Why inventory management is important (beyond compliance audits) to your cannabis store

There are real reasons why retailers need to stop, think and strategize how to maintain optimal inventory levels. Customer loyalty and profitability depend on it. 

by Leandra Reid and Krista Raymer, Vetrina Group

As cannabis retail competition grows exponentially and doors open in close proximity, striking an inventory balance has never been more important. 

A cannabis store’s inventory is the main artery of the business and has the capacity to dictate its life expectancy. The largest asset line on the balance sheet is on-hand inventory. How retailers plan and manage it directly reflects how profitable the retailer will be. 

Inventory and customer experience have a close relationship. Developing an inventory strategy is important for stores getting ready to open as well as ones that have been open for some time. From an operational perspective, it will save money and time. From a customer perspective, inventory and assortment are an attractor of customers and set the foundation for consistent expectations.  

There are two main components to inventory management that directly contribute to the success or failure of a business over time, volume and assortment. 

In all sectors, retailers are notorious for investing and holding too much inventory. This has also played out in cannabis. Due to varying levels of distribution speed across Canada, products are often aged before they get to the retailer, then into the hands of the customer. When a retailer holds excess inventory, the product sits longer and retailers are left with products no longer worth the full price tag. 

On the back end, inventory capital is locked up in products that just aren’t selling. This creates a situation where access to cash is limited, thus limiting the retailers’ ability to invest in better performing products. 

On the front end, customers recognize the product is aged and the assortment is not up to date. 

In contrast, being understocked compromises sales and service. Carrying too little leads to missed opportunities to make sales and potentially decreases customer confidence resulting in reduced customer retention and loyalty. 

So, what is a retailer to do?

The strategy must consist of both an offensive and defensive approach when thinking about what products to have in stock. 

It is impossible to have a product for everyone, but not carrying a product because the customer segment is “too small to service” can be harmful. When the opportunity to grow a customer segment long-term is ignored the potential to profit from it is handed over to competitors who will act on it. 

What the customer’s wants and what is purchased are usually not the same because they are limited to what was available at the time. This is why making inventory decisions on historical data can be a dangerous game, and should only be part of the strategy. Historical data tells a retailer what inventory decisions worked and which did not. But, past sales data report on what the customer would have bought if it had been there.

While data is essential to improve performance, relying exclusively on historical reports is a recipe for disaster because it only tells half the story. A recipe that combines market analysis, customer feedback and sales data to forecast what customers want and are willing to buy provides a more comprehensive view. 

While financially we see on-hand inventory as an asset, operatively it is an expense. It’s easy to forget the cost of inventory management extends past the cost of the goods. It includes the time and expense to order, process, count, maintain and store it. The longer the item sits on the shelf the more it costs to own. As with assets, they depreciate, so too will the value of cannabis inventory. 

Inventory is an expensive decision retailers make on a weekly basis. Without a plan, these decisions are facilitated with biases, influences and gut feelings. A strategy sets the rules and guides buying decisions based on the values and goals of the retailer.  Sales data then tells you how effective those decisions were.  

The best way to control the volume and assortment is with a profitable strategy. Without one, it’s easy to burn through cash. The best inventory management strikes a balance between products coming in and products selling out. The way to leverage inventory and build customer loyalty includes planning inventory beyond regulatory audits.

About Vetrina Group

Vetrina Group is a cannabis retail consulting firm with over 30 years retail experience utilizing consumer behaviour and data to accelerate profitability and optimize retailer brand value. Connect with Vetrina Group.

More from Vetrina Group:

• How to remain agile as a cannabis retailer
• The ‘Destination Store’ is more than the weed