Instead, these discounters targeted the young, blue collar wives, who weren’t generally seen as great profit generators due to the lower (gross) margin profile. In the case of department stores (during the rise of Kmart and Target), this meant catering to more affluent customers and higher ticket items such as lavish home furnishings.Ī few shrewd discounters saw an opportunity in the gaps where everyone was rushing away from. To illustrate the importance of inventory turns, I’ll borrow an example from the great book about business failures called The Innovator’s Dilemma, covering the rise of the discount store versus the established department store retailers.Īs companies generally tend to do in standard corporate strategy, managements will aggressively target higher margin markets, and move “up market”. Other components of gross margin, such as inventory turns, can reveal business models with better profits and cash flows even while targeting lower margins.īefore exploring the basics of inventory turns and gross margins, let me work backwards with an example to show just how integrated these two metrics are.įor beginners to these basic terms, refer to the basics of the industry turns formula below and then come back up to read this compelling example.

High gross margins are good, but just because they are higher doesn’t always mean a company has a better strategy.

When are inventory turns not relevant