Measuring Your Return on Investment

The sales figure in the chart of $1,003,916 is made up of the 6,886 items sold multiplied by the average sale value of $145.

This month, our emphasis is on return on investment, or ROI. This is a measure of how much you get back for every $100 invested in inventory. It is a multiplier of markup and stock turn—in other words, how much profit you make on each item you sell times how often you can sell it.

ROI is an important measurement for any business as it determines how effective your investment has been. In the same way that interest rate per annum measures how effective your money has been performing for you at the bank, ROI determines how effective your money has been invested in inventory for your store. An ROI of 200 means the owner has generated $200 of gross profit for every $100 invested in inventory.

In the above statistics, the average ROI across the stores measured is 69, or a return of $69 for every $100 invested in inventory. This is calculated by multiplying the markup of 99 percent by the stock turn of 0.7 times per annum.

There is more than one way to achieve a return on investment. Two stores may achieve an ROI of 200 in the following ways:

Store 1 150% markup × 1.3 stock turn = 200 ROI

Store 2 100% markup × 2 stock turn = 200 ROI

Again, the key to using this information each month is to compare it to your own store’s performance in each area and to identify opportunities. For example, let’s say your store was doing a 0.7 stock turn in line with the industry average but your markup was only 85 percent compared to the average above of 99 percent.

Your Store

0.7 × 85% = 59 ROI

Average Store

0.7 × 99% = 69 ROI

Comparing your store to one achieving the industry average you would be generating an annual gross profit of $118,000 with a $200,000 stock investment ($200,000/100 × 59). The average store with the same stockholding would be generating $138,000 in annual gross profit ($200,000/100 × 69), an improvement to the bottom line of $20,000. The same scenario would apply if you were achieving the industry markup but had a lower stock turn—an improvement in stock turn will put more money onto that bottom line.

It’s important to point out that although a ROI of $69 for every $100 invested in inventory is the average, this is by no means a stellar performance. In fact many stores are achieving a return of $200 gross profit for every dollar invested in inventory, and this should be the objective for any successful store. Both the average stock turn of 0.7 and the average store markup of 99 percent are substantially below where they should be and a store achieving these averages should be looking to improve on two fronts:

  1. Increase your markup to a sustainable level. Putting a markup of 100–120 percent on product is simply not sufficient. (For comparative information on realistic markups, we can be contacted for further assistance; details below). Note that reducing discounting can help increase the actual markup achieved.

  2. Carry a realistic level of inventory. The average jewelry store requires approximately $1 of inventory for every $4 of sales achieved. In reality the average store is carrying almost $1 of inventory for every dollar of sales, an excess inventory of over half a million dollars. This is wasteful—the same level of sales can be achieved with almost a quarter of the inventory, freeing cash up to retire debt, use for personal purposes, or reinvest into better investments (or inventory that yields greater sales). Sadly, too many jewelers see this excess inventory as some sort of retirement fund that they can cash in when they sell the store. In today’s competitive environment, savvy business buyers would offer less than 50 cents on the dollar to purchase this underperforming product that has failed to sell, and who can blame them? There is no room for sentiment on this aged and bloated product.

If you would like to know more about how to contribute your own data and receive a personalized Industry KPI report each month, or if you need help to improve your markup or stock turn, e-mail Carol Druan at Carol@edgeretailacademy.com or call (877) 569-8657. Visit our Web site at www.edgeretailacademy.com.

12 Month KPI Analysis to Dec 09 Average Store
Note: These 12-month averages above are calculated from the performance of a large number of independent jewelry stores across the United States for the month of November 2009.
Total sales $1,003,916.00
Sales numbers 6,886.00
Avg. sale $145.00
Gross profit $501,209.00
COS $502,707.00
Markup percent 99.00
Closing stock $756,236.00
Stock turn 0.70
ROI 69.00