GMROI, or “gross margin return on investment,” is a combination of three numbers: annual sales, average inventory at cost, and gross margin percentage. Here’s the formula: annual sales dollars divided by average inventory at cost dollars times gross margin percentage. For example, if your total sales are $1 million and your average inventory at cost is $450,000 and your gross margin percentage is .49, then your GMROI is 1.09. In other words, you are making $1.09 for every $1 invested. You should also find your GMROI for each department and even category in your store.
If you earn keystone on sales and keep inventory level equal to profits and sell this stuff once a year (turn of 1), your GMROI will be around a 1.0. Change any single number or all three and GMROI will go up or down.
Aged inventory makes it go down. High profits can make it go up. Sell the stuff like hotcakes (turn faster than 1) and GMROI will go up even if profit margins are low because the average inventory at cost will be low compared to annual sales.
In managing inventory, the most important thing to remember is that your overall inventory level in the store and in each category should be about equal to the gross profit for a year. This can vary depending upon profit margins. As an example, there are some laws in the universe that “mostly control” GMROI.
One has to do with watches.
If your GMROI is consistently low, you do not have a successful business model.
Because watches have a lower margin (the factory puts a tag in the box for retail and it is lower than keystone), you can’t get keystone, and because most jewelers just don’t market and sell them well, the turn is lower than once a year. Therefore, inventory level is too high and watches usually have a GMROI of less than a 1.0. Usually nothing you can do about it. So another category must do better than watches to help the store have a GMROI better than 1.0.
I’ve seen jewelers selling Rolex who have a 0.35 GMROI on ladies watches and 0.85 on men’s. Not great at all, but if the rest of the store does well, then what having Rolex does is to just add a certain amount in cash to the bottom line in gross profit dollars. But other departments will have to be great performers because the store will need that money to help pay the accounts payable on Rolex.
It’s also a prestige marketing tool for the store. But generally speaking, you will struggle if you just sell watches.
Tourneau used to be an exception, but now they are struggling and haven’t been able to garner even one serious offer to buy the company. With millennials not being watch collectors or buying expensive watches, their sales are off, margins are low and their inventory levels are too high (because watch manufacturers dictate how many you must stock), so their GMROI is low, which results in too much debt.
Whether you sell watches, jewelry or widgets, if your GMROI is consistently low, you do not have a successful business model.
So check your GMROI regularly and compare it year-over-year to see if you’re improving. Be sure to check each department so you can catch underperformers and treat any problem areas.
This article originally appeared in the May 2017 edition of INSTORE.
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