The Gross Margin Return On Investment (GMROI) is a key metric that calculates a retailer’s gross profit generated for the amount of money they invested in their average inventory holdings. In general, a higher GMROI is better, as it indicates that the inventory is turning into profit efficiently, helping retailers optimize their product mix, store layout, and even their promotional strategies to maximize profitability. On the other hand, a lower GMROI indicates that your business is not generating enough profit from its inventory.
GMROI is considered one of retail’s most important KPIs, as it gives you an overview of how healthy your business is, and narrows down its scope to measure the profitability of a single category or item.
The formula to calculate this ratio in microeconomics is quite simple, as it consists of dividing the gross profit by the average inventory cost, as follows:
| GMROI= | Gross Profit ___________________ Average Inventory Cost |
Gross Profit: Revenues - Cost of Goods Sold (COGC).
Average Inventory Cost: Beginning inventory + Purchases during the period – Ending inventory.
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