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Strategic Cannabis Retail Inventory Planning for a Profitable New Year

inventory series Dec 18, 2023

Ready to embark on a journey towards a more profitable cannabis retail business? This comprehensive guide on SKU rationalization equips you with actionable insights to fine-tune your inventory management strategies. 

As the cannabis industry gears up for a new year, the opportunity for refined and strategic approaches is at its peak. Before restocking shelves, reflect on past orders, leverage informed decision-making, and bid farewell to underperforming items. 

Inventory management, especially through SKU rationalization, holds the key to unlocking your most profitable year yet. It's about understanding and meeting actual inventory needs, ensuring each product serves a purpose, captivates customers, and contributes to your retail success. Master the art and science of SKU rationalization, and get ready for a year marked by efficiency, profitability, and customer satisfaction.

Choice Overload: Why Less is More in Cannabis Sales

Imagine walking into a cannabis store with a clear goal - maybe to try new types of products or find a new favourite. You stand looking at the endless list of products, skimming up and down to discern the small variations in potency and flavour, and soon all the options seem to blur together. This feeling can overwhelm even the most well-meaning customers. Whether in person or online, having too many products to choose from often leads to confusion and, surprisingly, fewer sales. Most people can think of a time they felt this, perhaps in the pasta aisle or when picking a cereal.

The feeling of being overwhelmed is called the paradox of choice. It was introduced by psychologist Barry Schwartz in his 2004 book "The Paradox of Choice: Why More Is Less." The paradox suggests that having more choices may seem good, but it can actually result in negative outcomes and increased dissatisfaction.

Having too many options can be overwhelming, making it difficult to make decisions and causing feelings of anxiety and dissatisfaction. The abundance of choices can make decision-making more challenging and time-consuming. Moreover, people may experience regret and doubt, questioning if they could have made a better choice from the available options.

The paradox of choice has been studied across various scenarios, from pension plans to purchasing jams, revealing a consistent trend: too many options can lead the customer to have decision paralysis. The average grocery store, once stocked with 3,700 products in 1949, now boasts around 45,000 products, and yet, more choices don't necessarily translate to happier customers.

When making inventory choices, it’s important to rely on data, product velocity, customer insights, and trends to inform your purchasing and ensure you’re only picking your best SKUs.

Inventory Management through SKU Rationalization

Effective inventory management is similar to finely tuning the gears of a well-oiled machine. By consistently using SKU rationalization, you not only gain a clear understanding of how to allocate your inventory budget but also learn from your data in a strategic manner, driving profitability.

What is SKU Rationalization?

SKU rationalization involves carefully analyzing and optimizing your product assortment in-store. Fun fact, SKUs stand for the 8-digit numeric code called a Stock Keeping Unit that retailers assign to products to help them keep track of their inventory. The goal of SKU rationalization is to improve efficiency, reduce costs, and increase profitability. 

Think of it as a crucial tool in retail that ensures every product on your shelves is not just taking up space but captivating your customers and enticing them to make that important purchase.

What are the benefits of SKU Rationalization?

Embracing SKU rationalization goes beyond mere optimization; it becomes a strategic cornerstone for elevating your inventory practices, enhancing profitability, and delivering an exceptional customer experience. 

SKU rationalization aims to make inventory spending more efficient and effective while reducing the amount of money tied up in stock. In fact, depending on the cannabis retail market, 70-80% of sales are generated with 20-30% of SKUs on hand.

A robust SKU rationalization process empowers you to:

  1. Improve Inventory Management:
    • Methodically assess sales performance to eliminate underperformers and duplicates proactively.
    • Avoid overstocking and allocate a budget to high-demand items for optimal inventory control.
  2. Reduce Inventory Costs:
    • Eliminate low-demand items to free up warehouse space and minimize carrying costs.
    • Mitigate expenses related to storage, insurance, and handling by streamlining inventory.
  3. Increase Profitability:
    • Prioritize more profitable stock by eliminating time and space wasted on low-demand products.
    • Optimize shelf space for high-demand SKUs, enhancing overall profitability.
  4. Provide a Better Customer Experience:
    • Extend SKU rationalization beyond cutting dead weight to make informed decisions when introducing new product lines.
    • Build a reputation for offering a diverse product mix aligned with customer preferences, maintaining a lean and customer-centric inventory.

Key Components of SKU Rationalization

We’ve posted about the importance of SKU rationalization before, but we’ve never broken down the four steps to rationalize your assortment. Let’s check it out. 

Assessing Past Inventory Performance: Examining Sales History

Understanding what worked and what didn't in the past is like having a playbook for the next game. Assessing past inventory performance, a crucial step in SKU rationalization is a straightforward process of looking back to move forward.

  • Identifying Winners: Start by recognizing the products that consistently sold well – the MVPs. Keep these winners front and center in future plans. Understanding your star performers gives you a solid foundation to build upon, ensuring sustained success by meeting customer demands effectively.

  • Managing Slow-Moving Items and Underperformers: Begin by identifying items that didn't move as quickly and underperforming products through comprehensive sales data analysis. Once identified, strategically decide whether to boost them through promotions or gracefully exit them from the inventory lineup.

The strategic approach is not just about clearing shelf space. It is aimed at maximizing the potential of each product and optimizing its performance in your retail location. Identifying underperformers presents an opportunity for inventory refinement. When identifying your underperforming SKUs, consider customer preferences to optimize overall profitability and enhance the customer experience.

This review isn't a nostalgia trip; it's a practical tool. It helps you understand what customers liked, what they didn't, and what simply didn't catch their eye. With this information, make practical decisions about what to stock, ensuring you're always in tune with customer preferences.

Dynamic Assortment Planning: Strategic Product Selection

Dynamic assortment planning is about making smart choices rather than stocking everything under the sun. It's a practical approach where you strategically pick products based on what customers like, seasonal trends, and market demands.

  • Data-Driven Decision-Making: Rely on data analytics and insights derived from sales data, customer feedback, and market research.
  • Flexibility and Adaptability: Emphasize flexibility and adaptability to respond quickly to shifts in consumer behaviour, emerging trends, or unexpected market changes.
  • Inventory Optimization: Avoid unnecessary stock of products that may not resonate with consumers. Focus on products likely to perform well in the current market conditions.
  • Customer-Driven Selection: Keep your ears close to the ground, paying attention to what customers are buzzing about. Ensure that the products on the shelves align with customer preferences.
  • Seasonal Sensibility: Tailor cannabis inventory to match seasonal preferences. Adjust product offerings according to seasonal trends.
  • Market Demand Dynamics: Stay attuned to market demands to avoid unnecessary stock. Highlight products gaining popularity and gracefully phase out those losing steam.

Dynamic assortment planning ensures every product has a purpose, aligning with what customers want, adapting to seasonal nuances, and staying ahead of market dynamics.

If you would like further help making inventory choices, consider implementing an Inventory Funnel as part of your inventory management process.

Optimizing Inventory Spending: Smart Allocation for Maximum Returns

Optimizing inventory spending is the smart move that makes sure every investment counts. Knowing that a big part of sales comes from a carefully chosen range of products, a profitable cannabis retailer focuses their inventory spending where it matters most – on the most profitable and popular products.

  • Invest in Profitable SKUs: Strategically select and maintain products that are highly popular among your customers. By identifying and prioritizing the most sought-after items, you ensure that your inventory reflects the preferences of your ideal cannabis consumer. Focus your spending on top-performing products to allocate resources effectively and amplify the impact of each investment.
  • Efficient Resource Allocation: SKU rationalization also involves the removal of outdated or underperforming products from your inventory. This not only declutters your inventory but also ensures that you offer products that align with current market trends and customer preferences.

This isn't a gamble; it's a calculated play. Optimizing inventory spending is about making shrewd decisions that align with business goals. It's a deliberate move to invest where it matters, ensuring that each SKU contributes not just to sales but to the overall health and sustainability of the retail operation.

Now, before we move to the final part of SKU rationalization, let’s pause to make sure you are clear on the differences between dynamic assortment planning and optimized inventory spending. While both share a common goal of enhancing retail efficiency and profitability, they focus on different aspects of the inventory management process.

  1. Dynamic Assortment Planning:
    • Focus: Primarily centers on the selection and adjustment of the product assortment.
    • Activities: Involves strategic curation of products based on customer preferences, seasonal trends, and market demands.
    • Purpose: Aims to align the product mix with dynamic factors such as changing customer preferences and market trends.
    • Flexibility: Emphasizes adaptability and flexibility to respond quickly to shifts in the market or consumer behaviour.
  2. Optimizing Inventory Spending:
    • Focus: Concentrates on the financial aspect of inventory management, specifically the allocation of resources and spending.
    • Activities: Involves allocating spending to maximize returns on high-performing SKUs, minimizing spending on slow-moving or underperforming items.
    • Purpose: Aims to enhance financial efficiency by strategically investing resources where they are likely to generate the highest returns.
    • Flexibility: While it involves strategic spending, it may not require the same real-time adjustments as dynamic assortment planning. It's more about efficient resource allocation over time.

In essence, dynamic assortment planning is about selecting the right mix of products to meet customer demand, considering factors like seasonality and market trends. On the other hand, optimizing inventory spending is about wisely allocating resources to maximize profitability, focusing on the financial efficiency of the chosen product mix.

In practice, these two concepts work in tandem. You strategically plan your product assortment (dynamic assortment planning) and then allocate spending to optimize the financial performance of that assortment (optimizing inventory spending). Together, they contribute to a comprehensive inventory management strategy.

Regular Review and Adjustment: Fine-Tuning for Retail Success

SKU rationalization is not a one-and-done affair; it's an ever-evolving process that demands regular check-ins. As a cannabis retailer, you understand that the pulse of the market and consumer preferences fluctuate. Thus, commit to a continuous process of reviewing and adjusting your product mix.

  • Frequent Check-Ins: Regular review sessions are essential for SKU rationalization. Continuously revisit your data and analyze the performance metrics of each SKU. Conduct regular check-ins to assess what is effective and what requires adjustments. We recommend that our clients do this every 6 to 8 weeks.
  • In with the New, Out with the Old: A profitable cannabis retail shelf has no place for stagnation. Recognizing this, embrace the need for adjustments. Introduce new products that align with emerging trends or shifting consumer preferences, breathing fresh life into the inventory. Simultaneously, acknowledge that some SKUs may have had their moment in the spotlight. In the spirit of efficiency, bid adieu to certain products that no longer resonate with the audience.
  • Quantity Juggling: SKU rationalization isn't just about the presence or absence of products; it's also about quantity optimization. Find yourself in a balancing act, adjusting quantities based on the ebb and flow of market conditions. This strategic juggling ensures inventory levels align with actual demand, preventing stockouts and excess stock scenarios.
  • Evolving Market Conditions: Pay attention to industry shifts. Whether adapting to seasonal buying patterns, responding to new competitors, or aligning with emerging trends, the adjustment phase of SKU rationalization is an agile response to evolving market conditions.

This iterative process isn't about overhauls; it's about refinements. Regular review and adjustment in SKU rationalization keep the retail strategy nimble, resilient, and perpetually in sync with the shifting realities of cannabis retail.

By implementing SKU Rationalization, streamline your inventory, reduce carrying costs, and create a more focused product selection that resonates with your target customer base. This process is especially crucial in dynamic industries like cannabis retail, where market trends and consumer preferences can change rapidly. Prepare for a profitable new year by mastering the art and science of SKU rationalization.

SKU Rationalization Action Plan

Use the following section as a guide to quickly check off the actions we went over.

Step 1: Assess Past Inventory Performance

  1. Identify Winners: Identify consistently high-performing products and your MVPs so that you can prioritize them in future inventory plans.
  2. Identify Underperformers: Utilize sales data to identify underperforming or slow-moving products. Then, decide whether to boost their performance through promotions or gracefully remove them from the inventory lineup.

Step 2: Dynamic Assortment Planning

  1. Data-Driven Decision-Making: Review the sales data, customer feedback, and market research to analyze the performance metrics of each SKU.
  2. Flexibility and Adaptability: Stay informed about shifts in consumer behaviour and emerging trends in cannabis retail and the industry. You can do this by subscribing to industry newsletters, such as Vetrina's Insider newsletter, or by attending in-person events, such as Hall of Flowers.
  3. Inventory Optimization: Evaluate the current stock for relevance and performance. Once you have identified them, remove the products with low demand or slow sales.
  4. Customer-Driven Selection: Seek direct feedback from customers on product preferences. Align product offerings based on customer input and preferences.
  5. Seasonal Sensibility: Monitor seasonal trends and buying patterns. Adjust inventory to align with seasonal preferences and take advantage of trends.
  6. Market Demand Dynamics: Regularly assess market demands and competitor offerings. Highlight products gaining popularity and phase out those losing steam.

Step 3: Optimize Inventory Spending

  1. Concentrate Spending on High-Performing SKUs: Spend money wisely by focusing on high-performing SKUs.
  2. Efficient Resource Allocation: Remove outdated or underperforming products from your inventor to reduce the impact of slow-moving inventory.

Step 4: Regular Review and Adjustment

  1. Regularly Review SKU Performance Metrics: Every 6 to 8 weeks, gauge what's working and what needs tweaking.
  2. Introduce New Products Aligning with Emerging Trends: Keep the inventory fresh by introducing products aligned with emerging trends.
  3. Remove SKUs That No Longer Resonate: Identify SKUs that no longer resonate with the audience. Streamline the inventory by bidding farewell to products losing their appeal.

Remember, when you use SKU rationalization, you're not just optimizing inventory; you're shaping the future of your cannabis retail success. This strategic process isn't a one-time fix but a continuous refinement, an ever-evolving dance with market dynamics, your own business shifts, and consumer preferences. By implementing SKU rationalization, you streamline your inventory, reduce costs, and curate a focused product selection that resonates with your target audience.

If this blog has you excited to prepare for a profitable new year, subscribe to Vetrina's Insider newsletter as we continue to share expert insights you can action.

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