Gross Margin Return on Inventory Investment (GMROI): Calculation and Application

Gross Margin Return on Inventory Investment (GMROI): Calculation and Application!

Gross margin return on investment or now days known as Gross margin return on inventory investment is used to plan and evaluate the performance of overall retail operations. Since 60-80% of a typical retailer’s investment is in inventory, therefore, it becomes essential for a retailer to know how much return he is getting on invested money in inventory.

Further, as retailing is becoming competitive and shrinking profits continuously have forced retailers to use some sort of financial tool that should provide a quick feedback to assess how many gross margin rupees are earned on every rupee of inventory investment.

GMROI today has become the widely used measure for any retail execution. It is one of the fastest and easy methods to measure and manage the productivity of a retailer’s investment in inventory. A ratio higher than one means, the retail organization is selling the merchandise more than its acquisition cost. GMROI considers both sales velocity of inventory and the overhead in terms of inventory.

Essentials of GMROI:

Following are the essentials to apply GMROI successfully:


1. To understand gross margin.

2. To understand inventory turns

3. Proper access to inventory details with regard to price, acquisition cost, sales volume and inventory turns.

Calculation of GMROI:

GMROI indicates the relationship between a retailer’s total sales, the gross profit margin retailer earns on that sales and the number of rupees retailer invests in his inventory. Working of GMROI can be understood with the help of this hypothetical example. A company has five departments. Given are the details of their respective annual sales, annual gross margin and average inventory cost. And out of the five departments, which is more productive?


Calculation of GMROI

As per the question, Department ‘A’ has the highest sales. Department ‘D’ has the highest margin. In order to calculate, which department is more productive, we can calculate the GMROI.

Calculation of GMROI

Form the above table 9.2, it is clear that Department ‘E’ has the highest GMROI, while from table 1, it seems that Department ‘E’ has the lowest annual sales and margin. Therefore, GMROI is the best way to judge the productivity of a retail store. Annual sales figures and margin alone are not really enough to tell the retailer’s actual position. A retailer having various outlets or various departments within a single outlet can calculate GMROI by departments, as mentioned above by categories, seasons, gender, regions or otherwise.


Calculating GMROI

GMROI = (Annual sales) X (Gross margin %) / (Average inventory cost)

Applications of GMROI:

The advantage of GMROI is that it is applicable to any store, department or merchandise classifications within a retail store. In case, a retailer’s accounting system is fully computerized, a retailer can get GMROI reports automatically on his computer or through a service as a part of monthly accounting reports.


GMROI should not be seen only as ‘financial management tool’, but it can be an effective human resource management tool as well. A retailer can apply GMROI to incentives as a performance appraisal tool for his employees.

Try to involve your staff in improving the firm’s GMROI by setting targets for achieving a particular gross margin and sales-to-inventory investment for each product category. A retailer should convey these targets, the reasons for setting them and any rewards that the retailer will give to the department that will achieve these targets. Motivate employees to share their suggestions that can improve the firm’s productivity in any manner. Encourage them reward them with appropriate recognition and financial awards.

Let the employees know what actually they are doing/performing and what is expected from them. Provide them latest information about their output and contribution. Further, the sense of healthy competition among various departments can do wonder in terms of improvement in productivity.

In nutshell, GMROI is a powerful management tool that involves two significant profitability factors: retailer’s gross margin and sales to inventory investment ratio. With the retail space becoming costlier, mall rentals soaring and inventory cost constantly rising; a retailer must get the best possible highest return from every rupee invested in inventory. GMROI will enable a retailer to achieve these goals by keeping a close watch on GMROI.

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