How many SKUs should cannabis retailers carry?
Part of any good retail experience includes optimizing your store’s product catalog and managing your inventory accordingly. By providing consumers with the right mix of cannabis products, you stand to generate more sales, increase your margins and ultimately drive towards profitability.
There have been differing viewpoints across the industry on just how many SKUs you should carry in your cannabis retail store. We sat down with our VP of Product, Joey Sterling, to get his perspective.
Hello! There are many reasons for retailers to be focused on their SKU count, but I think reason #1 is that consumers are confused. I’ve worked in this space for 5+ years and I am confused when it comes to what to buy and why I should buy it. I rarely leave stores confident in what I buy. It's a very well studied topic in retail and consumer psychology that too many options leads to poorer outcomes. That problem is wildly magnified in cannabis where many consumers do not yet have solidified buying habits and in some cases are shopping in a dispensary for the first time.
Then there are the secondary problems that have less to do with the customer experience and more to do with your operations. Every additional SKU you carry is another thing you need to think about when purchasing, counting inventory, analyzing your shelf space, educating your budtenders, and so forth. In many cases I believe cannabis retailers are spending more money just to provide a poorer customer experience in the end. You just can't, or maybe I should say it's really really hard to effectively merchandise and showcase thousands of SKUs. The average retailer on Treez today has around 1000. I think that’s way too many.
What do you see as the optimal amount of product a retailer should be carrying and why?
Every store is different, and look, I don't think the superstore idea or model shouldn't exist, I think there's a place for stores with 1,000 plus SKUs. I just believe more businesses will succeed if they don’t. I am excited for the first retailer to really have success with just 100 SKUs. There are some now having great success in the 250-300 range, so that might be more realistic for the time being, but it will consolidate and there will be clear winners on the brand side and clear preferences on the consumer side that drive SKU counts lower with time. People will laugh at my 100 number, but remember when someone showed up at your house with 3 jars and you still bought?
For sure. It's like so many other things where the Pareto principle of the 80-20 rule applies. We're getting there. With the raw data, about 12% of the products make up 50% of the sales on an aggregate basis across all of our client stores. This accounts for all the cannabis complexity of vintage products that hit the shelves once and never return, the brands that don't make it, and every other nuance in the data. Even with all of that, it's clear where most of the sales come from and it's not from the 40th undifferentiated preroll on the shelf.
We also see key retail metrics improve at the store level. For stores under 350 SKUs, they are consistently able to have more items per ticket than any other group. The 350-500 SKU count group does second best, and then items per ticket gets lower as the SKU count climbs. My hunch here is that it's easier to upsell when budtenders know what they're selling and when consumers feel more confident in what they're buying. We also see pretty strong correlation when looking at average order values. Stores with fewer SKUs simply see bigger tickets. Only a small number of retailers are getting over $100 per ticket, and two thirds of those doing so are working with limited assortments under 500 SKUs.
There's one shop I visited in Palm Springs recently that manages their assortment and merchandises their products better than anyone in the game as far as I'm concerned. We just earned their business and I am so excited to dig in deep and understand what kind of outcomes they see as a result. You could go in there and easily learn about everything, understand the different categories, get a sense of each of the brands.
I’ve also seen a lot of the opposite. I met with a retailer recently who uses almost none of their floor space to merchandise their top selling cartridge brand. The argument was that they instead need the space to showcase products that don’t sell as well. The top brand was responsible for 40% of their cartridge sales. This could make sense for a vertical business that was trying to move their own cartridge line, but that wasn't the case here. Don't do this. Maximize the top.
How important is the interaction between consumers and budtenders in driving sales?
Today it's critical. It's the interaction that drives over 80% of cannabis sales. But honestly, it's rigged by incentives from brands and riddled with recency bias. I have to emphasize again that there's not a blanket answer here. I work with some amazing budtenders that pride themselves on getting people to the right outcomes, and the industry desperately needs more of that. I want to give them the tools to make better and better recommendations for the consumer in front of them so that this interaction improves along with the outcomes of the product when those shoppers go home and give these products a shot.
Tons. We want to do more and are making investments to do more. Right now we produce retail analytics on product performance that help categorize products into different buckets based on their demand and sales value. This is to help cut through the noise and influence what inventory you carry and where you focus your time in terms of stock management and assortment planning. For instance, if you drill into the 10% or so of products that have consistent demand and high sales value, those are the things you should be maniacal about always having on the shelves. Then there's a wait and see approach to some other SKUs, and there's some products you should just absolutely never buy again.
We're going to invest more and more in this and make sure retailers are optimizing not only the assortment that will sell, but the costs of carrying this inventory.
What does the future look like for cannabis retailers? Can we point to other industries that have solved this issue?
There's still a lot of dialogue in the space about whether cannabis retail will look like X or look like Y. Cannabis retail is fascinating because there's opportunities to innovate on the customer experience that could be applied to other industries. I try to stay focused on the specific cannabis retail challenges as there are plenty, but I actually think the unique problems will drive all of retail forward in the end.
On this assortment topic specifically, there’s every variation out there in every industry. My first job in high school was at In-N-Out burger, known for a limited assortment and for being one of the highest grossing restaurants by sq ft in existence. I believe in the simplicity.
Certainly someone like Bevmo would point to their success selling alcohol with thousands of SKUs, and I think there will be and should be the Bevmo model in cannabis. But I don't think that represents what the typical consumer needs right now and I don’t think that's the best way to introduce new consumers to cannabis. Someone buying alcohol for the first time gets lost in Bevmo and leaves with the same anxious feeling they often leave the dispensary with today.
Ok final question. What other things are you thinking about on the product side that can help our retailers? What keeps you up at night?
So many things keep me up at night honestly. In broad strokes, we’ve all made a lot of strides in pushing the industry forward and into the mainstream, but we still have so far to go. I want people to get to compatible cannabis and really understand what they are buying, what their experience is likely to be, and get the outcomes they’re looking for. That's the whole promise of the industry as I see it. I want to make sure retailers on Treez are equipped to provide the best possible experience for their customers so we can get there faster. To me that means they need rich product data so customers can learn, they need modern payment options that consumers are used to, they need partners who can integrate and serve specific needs, they need automation of the day to day and the compliance nuances to be profitable. And they need a level of support and service like no other. That’s a lot, but that’s what we promise to our retail clients and what we try to provide everyday.
What helps me sleep is we have tons of great clients that want to come to the table, share problems, work through solutions. We have ramped product and engineering teams to ship those solutions at a velocity that I think an industry this robust and chaotic needs.
Thanks to Joey for his perspective on an increasingly important topic in the world of cannabis retail. If you’re a cannabis retailer, how do you handle product and SKU count in your business? Comment below!
If you're a current Treez client, we encourage you to speak with your dedicated Customer Success Manager about how you can optimize your SKU count and get to the optimal product suite for your business.
If you’re not a current Treez client, contact us today for a free and fully customized demo of our enterprise point of sale that comes with a dedicated customer success team and 24/7 support.
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