Time to Refocus on GMROI

Now is the time for furniture retailers to get back to monitoring and improving GMROI, a master measure of retail productivity, in an organization- wide way.

GMROI (Gross Margin Return on Investment) is a master measure of retail productivity. It is a misunderstood metric that many in the retail community consider to be driven solely by inventory performance.

Since March 2020, inventory, sales and margins have gone through a wild ride due to shifts in demand and supply abnormalities. First, sales halted due to government shutdowns. Then, abundant sales resulted from reopening and a stay-at-home economy. Inventory supply became scarce. Prices and freight rates shot up. Finally, the supply chain caught up and freight rates normalized. As in pre-pandemic times, written and delivered sales volume for many organizations are now equalizing.

Cash Flow & Profitability

GMROI is the ultimate driver of cash flow and profitability, given efficient expense levels. Some business managers believe that GMROI improvement actions should be assigned to people responsible for purchasing. It is true that purchasing has a big influence; however, it takes a collaborative team approach across all departments to improve.

Collectively, focusing on continually improving GMROI over time can lead to business growth. Here we will review GMROI basics; however, the goal is to introduce tools and ideas that Furniture World readers can use to increase GMROI to reach new and improved performance levels.

Marketing and GMROI

Retail marketing professionals manage customer acquisition, brand development and related media processes. Many of them have never heard of GMROI. That’s a shame because their actions directly impact delivered gross margin dollars annualized, the numerator in the GMROI equation (gross profit divided by revenue). Gross margin dollars are generated by sales. Sales are affected by retail traffic, which is impacted directly by marketing. Assuming that sales teams have consistent close rates, average tickets and margin percentage, any efforts that generate additional in-store or website traffic results in a GMROI increase.

Highlight Products: Marketing professionals affect the GMROI equation when they work to steer customers toward particular merchandise, categories and vendors. Average inventory is the denominator in the GMROI equation. For example, when an operation seeks to reduce overstock inventory, it might highlight certain items on its website or create high-impact promotions to reduce inventory levels and improve GMROI.

“Most retail marketing professionals have never heard of GMROI. That’s a shame because their actions directly impact delivered gross margin dollars annualized, the numerator in the GMROI equation.”

Website Traffic: To be a high GMROI organization, marketing teams must consistently attract similar or greater website and in-store traffic than in prior comparable periods. Website traffic is critical for furniture retailers because it increases store traffic and online sales. Web visitors are a leading indicator of future in-store traffic and sales. That’s why it is important to monitor web traffic closely.

Tip: If you have a CRM (Customer Relationship Management) system that connects to your website, you may be able to capture complete visitor contact information without having them fill out forms. This information can be used for automated, relevant marketing. Just be sure that you comply with data privacy regulations.

Sales Teams and GMROI

Sales team effectiveness can have the greatest impact on GMROI. That said, I would not encourage salespeople to be masters of this metric as it is often beyond the average selling individual’s area of interest. Instead, their performance should be measured and they should be encouraged to improve metrics that affect the GMROI equation.

The numerator of the GMROI equation is gross margin dollars, a byproduct of sales revenue. The more often your sales force sells at higher margins, the greater your GMROI will be, provided average inventory does not overwhelm those sales figures.

Inventory Pacing: On the inventory side, the only way to reduce or maintain appropriate inventory levels is to sell it off at the proper pace for your business model. Let’s assume, for example, that in a given month a retailer’s written and delivered sales are similar. If $500,000 in inventory is received, the sales team would need to sell at least $1,000,000 at 50% gross margin to not decrease GMROI for that month.

 Slow Turning Inventory: If an organization needs to sell slow-turning “DOG” inventory, it should let salespeople know which items to focus on and create incentives to sell that inventory by offering commission “spiffs” or other means.

Best Sellers: To keep winning merchandise producing high GMROI, salespeople need to remain focused on selling those hot items. Protection and mattresses are two critical categories essential to achieving high GMROI. Mattresses ship quickly and produce a decent margin. Protection has little cost, no physical inventory and generates a huge margin percentage.

Another characteristic of high GMROI- performing organizations is that salespeople use best practices for selling protection and mattresses.

A KPI Focus: To have maximum influence on GMROI, sales teams must perform at a superior level. Some top sales KPIs (key performance indicators) that contribute to higher GMROI are:

• Revenue per guest
• Productivity ratio (see a complete description at www.furninfo.com/furniture-world-articles/4033)
• Close rate
• Average sale
• Spiff items sold

Sales management should understand the GMROI equation and all that affects it. It is their job to lead sales teams to execute daily actions that produce favorable GMROI results.

“The furthest thing from most logistics employees’ minds is improving some acronym that is hard to pronounce that is backed by a mathematical equation.”

Operations & GMROI

The furthest thing from most logistics employees’ minds is improving some acronym that is hard to pronounce and describes a mathematical equation. However, your operations management team should be familiar with GMROI because these people are critical to maintaining it at a high level. Operations affect this metric in four key areas:

1. Receiving Ops and GMROI

   GMROI measures the velocity of margin produced from inventory. The faster you receive, display, sell and deliver merchandise, the higher your GMROI will be. High GMROI operations quickly tag, receive, and locate incoming inventory to an appropriate rack location, sometimes within minutes. A slower GMROI receiving process leaves merchandise unlocated on warehouse floors for days. A host of positive effects result from a quick-flowing receiving process. These include faster turns, lower inventory, shorter time to display and faster delivery. Margin dollars are gained, and inventory is reduced. A good measure of receiving speed that affects GMROI is ‘time to put away per piece received.’

2. Delivery/Pick-up Scheduling Operations & GMROI

   There are just three reasons to leave merchandise sitting in a warehouse rack.

   • Waiting to be scheduled for delivery or pick-up
   • Waiting to be displayed
   • Waiting to be sold

   
   Storing furniture items in a warehouse is a GMROI killer. To maximize GMROI, appropriate handling of merchandise to be delivered or picked up as well as good people and processes make all the difference. Retail operations that allow salespeople to do all the delivery scheduling without CRM or logistics technology in operations produce lower GMROI. That is because salespeople care a lot about sales and design, but less so about logistics. Fast GMROI, on the other hand, is produced by operational individuals who focus on pushing a certain amount of merchandise out every day and every week. They use tools like CRM text automation that enables customers to confirm or reschedule delivery or pick-ups. These tools move deliveries quicker into routing systems like DispatchTrack to enable effective delivery and higher GMROI. A good metric used to track scheduling speed is ‘the number of unscheduled sales scheduled for delivery per $1 million in annual sales.’

“Retail operations that allow salespeople to do all the delivery scheduling without CRM technology produce low GMROI.”

3. Picking and Prep Operations & GMROI

   Consistent and coordinated picking and merchandise preparation processes with time cutoffs produce greater GMROI. When the process for handling merchandise is carefully controlled, the result is organized quality control, fewer damaged goods and higher GMROI. That is because reverse logistics due to returns and damage has a negative effect on GMROI.

   Tip: Many effective picking and prep routines function on a two-day schedule. Here’s an example:

   • Monday AM: Picking schedules communicated with appropriate warehouse people
   • Monday mid-day: Picking completed and scanned to prepare areas
   • Monday afternoon: Quality control; preparation where required
   • Tuesday AM: Product staged in delivery truck and pick-up zones per efficient routing
   • Tuesday PM or Wed AM: product loaded on trucks (often a mix of in-box and blanket-wrap)
     
     

4. Delivery Operations& GMROI

   Filling the right number of trucks to capacity and optimal routing produces high GMROI. This can only be done through the application of motivated people, technology and effective process. Well-trained and reliable delivery crews are essential to minimize damages and decrease the delivery failure rate by correcting the root causes.

5. Transfer Operations & GMROI

   Paying attention to speeding the process of moving merchandise to showrooms for display increases GMROI. When inventory spends more time on display in a physical showroom, margin dollars are created and unproductive inventory sitting in the warehouse is minimized. The metric merchandisers can track here is ‘the number of items available to sell and not displayed.’

To be a high GMROI performing organization, your operation teams need to follow the right processes, have the right people, and use systems to enable quick inventory movement.

After Sale Service & GMROI

Service departments can help to minimize problems and maximize GMROI. High-performing service people and systems save sales, preserve margin, make customers happy and reduce inventory returns. If you merge the right people with the best tools to manage and solve customer issues, the result will be fewer dollars spent, better customer reviews and more repeat business. One of the most effective ways to manage service is through online, digital ticketing that makes it easy for customers to record details and upload images. This technology gives customers and relevant employees status updates in real-time. A great customer service metric to track and improve GMROI is ‘open service per million in annual sales.’

Purchasing & GMROI

Purchasing is a critical element that affects GMROI. I’ve written several articles on this topic that can be found at www.furninfo.com/authors/david-mcmahon/6. For this update, the main point is that buyers do not have sole responsibility for creating high GMROI numbers. They do, however, influence the in-flow of merchandise. Should they get the timing wrong, it can lead to reduced sales due to stock-outs or less cash on hand—the result of excess inventory. In either of these cases, GMROI falls. It’s like walking a tightrope. When buyers constantly get the balance of incoming stock in a decent zone, GMROI can be maximized. My rules of thumb for each of the following product categories are:

• Proven top GMROI merchandise items: Err on overbuying if you are a stocking operation versus special order.
• Average GMROI items that you wish to carry: Err on the lighter side.
• Low GMROI items or DOGS: Mark down quickly and do not re-buy.
• New merchandise purchases: Track your inventory-to-sales ratio to make sure it’s in balance and discover if there is an obvious hole in your lineup.

Buying practices need to be disciplined and planned out to achieve high GMROI. You can be somewhat creative when purchasing new, untested, merchandise; however, be more scientific with re-buying best sellers.

“The worst GMROI merchandising practice is to move items that don’t sell or need to be replaced with updated models back into the warehouse.”

Merchandising & GMROI

The quality of your showroom display can make or break GMROI. Merchandising is connected directly to both sales and inventory levels.

Showing the right inventory in the right way, at the right time, in the right amount is the purpose of skillful merchandising. Missing an important price point slot causes lost sales. Having too much or too little of any category on the floor—same result.

Whatever your business model, there is always a need to get rid of items that do not sell. The worst GMROI merchandising practice is to move items that do not sell, or need to be replaced with an updated model, back into the warehouse. It’s a cash killer unless those items can be sold online fast. Here are some better choices for handling slow-moving or old inventory:

• Mark them down on the floor
• Spiff them
• Move them to a clearance or outlet center
• Feature them prominently on your website
• Include them in larger projects where there is a good fit
• Give them away in a marketing campaign
• Donate them

Conclusion

GMROI is a key measure of retail productivity and profitability that was largely ignored during the pandemic. Despite the common misconception that it is solely an inventory management metric, GMROI is improved through a collaborative organization-wide effort. By focusing on continually improving GMROI, organizations can facilitate growth and continued success.

 See all of David McMahon’s articles here. He can be reached with questions about this or other retail operations topics at david@performnow.com.