The True Measure of Retail – GMROI – And What It Takes To Grow It

The True Measure of Retail –
G.M.R.O.I. – And What It Takes To Grow It
Paul Erickson, RMSA
Paul Erickson
Senior Vice President
www.rmsa.com
Info@rmsa com
Info@rmsa.com
Metrics Matter
What gets
measured – gets
changed
What gets
rewarded – gets
done
If you don’t
don t
measure it, you
can’t change it,
and if you don’t
reward change it
will not happen
pp
Metrics Matter
What gets
measured – gets
changed
What gets
rewarded – gets
done
If you don’t
don t
measure it, you
can’t change it,
and if you don’t
reward change it
will not happen
pp
Metrics Matter
What gets
measured – gets
changed
What gets
rewarded – gets
done
If you don’t
don t
measure it, you
can’t change it,
and if you don’t
reward change it
will not happen
pp
GMROI
Nature of Merchandise
1 Frequency of purchase
1.
2. High purchase frequency=lower replacement price
3. Low purchase frequency = higher replacement price
4. “Deliberation” merchandise
Nature of Merchandise
1 Frequency of purchase
1.
2. High purchase frequency=lower replacement price
3. Low purchase frequency = higher replacement price
4. “Deliberation” merchandise
Nature of Merchandise
1 Frequency of purchase
1.
2. High purchase frequency=lower replacement price
3. Low purchase frequency = higher replacement price
4. “Deliberation” merchandise
Nature of Merchandise
1 Frequency of purchase
1.
2. High purchase frequency=lower replacement price
3. Low purchase frequency = higher replacement price
4. “Deliberation” merchandise
Definition
Gross Margin
G
M i Return
R t
on Investment
I
t
t–
A measurement of the relationship between
inventory turnover and gross margin dollars.
dollars
It simply says that for each dollar tied up in
inventoryy at cost x number of dollars that
have been earned in gross margin = Gross
Margin Return on Investment
Formula
Annualized Gross Margin
GMROI =
A
Average
IInventory
t
att Cost
C t
Earn ‘n Turn Calculation
Example #1
$500GM = $2.00 GMROI
$250 ACI
Example #2
$500GM = $5.00 GMROI
$100 ACI
Warren Buffet
What is a Good GMROI?
Fast Sellingg – Low Margin
g
•
•
•
•
•
•
•
Sell 156 units a year
Cost is $5 – Retail is $7
K
Keep
6 on hhand
d att all
ll times
ti
Investment cost is $30 ($5 x 6 units)
156 unit sales at $2 GM = $312 GM
$$312 / $$30
$10.40 GMROI
Slow Selling
g – High
g Margin
g
•
•
•
•
•
•
•
Sell 2 units a year
Cost is $325 – Retail is $999
K
Keep
2 on hhand
d att all
ll times
ti
Investment cost is $650 ($325 x 2 )
2 unit sales with a GM of $674 = $1348
$1348 / $650
$
$
=
$2.07 GMROI
Item Comparison
Item A
Item B
Fast Selling – Low Margin
Slow Selling – High Margin
• GMROI – 28.6%
• Not so profitable
• GMROI – 67.5%
• Highly profitable
GMROI & inventory turnover
are the most important
measurements for vendor
performance
f
att retail!
t il!
Vendor Comparison
Vendor A
Vendor B
• Sales – $500k
• Sales - $500k
• Gross $ - $240 (48%) • Gross $ - $220 (44%)
• Turns – 22.00
• Turns 44.0
0
Let’s Compare
GM$
$240k
Vendor A
Vendor B $220k
AVG Cost $
$130k
ROI
$1.84
$57 5k
$57.5k
$3 82
$3.82
Three Keys to
Retail Success
Three Keys
y to Retail Success
IInventory
t
Turn
Revenue
R
Growth
Gross
G
Margin
Three Keys
y to Retail Success
IInventory
t
Turn
Revenue
R
Growth
Gross
G
Margin
Three Keys
y to Retail Success
IInventory
t
Turn
Revenue
R
Growth
Gross
G
Margin
outdoorindustry.org/OU
Recorded Sessions now available for on-demand viewing:
• Inventory Turnover – Three Steps to Purchasing Smarter, Turning
More and Making More Money
• Shoulder-Season
Shoulder Season Discounting Strategies – The Eight Truths of
Markdowns
• The Mysteries Behind Initial Mark-up – Pricing Strategies to Improve
Your Bottom Line
• The True Measure of Retail – GMROI – and What it Takes to Grow It
Thank You.
You
outdoorindustry.org/OU
Paul Erickson
RMSA Retail Solutions
www.rmsa.com
perickson@rmsa com
perickson@rmsa.com