Use of GMROII to demonstrate your value to Tesco

Gross Margin Return On Inventory Investment is probably one of the most valuable, yet underutilised tools in the NAM kit-bag today.

It follows that those that take the (small amount) of time to practice its use, automatically gain a competitive advantage over the competition, invaluable in these unprecedented times.

Essentially, GMROII is valuable because it links your product's Gross Margin for the Retailer, with the retailer’s stockturn of your product, instead of simply focusing on the Gross Margin.

For example, suppose the retailer sells £750k of your product per annum, enjoys a Gross Margin of 35%, and holds an average of 7 days stock of the product.

NamCalc (below) shows that the retailer is making a GMROII of 2,807% on the product. (any queries re the calculation, please let me know on bmoore@namnews.com).

Suppose the retailer is Tesco

Tesco’s latest Sales are £56.9bn, its internal Gross Margin is approx 21%, and it holds an average of 22 days stock i.e. £2.6bn in stock at any time.

Tesco’s GMROII on its total business is therefore 460%

[£56.9 x 0.21/2.6 x 100 = 460%]

Therefore your product’s GMROII of 2,807% is a significant contributor to Tesco’s business.

See details on the NamCalc screen-pull below. Each of the 33 calculator tools also has editorial detail explaining key uses/interpretations of the tool.

More details here

Sales per Sq Ft as a Primary Retail Indicator?

Given that rental levels and Business Rates are based on sales area, and with retail rents in prime spots in London’s Oxford Street reaching £1,000/sq ft/annum – equal to best-in-class grocery sales/sq ft/annum – it could be said that selling intensity i.e. sales/sq ft/annum is a pretty good indicator of retail effectiveness…

In other words, in the case of Oxford Street, a store achieving sales of £1,000/sq ft/annum is using all of its sales revenue to pay the rent, leaving costs of business rates of say £300+/sq ft/annum, cost of goods say 75% of net sales, overheads and store maintenance etc to be met from other parts of the business..

Incidentally, on a macro level, sales/sq ft/annum, can also steer a balance between investment in Bricks&Mortar and online – where space is infinite, and ‘free’ – helping to temper corporate  online enthusiasm as one begins to realise that fulfilment costs make online less profitable than well-run B&M…

Given that online space is infinite and ‘free’, a retailer contemplating switching resource to online development needs to have one foot firmly anchored to its Bricks & Mortar base, with its costs, in order to constantly re-evaluate the opportunity costs of developing its online channel vs traditional retail.

By the same token, Amazon’s decision to take the ‘retro-step’ of opening B&M bookshops can be seen to be state-of-art in that, using online sales results as a basis for B&M assortment, allows them to stock the most–demanded 4,000 titles – in 10% of the space a traditional bookshop needs in order to carry a minimum assortment of 40,000+ titles…

In terms of personalising the shopping experience here on earth, as shopper perception of shop-floor assistance can be based on staff numbers/sq ft,, minimum wage legislation can make adding people to the aisle an increasing burden. However, if a retailer hopes to go even further in terms of being different to online – using real people – by employing demonstrators and sales assistants, it is imperative not only that a non-pressured balance be arrived at in terms of salary and commission, but also that the combined costs of these expensive resources be calibrated against square footage…see GMROS and GMROL in KamTips.

Having calculated the sales and sales costs per sq ft for the whole organisation, it is then possible to examine different components of the business in terms of their relative contribution to overall performance.

For instance, a store by store comparison of sales/sq ft/annum will indicate which outlets are merely ‘showing off’, while others do the real work…

Seriously, it is obviously important to have show-room outlets in key parts of the country as  physical anchors for the online business, but if these outlets generate lower than average sales/sq ft, they become a drain on the business, besides starving other outlets of necessary upkeep and maintenance.

Think about it, the greater the difference between a flagship outlet and a ‘worker-store’ the more confusing for the shopper, besides raising the problem of which version to feature in the advertising, with a local real-life store visit possibly contradicting shopper expectations generated via national media…

Moving from store by store to in-store department by department comparison, adds more insight, making category comparisons a no-brainer in terms of determining a balance of resource and investment.

In fact, using this approach of developing a basis for measuring the sales/sq ft of the entire organisation, and then tracking the contribution beyond category to every SKU, on & offline to that overall performance becomes possible, even essential…

Having done so, tracking supplier Trade investment by sq ft performance allows a retailer to rank individual brands/categories and suppliers, whilst Gross Margin by the same measure shows relative contribution by SKU, eventually justifying the calculation of net profit/sq ft.

In fact, with GMROII barely out of the closet following 15 years of ‘digestation’, it is perhaps time to explore the possibility of the next phase of the process, Net Margin Return On Inventory Investment, providing even deeper insight into the retail value of brands.

Finally, if suppliers se major customers moving towards everyday use of these measures, it follows that incorporating a similar approach to assessing brand contribution per sq ft/annum, has to provide a joint-basis for possible synergies…

All else is detail… 

When the buyer says 'the retail margin is too small'... How to shift the buyer's point of view

S:   ....and with our retail margin of 22%....

B:    It's too small.  Our average margin for the category is 28%

S:    So, your average category margin is bigger than your overall company gross margin of 23%?

B:    How do you know that?

S:    Simple, I downloaded your annual accounts from Companies House @ £1 per document. See, on the P&L, second line....  But anyway, let's work with your category margin, providing you tell me your average category stockturn per annum.

B:    No, our stock rotation details are off limits... I shouldn't even have told you our category margin...

S:    Hang on, the more information you give me, the more I can tailor-make a business solution for your category. I have a limited sized cake, and the better I slice it, the greater the value for you. But anyway, for the moment, I can work with your company data.

B:    I'm listening, but make it quick...

S:    Right. As you know we deliver our top selling SKUs to you daily, a stockturn of 250 times per annum, but let's take an average of weekly delivery for the brand, 50 times per annum.

B:    So?

S:    So, our annual sales of £350k of the brand to you means that at any time you are sitting on £7k stocks of our brand, £350/50...

B:    And?

S:    And, with our 22% retail Gross Margin making you £77k Gross Profit per annum on a stock investment of £7k, in other words, you are making £77k Gross Margin Return On Inventory Investment (GMROII*) on our brand. As you can see, £77k divided by £7k times 100 means you are making a Gross Return of 1100% on our brand, a little better than the 22% you were complaining about earlier?

B:    I don't quite get it...

S:    No problem, it took me a week to get my head around it. Our brand is a bit like a bank in which you deposit £7k and you get interest of £77k per annum. In other words 1100% interest!

B:    We make that on all brands....

S:    In your dreams...joking!...   Let me explain?

B:    It had better be good....

S:    Your average company Gross Margin is 23%, in other words £184m on sales of £800m, and your average stock-turn is 17.5 times per annum, as you can see from your balance sheet showing Stocks of £45.7m. Dividing the £45.7m into your sales of £800m on your P&L, means your company is making £184m on your average stocks of £45.7m, an average GMROII of 403%, compared with your GMROII on our brand of 1,100%!

Buyer:            Suppose I told you that our average category stockturn is 27......
SuperNAM:           Now you're talking....

Adventures of SuperNAM (14)
* GMROII