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Pricing Compression: SKU Rationalization

pricing compression Jul 26, 2022

Besides rent, inventory is one of the largest cost centers that can kill profitability. It can make or break a cannabis retail store.

Cannabis markets across North America have seen year-over-year growth. In many markets, like Ontario, Alberta, California, Ohio, and Michigan, declines in store-level sales impact businesses.

Store saturation causes this, and it requires retailers to be more strategic with operating expenses.


Slow-moving inventory can be fatal for a store. Why? Because you’re only as good as the products for sale. When inventory can’t maintain a certain velocity, it sits. Inventory doesn’t gain value sitting in-store.

What do brands and retailers do? Mark down the prices, hoping to increase appeal. This is how pricing compression starts. Other brands then create competing products to generate more velocity, chasing the lower prices.

Being hands-on in the industry for 4 years, I can tell you, Cannabis brands/retailers across North America are learning a retail 101 lesson:

More SKUs ≠ more sales.

It’s more important than ever to assess slow-moving inventory and complete SKU rationalizations. Brands and retailers need to stand out and keep assortments fresh while providing what customers want.

SKU rationalization is all about improving the efficiency and effectiveness of dollars spent on inventory and reducing the amount of cash flow tied up in stock.

In fact, depending on the market, 70-80% of sales are generated with 20-30% of SKUs on hand.

So, why should retailers and brands rationalize SKU assortments?

Retailers:

  • Reduce inventory that complicates customer decision-making (i.e., the same flavour edible across multiple brands. Which ones could be eliminated, driving more sales into fewer SKUs?)
  • Avoid purchasing excessive seasonal/trendy SKUs; test and iteration are key. Define a period of time and assess how much you sell during it
  • Eliminate redundant products. When adding a new SKU, check if you have products customers would see as the same

Brands:

  • Meet with purchasers to discuss their assortment plans. Explain how your product fits into the assortment. What might be competing or complementary SKUs? 
  • Use engaging visual merchandising assets to support seasonal SKUs, and generate touchpoints to help promote limited-time products
  • Reduce your overall core assortment to allow for newness to flow in and out 

This should be done quarterly. SKU rationalizations support a review of your inventory ROI.

Make better assortment decisions, and reduce the inventory carry of slow-moving products.

 

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