Four Vital Retail Metrics and How to Measure Them
Retail Metrics, Key Performance Indicators or KPIs are values that show how well your business is performing. While there are many important indicators that retail businesses need to keep track of, four key KPIs are central to performance measurement.
Let’s see what these key retail metrics are and how we can measure them.
Retail Metric to Measure Inventory Performance: Sell-Through
Sell-Through (or Sell Thru) is used to track inventory performance; it gives information about the speed at which our inventory is moving. Also, this metric tells us how much inventory was available to achieve sales.
To calculate Sell through value, divide the Units sold during a certain period by the opening inventory of that period. In case, you are repeatedly purchasing inventory, a longer period will not be very useful. A period should be selected where the inventory represented is actually used to derive the sales during that period. For example, if you have the opening inventory of 60 units during a certain month and you sold 12 units during that month, the Sell thru during the selected period will be (12-60)*100=40%
Key Retail Metric Related to Supply Chain: Inventory Turns
It tells us how many times an inventory item is replaced in one year thus indicating how many times a particular inventory item is sold out or turned into cash. A higher inventory turn obviously indicates a higher cash flow. This is a very important KPI because it helps you to make decisions like what to sell, when to order and how much to order a particular item.
Moreover, Keeping a track of this KPI will also help you figure out which items you need to get moving out of the store so that you can reinvest the freed up cash into some other more profitable merchandise. For inventory items, having higher inventory turns, small gross margins are acceptable.
Inventory Turns = (Cost of Goods Sold) / Av. Inventory at Cost.
For example, you have total COGS of 15M during a year and your average inventory coast is 3M then your inventory turns are 12/3=5. If you do not have cost figures you can obtain the inventory turns by dividing sales Sales by Av. Inventory Value at Retail.
Key Retail Metric to Measure Profitability: Gross Margin
This is one of the most frequently used KPI in retail. It is obtained by subtracting the cost of goods sold (COGS) from the Net sales value, and thus indicates us how much we have earned by selling an inventory item.
When we divide the Gross Margin by the selling price, it gives us the Gross Margin percentage. Keep in mind that the Gross Margin figure is sometimes misleading because it does not tell us about average inventory holding cost.
Key Retail Metric for Assessing Products & Categories: GMROII
This stands for Gross Margin Return on inventory investment. It is one of the most important of all the KPIs in retail business. It helps you evaluate how many rupees you are getting back, for every rupee you have invested. Usually, this is calculated for a year, but you can use this KPI for any desired period.
It not only gives you the Gross Margin but also takes into account the inventory cost incurred to generate that Gross Margin. This KPI gives you information about Profitable/non-profitable Categories, Departments, or items.
GMROII = (Sales/Av. Inventory at Cost) * Gross Margin.
Similarly, GMROII can be expressed as (Net Sales – COGS)/ Av. Inventory at Cost. For example, if during a year the Gross Margin is 3M and average inventory at cost is 2.5M. The GMROII will be 3/2.5=1.2. This means that we have got back 1.2 Rupees back for every rupee invested during the last one year.
Retail metrics should be measured on a regular basis to gauge the health and direction of your business. But numbers can be intimidating and especially mid-size to chain retail stores cannot manually track all the important indicators. You need to invest in efficient inventory management software that has the right features for managing retail stores & retail chains. However, simply investing in good retail software is not enough. You need to regularly check reports and take action based on the report & analytics.