At the end of the day, cannabis retail follows the same principles as other retail industries, and the same inventory metrics used in traditional retail settings can help guide you to reduced costs and increased revenues. Ultimately, your goal is to always have the right amount of the right products available to your customers — no more, and no less.While hitting that perfect inventory sweet-spot may not always be possible, you can definitely optimize your cannabis retail operation by monitoring the right inventory metrics. We’ve put together a list of the top six metrics you should track to help keep your cannabis retail store running as smoothly as possible.
Top Six Inventory Metrics for Cannabis Retailers
1. Inventory Turnover
Inventory turnover, also referred to as stock turn, tells you the number of times you sold through your entire inventory in a given period of time. This is a great metric for determining how efficient your cannabis dispensary inventory management is, and it’s typically calculated on an annual basis.
To determine your inventory turnover, divide your Cost of Goods Sold (COGS) by your average inventory price. For example, if your annual COGS is $1 million and your average inventory is $100,000, your inventory turnover is 10 — meaning, you sold your entire inventory 10 times in one year.
Generally speaking, the higher your inventory turnover score, the better, because it means you don’t have inventory sitting idly in your stock room for long periods of time.
2. Product Performance
Keeping track of your highest and lowest performing products is key to maximizing cannabis dispensary profits. A deep understanding of product performance will help you maximize the other metrics listed here as well as your overall store performance.
Unlike inventory turnover, product performance should be monitored at least weekly. Doing so will keep you informed of the products you need to keep on hand as well as the ones that have been sitting in the stock room. Based on this info, you can craft strategic promotions to cycle through idle inventory and keep high-performing product sales up.
3. Lost Sales
Once you have a grip on product performance, it can be helpful to track lost sales to see how much revenue you’re missing out on when high-selling products are out of stock. You can calculate this metric by multiplying the days a particular SKU is out of stock by its average sales rate.
4. Sell-Through Rate
You sell-through rate tells you the percentage of products sold in relation to the number of products that were available for sale. It’s calculated by dividing the number of products sold by the beginning inventory number times 100.
For example, if you had 100 units of a particular product and sold 20, your sell-through rate would be 20 percent. You can calculate sell-through rates of individual products or of your entire inventory to get different perspectives on performance.
5. Gross Margin
Gross margin refers to the percentage of sales revenue that you keep after your COGS. To determine your store’s gross margin, subtract the COGS from your total sales revenue, then divide the number by the total sales revenue to get the gross margin percentage. The higher your gross margin percentage, the more you keep of every sales dollar, which is also referred to as gross profit. For example, a gross margin of 25 percent means you keep $0.25 of every dollar of revenue. The remaining $0.75 is spent on COGS.
It’s important to track your gross margin so you have a clear picture of how much revenue you’re retaining to spend on other operating costs — which, in our example above, would be 25 cents. Knowing exactly where your gross margin stands each sales quarter will keep you focused on strategizing ways to increase it.
Shrinkage is a metric that can help you identify potential instances of theft and fraud — either internal or external — as well as possible administrative errors. Shrinkage is the difference in the inventory you have on paper and the actual physical inventory in your stock room.
To calculate shrinkage, subtract your actual, physically counted inventory value from your ending inventory value. Obviously, the lower your shrinkage percentage, the better. Once you understand how much inventory you’re losing to illegitimate means, you can start monitoring customer and employee activity more closely to determine the cause.
Monitoring Cannabis Retail Metrics
Just like in other retail industries, your point of sale is the most powerful tool for tracking cannabis inventory metrics. A POS that provides a robust suite of reports can help you optimize your inventory turnover, sell-through and gross margin percentages while reducing lost sales and identifying shrinkage. With Cova’s cannabis retail point of sale platform, you’ll get detailed reports that you can customize and manipulate all through a user-friendly reporting dashboard.
To see exactly how Cova’s POS reporting can help you improve your cannabis retail operation, request a demo today.