In all my years in the retail industry, I never had the question posed to me, “What is the most important measurement for retailers to monitor”? Despite no one every asking, it’s a fair question I think. Given that most retailers appear to be driven by the metrics that interest the financial community, the list of candidates likely starts with metrics like comparable store sales, revenue, and of course profit.
As important as all of these common metrics are, none really speak to the “potential” that a retailer has to improve on any given number. To place performance in context, at least in my view, one needs to include spatial metrics that speak how efficient a retailer is producing profit with the allotment of retail selling space they have to work with. Can you see where I’m headed here?
About twenty years ago, spatial measurements were emerging as space management tools such as Apollo and Spaceman came on the scene. For the first time, supermarket retailers had the means to understand how the placement of products in the store and on the shelf impacted sales and profit. As a result, epiphanies were common place as retailers began to adjust space allotments and placements to a variety of items and results could be projected. I had the privilege of working with Dr. Brian Harris, the founder of Apollo Space Management as well as the ensuing scientific approach to category management back in the early 90’s. One of the key learnings that emerged from his work then was that we could actually combined sales performance with space performance we then had a metric that could help us understand if our performance was being both profitable and efficient.
Enter GMROI. GMROI, (Gross Margin Return on Inventory Invested), calculates profit generated by the dollars (measured in average inventory cost) on each item placed on the shelf.
GMROI= Gross Margin/Average Inventory Costs
The formula is simple, but in order to calculate Average Inventory Costs, you need a space management tool that calculates days of supply, holding costs, etc that comprise Average Inventory Costs.
Armed with GMROI numbers retailers could make judgements category by category, item by item, store by store. Below is a quick view report from the 1992 Marsh Super Study that uses GMROI as the defining index to measure category performance. Any number over 1 denotes the category is returning positively over the investment, but beyond that, the metric provides a relative unit of measure to compare items and categories.
The above report depicts a variety of metrics related to spatial performance. Anyone of them are of potential value to the retailer as a means to adjust and improve performance . GMROI, which is depicted in the far right hand side column in the table above, begins to paint the picture that category managers can use to fine tune space allotment, sku rationalization, and other decisions. But if the retailer is not privy to “advance” spatial metrics offered by space management tools, a simpler metric, Gross Margin/Retail Square Foot is still a very telling number, however, it is much more difficult to look at any level of meaningful granularity without the space management tools.
So, with the admission that we need a number of measurements to manage the business, my vote for most important retail metric above all others is GMROI. It provides the combination of profit that is earned by manageable business units with how smartly the unit being measure is positioned and allocated in the store. GMROI averages can be the yardstick for departments, categories,and even items, allowing comparisons and categorizations so that retailers can make adjustments in pricing, space allotment, stocking and handling practices, and even positioning within the layout of the store. I know of some retailers with well-seasoned space management departments are using this metric successfully. Others should try it!