Monitoring and Benchmarking GMROI to maximise profit.
Some garden centre owners may ask – “What is GMROI?”
GMROI is accountants’ speak for ‘Gross Margin Return on Inventory’.
It is essentially an index which measures the profit return on funds invested in stock. It brings together both Gross Margin and Stock-turn. The GMROI measurement is simply calculated by multiplying gross margin by stock-turn.
For example a gross margin of 45 with 5 stock turns is 45 x 5 = GMROI of 225
Garden centres know their gross margin (easily obtained from annual accounts)
Stock- turn is calculated by dividing cost of sales by stock on hand valued at cost.
For example opening stock plus purchases minus closing stock = cost of sales
opening stock 200,000
plus purchases 800,000
less closing stock 210,000
cost of sales = 790,000
Cost of sales 790,000 divided by closing stock 210,000 = 3.7 stock turns
Garden Retail Success monitor and benchmark GMROI (and many other key performance indicators) for garden centres in several countries. The chart below indicates the benchmark across all countries we monitor for 2010.
How does your garden centre perform?
Most garden centres measure profitability by gross margin alone. This can be misleading and can lead to strategic decisions that have a depressing effect on sales, cash-flow and profitability.
Measuring and monitoring GMROI enables you to check how good your strategy and management is of the following:
- Stock procurement (buying methods, buy price, ordering & receiving)
- Stock control (stock levels, purchase quantities,
- Pricing (variable pricing, price pointing, multi-buys, using price to drive volume)
- Product mix (correct balance to maximise sales with minimum stock by category)
- Marketing strategy (to maximise gross profit $ / € / ₤ rather than just margin)
- Merchandising (to maximise sales of fast turning impulse lines)
- Product Signage (to maximise sales of fast turning / high margin lines)
- Customers service (add on sales)
- Cash-flow (on time payments, and taking advantage of special deals)
Whilst GMROI is only one of many Key Performance Indicators needed to measure the total picture, it is a very important measurement of how effectively a manager is managing the money invested in stock from both the buying and selling point of view.
Progressive garden retailers regard a GMROI of 200 as a target to be achieved for satisfactory to good performance. Currently only 23% of the garden centres in this benchmark covering several countries exceed 200. This indicates a lot of room for improvement.
Knowing where to start is important. Obviously categories vary greatly. Bedding for instance has a high stock turn with a positive effect on GMROI, while garden décor has a slow stock turn resulting in a low GMROI. From the Garden Retail Success monitoring and benchmarking, we know what each category should be. The following chart indicates the level for the upper quartile – the level every garden centres should be aiming to exceed. The most profitable garden centres are performing well above these levels.
The garden centres with highest GMROI have all improved profitability significantly over the last three years in the Garden Retail Success mentoring and KPI monitoring programme.
- Bill Brett
If you would like more information on GMROI, improving profitability, or participating in KPI monitoring or benchmarking, email us