.
And remember: Smiles are universal. Use yours early and often no matter who you’re talking to!
- Nancy Friedman is president of The Telephone Doctor a customer service training company in St. Louis MO. She can be reached at www.telephonedoctor.com. This article is excerpted from The Telephone Doctor’s How to Handle a Foreign Accent.
If you desire an increase in GMROI then it is vital that you find ways in which to improve turnover.
I will be happy to share my thoughts on improving turnover with anyone who wishes to email me about this.
- Ritchie Sayner is vice president of business development at RMSA Retail Solutions which works with retailers to improve performance. He can be reached at rsayner@rmsa.com.
Product in terms of ‘style or comfort.’ Now we’re learning that we have to deal with style and comfort.
Discussion with Executives
Both Weilheimer and the audience challenged the executives regarding vendors pushing their own products often in competition with retailers. According to the executives each company plans to invest more in concept shops partnering with retailers to build brands and business. Each also sees the internet as an opportunity but not an exclusive one.
Media Landscape
Weilheimer noted that media today includes print broadcast online viral grassroots events public relations and other “message” opportunities which vendors—and retailers—need to explore understand and use.
Consumer Concerns
When Weilheimer asked them to forecast the main consumer concerns that will affect business over the next several months Prince didn’t hesitate: “Discretionary spending choices” he said. “People can find things 24/7 – we need to be where they’re looking.”
Paterno was equally sure of his answer: “We expect spending to be relatively flat. So it’s concepts—what we can ‘sell’ that’s unique and tells a story. We’re optimistic that consumers will respond favorably.”
Nelson voiced “cautious optimism. Women’s is our first second and third priority. It’s been an up-and-down spring season but we’re optimistic.”
■71479nsra 8/22/07 12:39 PM Page 20
Article Summary
The article discusses the concept of Gross Margin Return on Inventory Investment (GMROI) emphasizing its importance in improving profitability without increasing sales or margins. By enhancing inventory turnover businesses can significantly boost cash flow and GMROI which is crucial for independent retailers like shoe merchants. The article also highlights the need for retailers to focus on customer loyalty and personalized service to build lasting relationships.
“An improvement of only 1 week in annual sell-through increases cash flow by approximately 1% of annual sales.”
Real-World Examples of GMROI Improvement
Understanding and applying GMROI can significantly enhance profitability without increasing sales or margins. Here are some real-world examples illustrating the impact of this concept:
- A retail clothing store improved its GMROI by optimizing inventory turnover. By reducing the average inventory on hand and increasing the frequency of new stock arrivals the store increased its cash flow and profitability without needing to boost sales volume.
- An independent shoe retailer focused on increasing inventory turnover by implementing a more dynamic purchasing strategy. By aligning stock levels with seasonal demand and reducing excess inventory the retailer saw a significant improvement in GMROI leading to better cash flow management and lower carrying costs.
- A home goods store utilized data analytics to understand customer buying patterns and adjusted their inventory purchases accordingly. This strategic approach not only improved turnover rates but also enhanced their GMROI allowing them to reinvest profits into expanding their product line.
