How to plan inventory for cannabis retail

11 mins read

The Retail Expert Series features Krista Raymer, CEO of Vetrina Group, a leading cannabis retail consultancy. In this segment, Raymer shares her expertise on how to plan your cannabis store’s inventory. She will provide insight into why proper inventory planning is critical to your cannabis business, how to measure if your inventory planning is effective as well as some tips and tricks to improve your overall inventory.

Learn more about Krista Raymer and the team at Vetrina Group.

Retail Expert with Krista Raymer – Inventory Pt. 2

Today we’re going to talk about inventory.

We’re going to go over why inventory is important in your cannabis retail environment; what measurements we can use, or KPIs, to know the ‘health’, or success, of our inventory; and then some tips and tricks that are going to help you manage your inventory along the way.

Inventory Importance

So first – let’s dig into why the inventory is so important. Inventory in a cannabis retail environment usually looks like your second largest cost center; meaning that it’s one of your largest investments. Contrary to what a lot of people think, cannabis inventory isn’t going to gain value as we hold it. It’s actually a depreciating asset; it doesn’t get more valuable the longer that you hold it. So it’s really important that we’re making strong buying decisions and then getting the inventory out as quickly as possible. This is both good for our customer service, as well as maintaining our budgeting. When we think about cannabis retail environments and inventory specifically, inventory is going to directly impact the quality of sale.

So – what does that mean? The quality of sale is what products we’re selling to our customers, and how much we’re retaining in terms of profitability per transaction. So if we don’t have the right product and we can’t connect it to the right customers, then we’re going to miss a lot of opportunities. So our inventory is literally one of the key aspects to us being able to drive profitable transactions in stores.

Inventory Measurements

Next up, we’re going to talk about some of the KPIs on how we measure the health of our inventory. The first one that we want to consider is what our aging inventory looks like. So this is us digging into what percentage of SKUs we have in store that are ranging between 30, 60, or 90 days? Why this is important, is because this is going to tell us how effectively we’re moving through our inventory both from a SKU level perspective, as well as from a category perspective.

So if we can see that we’re holding a lot of inventory longer than 90 days , we need to take immediate action to be able to offload that inventory, free up the cash flow, and then re-invest it in SKUs that are going to perform better.

The second KPI that we want to consider is SKU velocity. SKU velocity is going to be a measurement of how quickly a SKU comes in and then leaves through the environment again. In cannabis retail, SKU velocity is a really healthy way for us to stay on track of how quickly products are turning over. We’ve got a lot of new products that come to market- and so we want to be aware of how quickly these products come in and then go back out; because this is going to directly tie back to profitability.

If we bring in a more expensive product and it doesn’t move as quickly, we might not make the same profitability on a product as if we brought in something a little bit lower priced, but turns over really quick. Different categories also have different standards of velocity. So something like a pre-roll or an edible might move a lot faster than some of our glassware in our accessories category. So being on track of what is happening in terms of velocity by SKU is going to help us tie back to what our profitability is as well. 

The last one that we want to consider is gross margin. We can plan our environment for healthy gross margins; but at the end of the day, we want to be optimizing what these gross margins look like by SKU.

One of the things that will directly impact this is how healthy our inventory is. So if we purchase inventory at full price, but end up marking it down at a lower price to get it sold; we’ve just eaten into our gross margin. We probably could’ve priced it more effectively at the beginning to see a healthier gross margin throughout.

So pricing, as well as how quickly inventory is moving, is going to directly impact what our gross margins look like.

Inventory Tips & Tricks

Finally, we’re going to talk about some tips and tricks when thinking about our inventory. 

So, inventory is a really large category. What we want to be able to do is break it into smaller sub-categories. This is going to help us really see the sight line of what is happening with the investments that we’ve made.

So if we look at only, for example, flower as one large category- it’s really hard to pull up the data that feeds into insights, and then what actions we can take from those insights. So if we’re really specific and breaking our categories down into smaller categories, which include less SKUs, then we can really dig into the data; understand what insights we need to pull out of it, and then create some action points to impact that.

The second tip that we want to make is thinking about our inventory in relation to sales forecasts. Sales forecasts are really important because it’s going to help us plan for a number of areas of our business. But within inventory specifically, we can then set out a cadence on what our budgeting should look like.

So, if we are generating future looking sales forecasts, we can also then allocate the right resources, to buy the right inventory, at the right time. One of the things that’s made cannabis retail so hard, is we only have historical data. That historical data only tells us so much about what our customer did previously, or what our retail environment was up to.

We want to take our historical data, influence it with some future projections as well, to generate a forecast that then allows us to budget effectively. Where this becomes really tricky and important is when we get into holidays like 420 or around the holidays, like Christmas, because our customer behavior shifts.

If we only look at historical data, we’re not going to plan that we have the right inventory in the right store at the right time. 

Finally–number three–our last tip and trick is to reassess regularly. Inventory is about iteration. At the end of the day, right now we’re in a growing space where the product and assortment changes monthly, at least.

So we want to be taking a look at what is happening in our inventory, and the health of our inventory, on a regular cadence to iterate and adjust accordingly. If we’re seeing shifts in those sub-categories, or categories, in terms of sales, and we’re generating more revenue out of those categories; we probably also need to make a re-forecast on what our investments in those areas specifically look like.

So iteration is going to get us to a point where we’re aware of what our is looking for, what our sales teams are capable of selling, as well as ensuring that we’ve got the right inventory in the right place at the right time. 

Thanks for joining us today! If you have more questions or want to know how to drive a profitable retail environment in cannabis, you can reach out to me directly at Vetrina Group.

We have more awesome content, just like this, that will be on businessofcannabis.com.

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