Mastering Inventory Management: A Practical Guide to Inventory Clean-Up

Messy inventory is the silent killer of cannabis retail profits. 

Inventory is hard. It's a cannabis retailer's largest cost center and primary revenue driver. That means how you manage your inventory is critical to continued growth.

Inventory management is an exciting aspect of running a cannabis retail business – hurray for buying mass quantities of weed! But it can quickly become a headache if not managed properly.

Inventory can spiral out of control. You’re a few months into operating, and your total SKU count has suddenly ballooned; you've somehow amassed quite a large amount of aging products, and your total cash investment in inventory has now surpassed monthly revenue. Sound familiar? 

Many cannabis retailers' inventory becomes a neglected 'black hole' because they don’t have an inventory process in place. Understanding and optimizing your inventory directly impacts your bottom line, often making the difference between a profitable business and one that struggles. 

In this blog, we'll break down the complexities of inventory management and guide you through practical processes to clean up your inventory and turn it into a profit powerhouse. 

Cleaning Up Your Inventory

Cleaning up your inventory means identifying what's essential for daily operations. Start by diving into your sales reports to calculate sell-through rates and inventory turnover ratios for different product categories.

Ask yourself a few questions:

• Are edibles slow movers? If you frequently return them to vendors, you likely have too much inventory or are stocking the wrong flavours.
• 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 your problem comes from not knowing exactly what to buy, we recommend using an Inventory Funnel which has its own blog here. 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 a series of questions, eliminating products that do not meet the criteria. 

But let’s get back to cleaning up your inventory and why it’s important. 

Why it’s important 

Messy inventory hurts cannabis retailers’ profitability, customer experience, and ability to make informed decisions. 

On the back end, when a retailer holds excess inventory, they not only hold onto products that are depreciating in value but also lock up their cash flow. This, in turn, limits their ability to invest in better-performing products. 

On the front end, your customers could perceive your assortment as being outdated and of low quality, which could ultimately break their trust. 

In contrast, carrying too little inventory could lead to missed opportunities to make sales and potentially decrease customer confidence, resulting in reduced customer retention and long-term loyalty. 

By cleaning up your inventory, you’ll be able to: 

• Boost your bottom line: Reduce costs, improve margins, and prevent losses from expired or slow-moving SKUs.
• Keep customers happy: Consistently stock the products they love, avoiding out-of-stock and building loyalty.
• Unlock valuable data: Use accurate sales and inventory insights to optimize forecasting, budgeting, marketing, and more.

Incredible right? Let’s tell you how it can positively impact your dispensary:

• Decrease inventory carrying costs: Optimize inventory levels to reduce storage and carrying costs for excess or underperforming products.
• Minimizes out-of-stock: Ensure your best-sellers are in stock to avoid missed sales and frustrated customers.
• Improves profit margins: Eliminate the burden of unsold inventory and see your margins increase as your product assortment performs more consistently.
• Prevents spoilage and obsolescence: Mitigate losses from expired or outdated products, especially important for edibles and seasonal items.
• Improves customer happiness: Build customer loyalty by consistently having the products they want in stock.
• Improves forecasting: Leverage accurate sales and inventory data to make better projections for budgeting, marketing, product development, and staffing.

We had you at decreased inventory carrying costs, didn’t we? Well, let’s get started. 

When should you do it?

While any time is a good time for an inventory clean-up, there's a strong reason to do it at least twice a year. Here's why:

1. Fiscal Responsibility: Most retailers tackle this at year-end or fiscal year-end for accounting purposes, which is entirely 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. 
2. 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.
3. 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 you do it?

The inventory clean-up process allows dispensaries to re-assess the profitability and value of the products currently 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 be lagging. 
   • 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 all affect an SKU's profitability. 
2. Evaluate 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: Often, the top 30% of SKUs 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 take a look at a short case study to help prove our point.

Short Case Study: Turning Deadstock into Cash Flow 

The Challenge: A brand 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, we pinpointed misalignment 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 Result:

• 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. How can you best support marketing, sales, and customer loyalty with your newly organized inventory? 

1. 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!
2. 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.
3. 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.
4. Attraction and Retention: A well-organized inventory supports visually appealing product displays and allows you to introduce new and exciting items continually. Don’t be shocked, but we’ve written a blog about this very topic: 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. If this blog has you pulling inventory reports and rallying the team, sign up for the Vetrina Cannabis Insider Newsletter. Get expert tips, industry trends, and insider secrets delivered straight to your inbox, all designed to help your dispensary on the road to profitability.