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Gross Margin Return on Investment (GMROI) is the only financial formula that generates a dollar amount instead of a percent, directly illustrating the fruits (or failure) of your invested dollars. GMROI measures the return on your investment—a GMROI higher $1 means a gain.
“You’re not just buying merchandise, you’re investing in merchandise,” says Paul Erickson, Senior Vice President of Client Services for inventory planning company Retail Merchandise Service Automation (RMSA), in RMSA’s Retail Insights video series. “The higher the GMROI, the more serious the inventory productivity in your business.”
Top line and margin are incomplete measures. The department with the highest topline isn’t necessarily your best seller. Neither is the department with the highest margin. The missing ingredient? Turn rate.
Navigating the turns
Kayaks are big ticket items. So are bicycles, climbing equipment, and ski gear. Sales of these beefy hardgoods jack up top lines, but seasonality means sales are few and far between. Kayaks can attribute their low GMROI primarily to a slow rate of turnover, according to retail consultant Matt Pruitt.
“The biggest influencer over GMROI is turn rate,” he says. “If you have these hardgoods and hardgood accessories, you have a really high stock to sales ratio over time.”
With all that cash tied up in inventory, it’s hard to keep products flowing from the backroom to the sales floor.
Pruitt recommends sticking to a receipt plan to combat this slow rate of turnover. If peak canoe season starts in June, retailers should order early to ensure their stock is frontloaded in May. This maximizes the sales season.
“There’s a science to it. It’s not a perfect science, but you have to approach inventory planning from an analytical perspective,” he says.
This means looking at past sales data and planning future inventory according to those trends. It also means leaving 15 to 20% of your seasonal merchandise budget open (where possible) to ensure you have the open-to-buy funds for in-season reorders.
“Think of it as liability insurance against shifts in trend,” says Pruitt.
High turn rate items are less durable and less seasonal. Apparel, particularly mid-weight apparel and sportswear, is a good bet for balancing out those low-turn items, says Pruitt. Though apparel-heavy stores have higher median operation expenses, they also have a high gross margin – up to 58% on average according to PWC’s 2013 benchmarking survey.
Other high GMROI items include hammocks, socks, and trekking poles, which are more versatile and less expensive. Hydration systems, like hydration packs, water bottles, and reservoirs, brought in about $1.65 per dollar invested. Thermal and insulated containers return a whopping $2.53 for every dollar invested, according to NPD data for the twelve months ending October 2015. Thermal containers, true year-rounders that keep drinks warm in winter and cool in the summer, virtually eliminating seasonality. Hammocks are traditionally a seasonal item, but they break the rule here with their $2.44 GMROI. The reason?
“Hammocks are hot right now and therefore not impacted by seasonality,” says NPD Sports Industry Analyst Matt Powell.
This isn’t to say you should dump your inventory and start specializing exclusively in camp thermoses and hammocks. Highly seasonal goods are just as important as meat-and-potatoes apparel and accessories. The trick is balance.
Corey Buhay is a Boulder, Colorado-based freelance writer and columnist. Her hobbies include poring over spreadsheets, style guides, and topo maps.