As a retailer, effectively managing your inventory is critical to the success of your business. One of the key inventory metrics retailers track is inventory turnover.
Inventory turnover measures how many times a company sells and replaces its inventory during a period. It indicates how efficiently inventory is managed and whether excess inventory is tying up too much capital.
Calculating your inventory turnover ratio provides insight into the health and efficiency of your retail operations. Read on to learn more about this important retail KPI.
What Does Inventory Turnover Measure?
Inventory turnover measures how efficiently a company is using its inventory. It calculates the number of times average inventory is sold during a period.
A higher turnover ratio means inventory is sold more times throughout the year. This indicates strong sales and effective inventory management practices.
A lower turnover ratio means inventory sits on shelves longer before being sold. This ties up capital unnecessarily and may indicate excess inventory or poor inventory planning.
For retailers, inventory turnover is a critical efficiency and profitability metric. Improving turnover allows retailers to increase sales without increasing inventory investment.
How is Inventory Turnover Calculated?
The basic formula for inventory turnover is:
Inventory Turnover = Cost of Goods Sold / Average Inventory
Retailers also sometimes use a variation with sales instead of COGS:
Inventory Turnover = Sales / Average Inventory
To calculate turnover, you divide the cost of goods sold (or sales) by the average inventory level for the same period.
This gives you the number of times your inventory “turned over” or was sold and replaced during that time frame.
Inventory Turnover Calculation Example
Let’s look at an example inventory turnover calculation:
A retailer has $1,000,000 in sales during the year. Its average inventory level for the year was $250,000.
Inventory Turnover = $1,000,000 / $250,000
This equals 4 inventory turns per year.
On average, the retailer sold its entire inventory stock 4 times over during the year.
Why is Inventory Turnover Useful?
There are several benefits to tracking inventory turnover:
- It measures inventory efficiency. A higher turnover ratio indicates inventory is selling at a brisk rate. Slow turnover may signal excess inventory or poor inventory planning.
- It helps track liquidity. Higher turnover frees up cash flow since less inventory needs to be carried. Lower turnover ties up capital in unsold goods.
- It supports profitability goals. Optimizing turnover allows sales growth without tying up more resources in inventory. Higher turnover can drive higher gross margins.
- It identifies problem areas. By segmenting turnover by product line, category or location, retailers can identify slow-moving inventory to liquidate or mark down.
While inventory turnover is useful, it should be assessed alongside other metrics to get a full view of inventory health and performance.
Problems with Inventory Turnover
There are a few limitations to consider when using inventory turnover:
- It can vary widely by industry. An “average” turnover in one retail sector may be very different from others, making comparison difficult.
- It ignores profitability. A high turnover driven by low margins may ultimately be less profitable than lower turnover with high margins.
- It doesn’t factor in stockouts. Very lean inventory levels can inflate turnover if it leads to lost sales from stockouts.
- It lacks context on its own. Turnover metrics should be assessed alongside other metrics to interpret properly.
To get maximum value, retailers should analyze inventory turnover alongside profitability metrics and optimal inventory levels for a balanced view.
What is a Good Inventory Turnover in Retail?
A “good” turnover ratio varies significantly across retail verticals. Inventory-intensive retailers like grocers may see only 5-10 turns per year. Fashion retailers may see 8-12 turns or more.
The average inventory turnover across retail is around 9x. However, each business is unique, so retailers should benchmark against competitors in their specific vertical and sector.
Some examples of typical inventory turnover ratios by retail vertical:
- Automotive parts: 15-20x
- Bookstores: 3-4x
- Clothing and accessories: 4-6x
- Consumer electronics: 8-15x
- Department stores: 3-4x
- Pharmacies: 12-15x
- Home improvement: 5-8x
Rather than target a specific turnover number, focus on improving turnover consistently over time. This demonstrates better inventory efficiency as your business scales.
Inventory Turnover Benchmarks by Industry
As mentioned previously, average inventory turnover can vary significantly across different retail sectors. This makes it difficult to compare your turnover ratio to “industry averages”. The most effective benchmarking analyzes turnover by your specific retail vertical and market segment.
Apparel Retailers
Within apparel, accessories and jewelry retailers have lower turnover ratios – around 2-3x. Meanwhile, higher volume categories like women’s apparel and family clothing drive higher turnover of 3-4x.
Specialty Retailers
Specialty retail demonstrates massive variability in turnover depending on the products sold. Gift and music stores turnover slowly at 2-3x. But pet supplies, office supplies, and used merchandise turns inventory 6-7x on average.
Furniture / Interior Retailers
Shoppers make big, infrequent purchases in this sector. This leads to lower turnover of 3-4x across furniture and home furnishings. Higher volume flooring specialists trend higher at 8x.
Electronics & Appliance Retailers
Commoditized appliance sales see slower 4-5x turns. But consumer electronics has frequent model changes and faster inventory cycles, driving higher 9x turnover.
Recreation Retailers
Recreation retailers cover diverse products ranging from toys to sporting equipment, leading to a wide range of turnover ratios based on seasonality, purchase frequency, and changing consumer trends. For example, hobby and toy stores see consistent 3.5x turns year-round while musical instruments only turnover 2x given infrequent replacement of durable goods. Sporting goods fall in the middle at 2.7x as apparel cycles faster than equipment.
Food & Beverage Retailers
The food and beverage sector includes retailers with very high turnover for perishable goods as well as slower turns for shelf-stable inventory. For example:
- Perishable categories like baked goods (69.5x) and fruit & vegetable markets (29.1x) turnover inventory extremely fast. This prevents spoilage given short shelf lives.
- Frequently visited gas stations and convenience stores also have very high turnover of 24-37x thanks to grab-and-go customer traffic patterns.
- Grocery stores overall turnover steadily at 15x. Supermarkets aim to balance fresh and shelf-stable items for consistent turns.
- More durable products like liquor (6.1x) and supplements (4.9x) remain on shelves longer before being sold and consumed.
Health & Personal Care Retailers
Health and personal care covers products with vastly different turnover rates based on purchase frequency and perishability – pharmacies turnover rapidly at 14.8x due to medication consumption cycles while cosmetics turnover just 3.4x given longer shelf lives. Optical stores and overall health retailers fall in the middle with 5-9x turns.
Motor Vehicle & Parts Retailers
New and used vehicle inventory sits far longer before selling, with lower 4-6x turns. But parts and tire retailers track closer to industrial distributors with rapid 14-16x inventory cycles.
The most effective benchmarking analyzes turnover specifically for your retail niche – rather than relying on broad industry averages. This helps accurately evaluate operational efficiency and uncover opportunities to improve.
How to Improve Inventory Turnover in Retail
Here are strategies retailers can use to optimize their inventory turnover:
1. Enhance Demand Forecasting
Accurately forecasting demand for each product ensures you have just enough inventory to meet sales goals without investing in excess stock. Leverage historical sales, seasonality, promotions, and other factors to improve forecast accuracy.
2. Optimize Replenishment Cycles
Replenish top-selling items more frequently in smaller batches to keep up with demand. For slower items, replenish less often in larger batches up to a set stock level.
3. Right-Size Inventory Levels
Analyze past sales patterns and demand forecasts product-by-product to determine optimal base stock levels, reorder points, and order quantities.
4. Improve Inventory Accuracy
Cycle counting programs help identify and correct errors to ensure inventory records match physical levels. This prevents stockouts and improves turnover.
Tracking and improving your inventory turnover can have big benefits for your retail operations and bottom line. Use these tips to make the most of this key inventory management metric.
