Who Owns GMROI And Shrink?

A user of one of our training programs contacted us with a question. He took the mastery test and challenged the answers that came up in the question shown above. He thought that Store Operations should own GMROI and the Buying Division should own shrink.

While he was wrong in the context of the question shown above, he had a good point when you think about it.

In practice the Buying Office owns GMROI because:

  1. They buy the product and where they source it from (factory gate price plus shipping and any import duties) determines the initial gross margin.
  2. They control the promotion decisions, which products to promote, level of markdown to invest, duration of promotion, promotional support obtained from the from manufacturer, which all impact the margin.
  3. They control the initial allocations to stores for new products, plus the promotional sales forecast and therefore the lift in stock levels necessary to support the promotions.

Store Operations owns shrink in the sense that the bulk of shrink happens in stores so they own all of that part. Most shrink is store employees and customers (often in that order). However, you do get some from the warehouses and the warehouse management owns that part. You also get some from vendors for two reasons:

  1. The delivery drivers or third party carriers steal some, especially if the warehouse receiving procedures are weak and warehouse management owns this, if it shows in the warehouse stock loss at inventory counting time.
  2. The suppliers sometimes invoice a different amount to what they shipped. Finance detects this in their invoice matching process, but usually B&M owns this part.

In accounting terms, B&M takes the hit on all shrink because the sales revenue is lower than it should be. You, the retailer, paid for goods that invoice matching didn’t detect as incorrectly billed, therefore the cost of goods is higher because you don’t get sales revenue from the shrink percentage, so the achieved margin is lower. The norm for shrink is 2% sales, measured at selling prices across all retail segments. Some segments are better than average, some are worse. The impact of this is that if you achieve 5% pre-tax profit, it would have been 7% with no shrink. 2 on 5 is a 40% profit impact! So it’s clearly an area worthy of serious attention.

If margin management or stock loss is a concern for you, please feel free to get in touch. You can contact me at brian_hume@martec-international.com or via my LinkedIn profile. You can also see examples of our training classes on our Youtube channel.

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Posted by Brian Hume
20th December 2018

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