Gross Margin Return On Inventory investment ( GMROI)
Retailers across the world would like to have merchandise that has high sales and high margin. Many retailers shifted their concentration to store brands or private labels to ensure they get a better margin. Retailers are also interested to find the how much he or she should invest on getting the sales which leads to margin. This is calculated using GMROI.
Gross Margin Return on Inventory Investment (GMROI)
Formula to calculate:
GMROI = Gross margin percentage * Sales to stock ratio
= (Gross margin/ sales) * ( Net sales/ average inventory)
= Gross margin/ average inventory
Importance of GMROI:
General margin analyses focus on total sales in the retail outlet and margin a retailer gets on it. It ignores the inventory held and operation costs involved with it. Retailer is interested in utilizing his assets effectively. GMROI has two components in the first part it looks at what is the margin a retailer gets on the sales and how much sales he can do it on the average inventory.
Example of GMROI:
A discount store in Ganganagar is able to sell Rs 25000 worth of ready to eat products and Rs 40,000 worth of Rice Retailer gets 10% margin on Ready to Eat products and 15% on the Rice. If he should hold average inventory of Rs 5000 and Rs 10,000 in ready to eat food category and rice products calculate what the GMROI for both products.
Solution:
GMROI= Gross margin/ average inventory
Gross margin for ready to eat products= Rs 25000* 10%
= Rs 2500
Gross margin fro Rice products = Rs 40,000* 15%
= Rs 6000
GMROI for ready to eat products = Rs 2500/ Rs 50000
= 0.5
GMROI for Rice products = Rs 6000/ Rs 10,000
= 0.6
