KamLibrary - NMROII - A Step Past GMROII?

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.

Essentially GMROII evolved as a way of linking two relatively easy measures, Gross Margin (difference between buying price and selling price) as a percentage of average stocks at cost. This allowed retailers and suppliers to appreciate the value of a brand in terms of the combination of its gross margin and annual rotation, or rate of sale, rather than simply assessing Gross Margin and Sales growth. In other words, in the right hands it was possible to recognise the value in a brand with a small gross margin, providing it rotated more frequently than the retailer’s average stockturn.

Once established it was then possible to apply the GMROII measure across an entire retail operation, a market, a store, a department, a category, a SKU and it could even be used to assess the total value of a supplier’s portfolio to the retailer, and thus identify the key value drivers and acknowledge excellent performance in the supplier-retailer partnership.

From the beginning it seemed obvious that those gaining some benefit from the application of GMROII should then enhance the process by attempting to calculate Net Margin by SKU, thereby picking up all the costs associated with retailing the brand, a process that has become easier for retailers to measure over the years.

However, for suppliers to enter the process it is first necessary to apply some inspired guesswork, hoping that even the application of ultra-conservative estimates will still demonstrate sufficient value for a partner-retailer to want to jointly explore the potential in greater depth, by sharing appropriate data.

In practice this means applying the following calculation to a typical brand.

Suppose your brand has a retail Gross Margin of 35%, vs. a retailer’s gross margin of 25%. Given average retail handling and overheads of 15%, and allowing for average shrinkage of 2%, this leaves a Net Margin on the brand for the retailer of approximately 18%, all things being equal… However, reduce this to 12% to cover unknown costs in the retail operation.

Given that the average Net Margin of UK multiples is approximately 4%, it can be seen that not only is your brand over-performing profit-wise, the resulting insights should be sufficient to persuade a partner-retailer to make the analysis more productive by providing appropriate real data. However, should the partner require more persuasion, it is possible to extend the analysis using open domain data. In other words, using the retailer’s latest annual report identify Net Margin (% & £), calculate annual stockturn (sales/stock) and assume an average gross margin of 25%.

In other words a retailer with annual sales of £10bn, a Net Margin of 4%, an annual stockturn of 22 times per annum has an overall NMROII of 88%. This becomes the ultimate bench mark for both supplier and retailer, in that any brand with a NMROII greater than the retailer’s average, has to represent real incremental value to the retailer.

By the same token, a brand’s sales for the retailer of £150k, on weekly delivery, with a retail Net Margin of 8% produces a NMROII of 353% and has to be worthy of further exploration...(See KamTips)

Producing this level of insight from the retailer’s own open domain data has to provide a basis for more collaboration and data-sharing at all levels of the supplier-retailer relationship. For this reason it can be beneficial for all multi-level contacts of both NAM and Buyer to understand, buy into and apply the NMROII process throughout the organisation.

With appropriate management NMROII can also help to convince the retailer of the benefits of fair-share negotiation by revealing the real value in the relationship, the ability of the NAM to combine a pan-market view with the in-depth and essentially narrow perspective of the retailer.

This combination of breadth and depth using the NMROII tool can thus help to elevate the partnership to new levels of productivity via a true consultancy relationship, at minimal cost to the retailer.

All else is detail…

For KamTips on 'Calculating NMROII', see NamNews - June 2011

Date article published: June 2011

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