What Is Gross Margin Return on Inventory Investment (GMROII)?

Learn about:

• What Gross Margin Return on Inventory Investment is
• How to calculate your gross margin
• Optimizing GMROII

Whether you are working with big chains or smaller retail outlets, suppliers’ primary focus is getting their products out there. And while that is often the primary goal, there are certain things that they should pay attention to, such as the level of their inventory, their sales, and the profitability of their product. 

When it comes to enticing retail stores to sell a product, suppliers will want to show them that having their product’s SKU in their stockroom will not just be a waste of space. So how do suppliers do this? By using the Gross Margin Return on Inventory Investment, or GMROII. 

What Is Gross Margin Return on Inventory Investment (GMROII)?

So, what is Gross Margin Return on Inventory Investment? Well, let’s break it down a bit. Suppliers likely already know a bit about Return on Investment (ROI) rates. However, GMROII is different in that it measures the amount of profit suppliers receive when they invest. 

Gross Margin refers to profitability in the retail industry – the profit made after selling the inventory purchased. When putting this all together, we get the Gross Margin Return on Investment (GMROI), sometimes referred to as Gross Margin Return on Inventory Investment (GMROII). And this measures all the costs rolled into one to get the inventory (shopping, storing, merchandising, etc.) concerning the Gross Margin (the profit). 

The higher the GMROII, the more interested retailers will be in the supplier’s product. Therefore, retail GMROII is one of the top key performance indicators (KPIs). Of course, before you can do anything with this number, you need to know a little more about this indicator and how to calculate it. 

Benefits of Knowing Your GMROII

A supplier benefits from knowing its GMROII as it can help the supplier expand to different retailers, such as Walmart or Kroger. Being able to show one’s GMROII can convince big-box retailers to one’s product.

Knowing the GMROII means having the data – the numbers and stats – to show a product’s value. Calculating this number shows just how profitable the product is. Seeing where a supplier is starting – and researching ways to improve it – is an excellent place to begin to sell to major retailers. 

Related Reading: Retail Data Explained: Descriptive, Predictive, and Prescriptive

How to Calculate Your Gross Margin Return on Inventory Investment

Calculating GMROII is not as difficult as it may sound, though it is vital to keep in mind that there are very different variations in creating this formula. Depending on the accounting methods used by businesses and their industry, suppliers can plug other costs into the equation. 

Before calculating the GMROII, suppliers need to determine the Gross Margin. To calculate this, suppliers can use the formula: 

![Gross Margin = [ (Revenue - Cost of Goods Sold) / Revenue ] x 100]

Gross Margin = [ (Revenue – Cost of Goods Sold) / Revenue ] x 100

The general formula to calculate GMROII is as follows: 

![GMROII = Gross Margin / Average Inventory Cost]

GMROII = Gross Margin / Average Inventory Cost

While suppliers are looking for a good, healthy GMROII, they mustn’t fret if the number is low. Everyone has to start somewhere. If it is not where the supplier would like it to be, this is a starting point for improving it. 

If a supplier is not sure what a good GMROII calculation is for its industry, it must look at the rate of a few competitors as GMROII will vary greatly depending on the benchmark of the department or category. 

Optimizing Your Gross Margin Return on Inventory Investment

Once a supplier discovers its GMROII, then it can start making changes to show the item as more profitable and make retailers interested in investing in the product. 

Adjusting the item’s price may seem like the most logical means to changing one’s GMROII after looking at the sales data. However, it is not that easy. However, as economics shows, when the price increases, demand usually decreases. A higher price and a lower demand will send a supplier’s GMROII in the wrong direction. 

If a supplier decreases its product cost, the retail stores may have more leniency in adjusting their prices, thus increasing GMROII. While this may seem counterintuitive to increasing margins, decreasing costs and increasing GMROII will cause stores to order more products.  

The result? Significant profit.

Related Reading: Demand Planning

Limitations of the GMROII

As with any reasonable measure of success, there are limitations. The GMROII analysis can tell us just how profitable something is, but it should not be the end-all number. Suppliers must be sure that they effectively review their financials to ensure that they truly are doing everything as cost-efficient as possible to get the most significant return. 

Focusing solely on GMROII doesn’t always give suppliers the bigger picture.  

Wrap Up

Your Gross Margin Return on Inventory Investment analytics will give you an idea of how profitable your product is. The higher the GMROII, the more profitable it is. Once you know your number, you can always make changes in how you price your supply to increase your GMROII. Just be careful as minor adjustments to price can significantly impact your rate – both positively and negatively. 

Get to know your industry, and you will figure out what works best for your product. 

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