After some of the discussion on my previous post on GMROI, I thought I would expand on what it is and how it is used.

In modern retail, GMROI is one of the most important and commonly used measurements in use. As I showed it is easy for you to get from our point-of-sale system. So there is no reason not to use it unless you do not have your stock figures correct, in which case it is not going to work.

What GMROI does it calculates the total return on every dollar invested in a particular stock item or stock category.

What it does is measure your stock’s total sales, gross margin, sales, stock turns and investment.

The calculation is.

GMROI = ($Gross Profit)/($Sale) x ($Sale)/($Ave inventory at cost)

The trick is once you get the report from our system is to compare the figures. You look at the top ones and check whether you have been understocking them, similarly your bottom ones maybe you are overstocking.

Then look at your retail space and what you want to do is give more space to the higher GMROI products (the 20% of items) and reduce the lower GMROI products (the 80% that just sits there).

Some people want to do it by category but the problem, here is that at the category level, the low and high GMROI products get averaged out, and it is very difficult to see anything.

Note one point I will add is your stock carry costs which would be such items as rent, transport, damage, shop theft, insurance, taxes, etc probably about 25% extra. So for every dollar invested in stock, you need about 1.25 dollars is the return – of which one dollar is for the stock while the remaining 25 cents is for overheads.So on an item a GMROI should be more 1.25 otherwise you are losing.