GMROI (gross margin return on inventory)
GMROI (gross margin return on inventory investment) is the gross profit a product earns for every dollar of inventory held, measured at cost.
- Measures
- Gross margin earned for each dollar of average inventory held at cost.
- Formula
- Gross margin ÷ average inventory at cost, both over the same period.
- Watch for
- Comparing across formats. Margin and stock turn differ too much between categories.
Updated
Meaning / 01
What it means for retail and category teams
The usual formula is gross margin dollars over a period divided by the average inventory at cost over the same period. It combines margin and stock turn in one number: a line can earn it through high margin and slow turn, or thin margin and fast turn. GMROI is most useful compared within a format, because what counts as good varies widely between, say, fresh grocery and high-ticket durable ranges.
Stakes / 02
Why it matters
Margin percentage alone rewards lines that sit on the shelf, and sales alone reward lines that tie up too much stock. GMROI asks whether a line earns its working capital, which is the question a range review and a buying budget are trying to answer.
Example / 03
Illustrative example
The business and figures are illustrative. None of it is customer data.
| Item | Gross margin earned | Average stock at cost | Result |
|---|---|---|---|
| Line A | $12,000 | $4,000 | GMROI 3.0 |
| Line B | $12,000 | $12,000 | GMROI 1.0 |
Same margin, three times the stock: Line B returns a third as much on the cash it ties up.
Read the example as text
Two lines in a homewares category each earn $12,000 of gross margin over a year. Line A carries an average of $4,000 of stock at cost, so its GMROI is 3.0. Line B carries an average of $12,000 of stock at cost, so its GMROI is 1.0. The margin is the same, but Line B ties up three times the cash for it, so Line B is the first candidate for a smaller buy or a range cut.
Work through the calculation
GMROI = gross margin earned ÷ average inventory at cost
Try your own figures and see a fuller worked example on the gmroi calculator.
Questions / 04
Common questions
How do you calculate GMROI?
Divide the gross margin dollars earned over a period by the average inventory at cost over the same period. $12,000 of gross margin on $4,000 of average stock at cost is a GMROI of 3.0: three dollars of margin for each dollar of stock held.
What is a good GMROI?
There is no single good number. GMROI depends on a category's margin structure and stock turn, so a thin-margin, fast-turning category and a high-margin, slow-turning one produce very different results. Compare a line with similar lines in the same format, and with its own trend. Below 1.0, a line earned less gross margin over the period than the cost of the stock it carried on average.
What is the difference between GMROI and inventory turnover?
Inventory turnover is cost of goods sold divided by average inventory at cost: how many times the stock sold through. GMROI uses gross margin instead of cost of goods sold, so it also reflects how much each sale earned. Two lines with the same turnover can have very different GMROI if one carries more margin.
Should GMROI use inventory at cost or at retail?
At cost. GMROI measures margin against the cash tied up in stock, and that is what the business paid for it. Using retail value overstates the investment and understates the return.
Related / 05
Related concepts
Next step
Calculate it across a real range
The GMROI calculator handles one line. Bring a category to see how margin and stock held compare across the range.
