Your dispensary inventory management is either a profit killer or a profit powerhouse.
Dispensary inventory management is an exciting aspect of running a cannabis retail business, but it can quickly become a headache if not managed properly.
Inventory is a cannabis retailer's largest cost center and primary revenue driver. That means how you manage your inventory is critical to continued growth.
Imagine this: you’re a few months into operating. Suddenly, your total SKU count has ballooned; you've somehow amassed a large amount of aging products, and your total monthly revenue isn’t matching how much cash you’ve invested in inventory.
Sound familiar?
Many cannabis retailers' inventory becomes a neglected 'black hole' because they don’t have a dispensary inventory management process in place.
Understanding your store’s data and optimizing your inventory directly impact your bottom line. They often make the difference between a profitable dispensary and one that’s forced to close its doors—a fate that meets 75% of cannabis business owners.
What clean cannabis inventory means
Cleaning up your inventory means identifying what's essential for daily operations.
When you hear “cleaning up your inventory,” you might think of auditing. Auditing is the process of physically counting all of your store's inventory and reporting it to your state government.
Dispensaries must audit inventory to remain in operation and compliant with state laws, while cleaning up inventory is something you should do to increase revenue and improve customer retention.
To avoid fines, we recommend dispensaries establish a standard operating procedure (SOP) for inventory audits and conduct them at least once per week.
When it comes to cleaning up your inventory, the first step is to dive into your sales reports. We recommend calculating your sell-through rates and inventory turnover ratios for different product categories to get a good sense of how inventory is performing.
Then, ask yourself a few questions about the data you see. For example:
Are edibles slow movers? If you frequently return them to vendors, you likely have too much inventory or are stocking the wrong flavors.
Do you constantly run out of 3.5G flower? It might mean your weekly inventory buy is misallocated to categories where products sit unsold.
These insights will guide you in making the necessary adjustments. If you don't know exactly what to buy, we recommend using an Inventory Funnel.
This decision-making tool helps retailers and brands determine the right assortment and investment in their inventory. It is designed to narrow down answers through questions, eliminating products that do not meet the criteria.
Clean cannabis inventory: why it’s important
Managing your dispensary inventory means balancing the inflow and outflow of cannabis products on your shelf. You don’t want too much inventory that products appear not to sell well, but you don’t want too little inventory that customers don’t spend money at your dispensary.
Cleaning up your inventory:
Boosts your bottom line: Reduce costs, improve margins, and prevent losses from expired or slow-moving SKUs.
Keeps customers happy: Consistently stock the products they love, avoiding out-of-stock and building loyalty.
Unlocks valuable data: Use accurate sales and inventory insights to optimize forecasting, budgeting, marketing, and more.
Incredible, right? You’ll also:
Decrease inventory carrying costs: Optimize inventory levels to reduce storage and carrying costs for excess or underperforming products.
Minimize out-of-stock: Ensure your best-sellers are in stock to avoid missed sales and frustrated customers.
Improve profit margins: Eliminate the burden of unsold inventory and increase your margins as your product assortment performs more consistently.
Prevent spoilage and obsolescence: This prevents losses from expired or outdated products, especially for edibles and seasonal items.
Improve customer happiness: Build customer loyalty by consistently having the products they want in stock.
Improve forecasting: Leverage accurate sales and inventory data to make better projections for budgeting, marketing, product development, and staffing.
How often should retailers clean up their cannabis inventory?
While any time is good for a dispensary inventory clean-up, there's a strong reason to do it at least twice a year. We recommend aligning your inventory cleanup days at the beginning of the year (January) and ahead of the holiday season (July).
Pro tip: Plan to clean up your inventory at least twice a year!
Here's why:
Fiscal Responsibility: Most retailers tackle this at year-end or fiscal year-end for accounting purposes, which is too long to keep these obsolete products on your shelves. Not only are they locking up your inventory cash, but you’re losing money every time one of your team members has to remerchandise it.
Maximize Agility: Since the average SKU lifespan is between 16 and 34 weeks, scheduling two clean-ups annually helps you proactively identify slow movers who are wasting cash and shelf space.
Optimize Performance: Regular clean-ups directly support SKU rationalization efforts, ensuring your product mix always performs at its best.
A proactive approach to rationalizing SKUs will ensure you have highly curated, fresh inventory, which drives strong velocity. Let’s explore how you do this.
How do dispensaries streamline clean inventory management?
The dispensary inventory management clean-up process allows dispensaries to reassess the profitability and value of the products in stock. Keyword being process.
Why is it a process? Because it requires ongoing optimization. As many retailers know, it’s not a ‘one-size-fits-all’ solution, even in industries as niche as cannabis retail. A thorough inventory clean-up involves data analysis, strategic thinking, and decisive action.
Here’s our step-by-step approach:
1. Analyze Your Sales Data
Metrics Matter: Focus on top revenue per SKU, gross margin, and units sold to understand what’s driving sales and profitability.
Break Down by Category: Examine sales percentages and dollars by product category to identify high-performers and areas where inventory may lag.
Example: A $60 concentrate with a 30% margin yields $18 in margin dollars, while a $10 edible with a 50% margin yields only $5. This shows that price point, margin percentage, and velocity affect an SKU's profitability.
2. Evaluate the Cost of Goods Sold (COGS)
Beyond Sales: Profitability depends on understanding the costs associated with each product. Track COGS fluctuations throughout the year to identify opportunities for savings.
Example: Take advantage of seasonal discounts for beverages during the warmer months when sales are highest. Buying in bulk when COGS are low can increase your profit margins.
3. Identify Your High-Margin Products
Dollars vs. Percentage: Margin dollars tell you what drives your bottom line, while margin percentage can reveal opportunities for pricing adjustments and insights into product velocity.
The value of Niche Products: A low-velocity item with high-margin dollars might still be a valuable player in your product mix.
4. Develop Category-Based Plans
The Pareto Principle: The top 30% of SKUs often generate 70% of sales. Focus your efforts accordingly.
Incentivize Sales: Consider markdowns or promotions to sell down slow-moving SKUs and clear up valuable shelf space.
Clearing out old SKUs makes space for current and new high-performers to shine. You can dive deeper into optimizing operations by carefully analyzing data and understanding your store's specific inventory needs.
A well-executed inventory clean-up is a key component of a profitable retail strategy, but your team also plays a key role. Let’s look at a short case study to help prove our point.
Short dispensary case study: turning deadstock into cash flow
The Challenge
A cannabis retailer with aged inventory struggled to sell products due to mismatched branding, pricing, and customer preferences. Despite extensive merchandising efforts and staff training, sales remained stagnant.
Data-Driven Approach
Upon review, a misalignment was discovered between the products' pricing tier and comparable items in the same category. We also identified an issue with the product naming conventions. Unfortunately, existing packaging couldn't be changed in the short term.
The Strategy
Pricing for Velocity: We analyzed sell-through rates and tested price points to find a sweet spot that would quickly move inventory.
Visibility and Promotion: We created dedicated displays near checkout areas, offered promotions, and incentivized staff to actively sell these products.
Customer Experience: We presented these items as value buys rather than clearance products, maintaining a positive customer experience and brand image.
The Results
Inventory Clearance: The products are sold at the targeted velocity.
Cash Flow Boost: We successfully transformed deadstock into cash flow.
Improved Margins: Despite lower margin percentages, overall margin dollars were maintained through increased sales volume.
Wider Application: We successfully adapted this approach to improve inventory performance in other product categories.
This case study highlights the power of analyzing sales data, understanding your costs, and strategically balancing margin and velocity. Sometimes, prioritizing sales volume can boost your bottom line and clear out underperforming inventory to make way for better-selling products.
Now you have your inventory sorted, so what’s next?
Maximizing your inventory’s potential
Once your inventory is under control, you and your team can shift to maximizing its potential. Here are four ways to support marketing, sales, and customer loyalty with your newly organized inventory:
Gaining Strategic Alignment: Ensure your product purchasing schedule aligns with your promotional calendar. Plan with ample lead time for product availability to avoid customer friction and wasted marketing efforts. Want some further help creating a 5-Peak Promotional Calendar? Check out this blog!
Forecasting for Success: Analyze sales history and similar product performance to project inventory needs accurately. Optimize your inventory levels to meet demand and avoid missed sales opportunities.
Upselling and Cross-Selling: Identify complementary products that naturally pair well or are purchased frequently together. This boosts the average baskets and enhances the customer experience.
Attraction and Retention: A well-organized inventory supports visually appealing product displays and allows you to continually introduce new and exciting items. Learn how to build stories that sell with your dispensary merchandise.
By assessing and cleaning up your inventory, you create the foundation for a thriving retail operation where every product works hard to boost your bottom line.
For more retail case studies and dispensary inventory management tips, sign up for the Vetrina Cannabis Insider Newsletter.
