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.
GMROI = Delivered gross margin dollars annualized / Average inventory
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.”
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
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
- 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
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:
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
Delivery/Pick-up Scheduling Operations & GMROI
There are just three reasons to leave merchandise sitting in a warehouse
- 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.”
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
- 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
Tuesday PM or Wed AM: product loaded on trucks (often a mix of in-box
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.
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
Low GMROI items or DOGS: Mark down quickly and do not
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
- 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
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