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With most cannabis dispensaries operating on razor-thin margins, exploring every opportunity to increase efficiencies can make or break a business. Cannabis is a young and growing industry with exciting opportunities still ahead. The legal cannabis industry is a also unique market with a storied past. Despite that, many lessons can be learned from more mature industries and businesses.
One thing that continues to stand out to me is that all too often in cannabis, we’re missing the data-driven mindset that has proven to help so many other businesses in so many other industries. A data-driven mindset can help us rethink key decisions and improve processes. It can help businesses free up needed capital and at the same time, encourage transparency and build trust amongst us.
Working capital in cannabis is precious. Businesses are navigating between an endless array of hurdles, from limited fundraising opportunities to the lack of financial institutional backing to complex, state-specific compliance and regulations. While most of these are outside of an operator’s control, we found that inventory management — one of the largest consumers of working capital — is an area of opportunity for both retailers and brands. I’ve had conversations with dispensary owners and many say nearly 20% of their inventory is dead. Meaning they have tied up, and typically burned cash on, a supply of cannabis that can’t be sold to customers.
This number is huge. A real-world example of this is from CASA, a cannabis demand planning consultancy that identified over $300K in surplus in paid-off inventory in a single Michigan retailer. This working capital was sitting on the shelf while it could have been used to generate an additional $600K in revenue for the business.Over the course of a year, that is millions of dollars of opportunity costs that could be spent for activations like opening another location, expanding marketing efforts, training employees and more. This inefficiency can be traced to a few common practices that can be resolved if we adopt that data-first operating model.
How Did We Get Here?
We often hear how unique cannabis is compared to other markets and that’s because it’s simply true. The reality is that the cannabis industry has historically been underserved by software vendors that have not provided tools that harness data in the way that many other industries take for granted. Fortunately, this is changing with new solutions coming to market rapidly; however, change management is challenging.
Most sales reps for cannabis brands are incentivized to maximize order value. The larger the order, the better. This is because they don’t know the next time they’ll get an order and have limited visibility of the retailer’s actual sell-through. This translates to larger order sizes and conditioning the retailer to negotiate based on order size. This approach to sales and purchasing can not only adversely affect the relationship between the brand and retailer but also create inaccurate signals and unintended margin reductions for the retailer.
For example, let’s look at a dispensary that holds four weeks of inventory and purchases each month without looking at SKU velocity. They purchase an aggregate of four weeks of inventory across four SKUs. Two of the SKUs sell over a two-week period and two SKUs sell over a six-week period. However, in those four weeks of inventory, both the brand and the retailer lost sales by being sold out of the fast-moving SKU, and the brand had the wrong demand signal on the sell-through of the two SKUs. Without looking at any data behind sales, those unpopular products will probably continue to sit on the shelves, be discounted and sell at a lower nominal margin than expected. Remember, dollars, not percentages, pay bills.
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Without data to support ordering decisions, waste and inefficiency will continue to be a heavy burden on dispensaries. When the gross margin percentage is the only thing being evaluated, it omits significant information from the decision-making process.
How Data Can Be Harnessed
Some cannabis brands are proactively thinking of innovative ways to be better partners with their dispensary clients. In reviewing sales data with a client, the client recognized that their retailer average order values were roughly the same as the order minimum and were typically placed on a 4- to 5-week basis.
In surveying their retailers, they learned that their retailers were holding off on replenishing their fastest-moving SKUs until they could meet the order minimum. They estimated this was costing them 10%-12% in sales each month, not to mention the impact on the customer lifetime value and brand loyalty.
Taking this data, they partnered with a logistics and fulfillment operator to provide a next-day delivery promise with no order minimums in order to eliminate stockouts by increasing order frequency. By using data, the company was able to make smarter, more informed, impactful decisions and saw their year-over-year sales grow by 40%.
This is just one specific example, but imagine if cannabis brands and retailers were able to deploy this data-first collaboration across their entire workflows. They could free up desperately needed cash flow across the supply chain while significantly improving their relationships, allowing the pie to expand.
Final Thoughts
Executives in other industries frequently brag about being data-driven without providing too many examples or results, but in cannabis, there are real opportunities to modernize the approach to sales and positively impact the bottom line for dispensaries across the market. Everyone is working smarter and seeing the benefits of it all. And the trickle-down effect of this all is that trust amongst ourselvespulls itself to the top of the conversation.
