Gross margin return on inventory investment (or GMROII) is a profitability metric for retail products and categories. It is calculated as margin divided by the average dollar value of inventory held during a specific period of time, expressed as a “rate” or percentage. GMROII can be a vital metric in determining whether sales rates justify inventory positions.
The purpose of retail product profitability metrics is to assess the effectiveness and profitability of individual product and category sales. Retailers and distributors have a great deal of choice regarding which products to stock and which to discontinue as they make room for a steady stream of new offerings.
By measuring the profitability of individual stock keeping units (SKUs), managers develop the insight needed to optimize such product selections. Profitability metrics are also useful in decisions regarding pricing, display, and promotional campaigns.
Specifically, GMROII applies the concept of return on investment (ROI) to what is often the most crucial element of a retailer’s working capital: its inventory. It is used to quantify return on working capital invested in inventory.
This metric quantifies the profitability of products in relation to the inventory investment required to make them available. It is calculated by dividing the gross margin on product sales by the cost of the relevant inventory.
Gross margin return on inventory investment (%) = Gross margin on product sales in period ($) ÷ Average inventory value at cost ($)
Allowances and rebates must be considered in margin calculations. For “loss leaders,” this measure may be consistently negative and still not present a problem. For most products, negative trends in GMROII are signs of future problems.
- ^ Farris, Paul W.; Neil T. Bendle; Phillip E. Pfeifer; and David J. Reibstein (2010). Marketing Metrics: The Definitive Guide to Measuring Marketing Performance (Second Edition). Upper Saddle River, New Jersey: Pearson Education, Inc.