Sir Winston Leonard Spencer-Churchill, was a British politician who was the Prime Minister of the UK from 1940 to 1945 and again from 1951 to 1955. According to Wikipedia, he was”widely regarded as one of the greatest wartime leaders of the 20th century, Churchill was also an officer in the British Army, a historian, a writer, and an artist. He won the Nobel Prize in Literature, and was the first person to be made an honorary citizen of the
US”.
One of his famous quotes was: “Never give in – never, never, never, never, in nothing great or small, large or petty, never give in except to convictions of honor and good sense. Never yield to force; never yield to the apparently overwhelming might of the enemy.”
As a young economics student, my lecturer, Mr Levy, was teaching us the basics of supply and demand and perfect competition. One example he gave was that when prices are low, you should stock up. He said that if the price of car tyres suddenly dropped, you should buy some and store them in your garage even if you didn’t need them. As a young retailer I had to disagree with Mr Levy because I had been taught that in retail you buy just enough to cover your forward sales.
In November 1978 the gold price (all in USD) was $715. A year later it had climbed to $1395 and within two months reached $1976. Another two months saw it fall to $1498 and within two years it was $816.
Towards the end of 1979, my fine jewellery buyer said to me that she wanted to stock up with gold as the price was going through the roof. My response was that if she wanted to invest in anything, she should consider the stock exchange, but I would not approve purchasing more than we needed.
What followed the crash was a very savvy consumer who came into the store with a calculator and asked for the weight of the item that interested them, and in the years that followed we had to manage our inventory very carefully.
Fast forward to the mid 90s when I was running a department store group in Singapore. I queried the stockholding in Chinese eating bowls and found that there were two container loads in the warehouse. Upon quizzing the merchandise director, I was told that she had bought the first container but then the price dropped so she bought another container!
She clearly hadn’t heard of GMROII.
Investopedia says that GMROII is a useful measure as it helps management to see the average amount that the inventory returns above its cost. A ratio higher than 1 means the firm is selling the merchandise for more than what it costs the firm to acquire it. The opposite is true for a ratio below 1.
And yet as I have commented previously, I see very few retailers using this KPI.
If Churchill had been a retailer I have no doubt that he would have said “never, never, never, never, invest in stock”.
Stuart Bennie is a retail consultant at Impact Retailing and can be contacted at stuart@impactretailing.com.au or 0414 631 702.