![]() For example, a grocer may carry low margin items that customers regularly buy, even if the GMROI on that product is less than 1. There are some items that retailers stock to bring customers in the door (called loss leaders) but may have a low GMROI. ![]() While GMROI is a powerful tool for retailers, it has some drawbacks worth considering as you use this key performance indicator (KPI). But without robust inventory analysis based on metrics such as GMROI, the retailer might not become a problem for weeks or months and will continue taking a loss on that product. Underestimating the cost of inventory can cost a company precious resources that could have been used in other ways to improve GMROI and increase profitability.įor example, if a particular product languishes on the shelves, a retailer needs to identify why and correct it to avoid losing any more money than necessary. It involves dividing gross margin (profit) by average inventory cost over a certain period.Ĭonsidering that retail companies often invest much of their capital in inventory, the question of how effectively they can leverage that inventory for profit becomes a very pressing question. Retailers most commonly use GMROI, and its importance is hard to overstate in that field: This key performance indicator is one of several that indicate whether a retail business is on track to become profitable or not.įor such an important metric, GMROI is very simple to assess.
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