A retail-specific metric that measures the amount of gross profit earned for each dollar of inventory investment. This key performance indicator (KPI) helps retailers evaluate the profitability and efficiency of their inventory management.
How GMROI Works
GMROI is calculated by dividing the gross profit by the average inventory cost. It answers the question “for each unit of average inventory held at cost, how many units of currency of gross profit I generated in one year?”.
- Gross Profit: Total Sales Revenue minus Cost of Goods Sold (COGS).
- Average Inventory Cost: The sum of Beginning Inventory Cost and Ending Inventory Cost, divided by 2.
Improving GMROI
Retailers can improve GMROI by:
- Increasing gross profit: Through higher sales or better pricing strategies.
- Reducing inventory costs: Through better purchasing, negotiation, or inventory management.
- Optimizing product mix: Focus on high-margin, fast-moving items.
Applications of GMROI
Retailers can use GMROI to:
- Compare performance: Different product categories, stores, or periods.
- Make data-driven decisions: Improve overall profitability.
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