|Retail Successentials October 2014: How to plan profitable product assortments for your store|
|Written by Bill Nielsen|
|Wednesday, 03 September 2014 08:58 AM America/New_York|
Manage your product mix to maximize sales year round
GMROI mystifies many a retailer, but the acronym stands for a factor so critical for your store that you should know what it is and why it’s beneficial. But if you don’t get it, you are not alone, as a large percentage of retailers do not fully understand its value. GMROI stands for Gross Margin Return On Investment and is the single most important metric to retailers.
Why is it so significant? At a glance, GMROI is a ratio that will tell you how healthy your inventory is and exactly how much profit you are making for every dollar of stock on your shelves.
USE YOUR CALCULATOR
Now that I have your attention, let me show you how to calculate your store’s GMROI. Follow these three simple steps:
1. Determine your average inventory at cost. Start by adding the starting cost of inventory for a 12-month period and add to that number the ending cost of inventory for the 12th month as well. The sum of these 13 values is then divided by 13 to get your average inventory at cost.
2. Calculate your gross margin for the same 12 months. Next, take your total sales number for the 12 months and subtract from it the cost of goods sold during that period. The result is your gross margin.
3. Divide your gross margin by your average inventory cost to calculate your GMROI. The result is a ratio that represents how much profit you make on every dollar of inventory you stock on average. The higher the number, the better you are doing.
So what drives GMROI? Even when customer traffic is down and sales are hard to come by, you can increase your GMROI dramatically and thereby improve cash flow and profitability by making sure you are managing your inventory effectively.
PRACTICE INVENTORY ABCs
The best strategy for inventory management includes a careful combination of the following:
Your first return or markdown is always the cheapest. By this, I mean having inventory on hand that is not selling costs you money every day. Get rid of nonproductive stock as soon as you see it and as quickly as you can. Run a “not-sold-since” report that shows you how long a product has been sitting on your shelves. If you do not have a system that will do this, you may want to consider getting one, as such investment will pay for itself in short order by freeing up valuable open-to-buy dollars. Any item that has not sold in more than 90 days is suspect. Items that have not sold in more than 150 days need immediate action.
Don’t fear the cost of returns or even the pain of selling items at or below cost. You are far better off to take an item that cost you $1 and get rid of it for 75 cents so you can reinvest that same 75 cents in something that will meet the needs of your customers and make you money rather than stock items that no one wants.
Be sure you are in stock on what customers expect to find. Identify what products are hot or, based on seasonal reports, what is about to be hot, and invest appropriately in those items. Include advertised products in your focus as well. Keep doing this by stocking and replenishing fewer of the right products more often.
Trying to take these steps manually and consistently across hundreds or thousands of products is just not practical. The issue is compounded even more by the retail best practice of managing different classes of inventory differently. Consider the need to manage new releases, best-sellers, core items that sell well and seasonal items—all based on their unique and respective characteristics.
The good news is that the cost to have a world-class merchandising solution has come down dramatically in recent years. Small retailers can replace their POS and inventory-management systems for as little as $1,500 up front and $99 a month with a tool that will perform as well as the very expensive systems that could only be afforded by the largest of retailers in the past.
Lastly, sell it before you own it. Taking orders and shipping product to the customer means you get paid before you have to pay for the inventory. Yes, your profit-margin percentages might be a bit lower, but such a strategy is the best and easiest way to generate profit-margin dollars, increase GMROI, and give your bottom line and cash flow a shot in the arm. To do this, you need to go back to being an omni-channel retailer and make sure customers can find and order products from you, be it in the comfort of their home or while standing in your store. Again, seeking help here and investing in the right business solutions can bring great returns on relatively small investments.
Most retailers have 15-25% of dead, nonproductive inventory. Implementing the above steps to ensure that 100% of your inventory is working for you is one of the top Retail Successentials for driving sales, profit and cash flow.
As you bring all of this together, take time to strive for balance in your assortment. An easy-to-use but proven blend of the following will serve you well.
Capitalize on core. Your core should be the best-selling items that you merchandise in-line. Generally I suggest to clients that they stock no more than one or two units of all of their core-assortment titles, knowing that they will be replenished weekly. Assuming two units of each title and a desired turn goal of three, any nonseasonal item that sells six or more units in a year would be a candidate to be in your core.
A subset of your core are the top-tiered items that we should plan to stock in great depth up to a four-month supply that will yield a inventory turn of 3.0. These are the items that customers count on you to always have in stock. Think bread, milk and eggs at the grocery store and apply it to your assortment.
Seasonal items help you be relevant all year long. However, the key is to order pre-season and stop replenishing four weeks before the season ends. For example, back-to-school items should be ordered to arrive by July 1 and should not be replenished after Aug. 1.
Each of these three groupings of products should be planned for the turn-goals mentioned since, of course, your actual turn will be a good bit lower since some items likely will not sell as planned. Do this well and your store can reach an inventory turn of 3.0 or better, which will generate a very good GMROI and positive cash flow for your business.
NEXT ISSUE: We will look at how to plan stock-to-sales-to-space in your store.