For Retailers | December 15, 2023

Rexroad’s Retail Tips: Choosing Brands That Bring In The Fans

New ways to think about what products and categories that cannabis dispensaries should purchase to reach target margins and stay relevant in 2024.

Leaf Link blog Retail Tips for category assortment

By Andrew Rexroad
Principal Product Manager of LeafLink’s Retail Solutions, and former Vice President of Material Strategy for Columbia Care

When deciding what inventory to buy for your dispensaries, how do you choose what you put on the shelves? How do you decide how much you should purchase? Buying too much is a sure fire way to start the discounting death spiral. And not buying enough, means you could miss out on revenue.

Let’s start by taking a step back and looking at the dispensary experience. You want your store to be the go-to destination for locals and tourists, but stocking a little of everything may not be the best move when thinking about brand equity and margins.

Ron Gibori, CEO of the premium cannabis cultivator Six Labs, has an interesting take on this. The relationship that brands have with retailers is the same sort of relationship that bands have with concert venues. Bands are looking for venues with great lighting, acoustics, and a place for the merch table. Consumers, meanwhile, patronize the establishment for one reason – the talent and their performance.

Venues are known for their events and often pride themselves in finding rookie opening acts – before they got famous. Remember the hi-dive? It’s a dingy, single-stage, standing room only bar on South Broadway in Denver, Colorado. It’s where The Lumineers, Nathaniel Rateliff, and The Fray got their start. It’s known as the go-to venue for grungy rock and roll shows.

In cannabis retail, the same principles apply. A retail store’s performance is correlated to its ability to host the right brand talent, at the right time, at a compelling price. You want to make space for the next big thing, but you also want to invite the big-name brands that everyone knows and loves.

So how does a retailer know what talent to host?

As the Billboard charts used to serve the masses during the radio era, BDSA, LeafLink Insights, and Headset keep tabs on how products are trending. Each has a different data set and a different way of grouping the data. We can use these tools to understand what brands are getting the most attention in the markets we serve. The information can be consumed and used in a variety of ways. While some brand owners point to their personal scoreboard and benchmarks, some retailers use the data to ensure they stock the top products (and hedge against demand volatility.) This is a starting point for the discussion about a retail store’s assortment, and only the tip of the iceberg.

Savvy retailers who need results should adopt a category management approach. The practice is not new to the consumer packaged goods industry, but it isn’t a mainstream practice in the cannabis industry–yet. (We’re working on this at LeafLink btw. Stay tuned!)

The task can be done manually for a small set of locations (3 stores or less in the chain), but manual toil does not scale well. Effective category management must categorize, index, identify, and optimize SKUs within each location’s assortment on a routine basis – and make sure all stakeholders know what’s in the mix. There are a few moving pieces, and now I’ll provide you with five steps you can use to strengthen your practice.

Step 0 – Categorize

Before a retailer can begin the category management journey, they must first establish the categories they will be managing. Seems pretty simple? Easier said than done. While there aren’t a huge number of categories in the cannabis space relative to other industries, there are often mis-categorizations which can lead to confusion and hair splitting. It can be easy to get into the weeds and lose track of what is important.

Take the cannabis concentrates category for example. Cannabis concentrates can be packaged and sold as distillate, live resin, live rosin, wax, budder, badder, crumble, shatter, diamonds, sauce, pie crust, hash, bubble hash and of course tincture. This is not the complete list, but you get the picture. A retailer would have to have a massive amount of shelf space and be heavily assorted to serve customers who are looking for each of these. A good rule of thumb when choosing categories is to look at the amount of sales it earns. Begin by evaluating the “concentrates” category as a whole and split out any unusually high category share that exists at any one location. If a category’s sales are in the single-digit percentage, lump it into another more broad category.

Start with macro categories that classify inventory by method of consumption such as: Flower, Pre-Rolls, Concentrates, Edibles, Vapes, Topicals. Then get more granular as needed. Add a “good,” “better,” and “best” rating when selecting your product assortment to ensure your stores can attract and serve a broad audience. When you’ve decided which product categories to carry in a store, add a layer to your model that identifies product popularity.

Step 1 – Index

Every month, you should evaluate what products are selling well and which ones aren’t getting quite the fanfare the sales rep promised. Cannabis consumer preferences can change quickly; and fads can come and go. Understanding what serves your customers best – at each location – is the key to success. I’ve found it helpful to create an analytics framework, and will share it with you now. Start by measuring each SKU’s performance at the location by category. Make lists by category and include information such as quantity sold and revenue and/or profit generated per product. Rank the performers from best to worst and take a good hard look at the bottom performers. In general, the bottom 20% could stand to improve their performance. Repeat this process for every category and understand which items need further review. I like to use margin x velocity for the period evaluated to properly measure one product against another. In an environment with constrained shelf space, it’s important to ensure every square foot is stocked with products that sell well.

Step 2 – Optimize

When the bottom performers have been identified, dig a bit deeper. Within the category by location measurement constraint we’ve chosen, four distinct levers can be pulled for each SKU to tweak its positioning relative to the competition and provide better outcomes for both brand and retailer. The levers include: adjusting retail price, adjusting wholesale cost, promotional activity and product swap. I recommend pulling the first three levers before the final, and for action to be taken at a regular cadence–at least once per month.

Adjusting Retail Price is typically dependent on several factors and can be wrapped up into a retailer’s identity. Some brands enter the market as a value, mid-tier or luxury brand; retailers can also position themselves in similar ways. This self-imposed dispensary identity can have an impact on how retailers choose to price goods for resale. Another factor impacting product pricing is internal product competition. For vertical retailers, or retailers who produce a portion of the goods they sell in adjacent or co-owned operations, there is a tendency to protect these goods within their price/value tier. For example, for a retailer producing a mid-tier gummy product internally, while also carrying a brand name gummy from a third-party supplier which may bring in organic foot traffic, the pricing strategy may be to price the internal product $1 or $2 dollars below the third-party product in efforts to convert an open-minded customer to save a couple bucks, try something new, and adopt the internal SKU. While this may seem like a no brainer, the retailer could be leaving money on the table in the big picture, taking a short-term gain and potentially turning a blind eye to valuable product feedback. Brand nepotism seldom equates to brand loyalty and prevents Adam Smith’s invisible hand from doing its best work.

Retailers and brand owners should work closely together on setting a price to maximize the competition at any given location and uphold the brand promise. Along with the sale of every unit of a branded product, there is an implied promise made by both the brand owner and the retailer to the customer about the value and experience they are about to receive. This implied promise is the fuel behind what we know as the Manufacturer’s Suggested Retail Price (MSRP). Wide variation to MSRP caused by a retailer’s price manipulation in a vacuum can break this brand promise and cause harm to both the brand’s and retailer’s reputation. By surfacing the indexed ranking to brand owners for products that aren’t quite holding their own competitively, they can learn valuable feedback about the competitive landscape and suggest a price which fits better for the location and the consumer base they serve.

Adjusting Wholesale Cost may be necessary when a product has been priced as high as the market will tolerate for a given location, but still is not competitive from a margin x velocity perspective relative to its peers. This is also generally the easiest lever to pull to increase the competitive potential of a product at retail. Holding MSRP steady for an additional cycle, with all things equal should produce a similar velocity for the product (we’ll discuss price elasticity of demand in a future post) and allow the brand’s marketing to stay constant. During this period with the retailer enjoying a discounted cost per unit, the gross margin increases with the same velocity and the product climbs the category leaderboard.

Promotional Activity is required in instances where a product’s MSRP and wholesale cost have no wiggle room, but there is simply not enough velocity to be competitive. More energy needs to be put into selling the brand at a given location. This can be done in several ways, including but not limited to: brand activation (commonly performed with brand ambassadors on location), social media posts, or budtender incentive programs.

Another potential way a low margin x velocity product may become competitive in this category management schema is to position as a loss leader. While indexing products, I’ll also analyze the basket performance of a product and be sure to retain any products associated with high-margin basket activity. Positioning alongside a higher-margin product as a complement or bundle deal can have major impacts on a product’s basket margin participation. An example of this would be for a third-party edible to work with a vertical retailer on a bundle with an internal flower product, which should have a very healthy margin for the retailer. By promoting the purchase of the non-competitive, but complementary products to the consumer, the retailer becomes more profitable as a whole and the low-indexing SKU is now leveraged as a valuable margin driver for the retailer.

Product Swaps are necessary when a product fails to be competitive and falls into the bottom 20% of SKUs in a category for multiple cycles. For both brand and retailer, this can be bittersweet, but it’s a chance for new beginnings and valuable product-market feedback for all parties involved. As a product vacates its spot at any given location, a similar competitor should be chosen either through an internal evaluation mechanism or from a statistically significant LeafLink Product Recommendation. Any buyer will tell you there are no shortages of new products to try. In fact, a major problem with a retailer’s ability to test the market at their location with new products is the analysis paralysis and decision fatigue caused by too many suitors. With this cyclical approach coupled with a product recommendation engine, new product placement can be de-risked and product can be iteratively tested for fit more often.

Step 3 – Communicate

A plan is well and good, but if no one knows it exists, both parties are headed toward conflict. I recommend brands and retailers discuss product performance early, often, and well ahead of the periodic optimization events. Relationship management goes both ways; and a product swap or economical change should be no surprise to a brand owner at the end of an optimization cycle. For a sales rep to offer a discount, change a brand promise, or engage in promotional activity, they oftentimes need approval from their leadership. Successful outcomes dictate ample communication about the right answers to the test. Ideally, a retailer will support a brand with an automatically-generated analytics set showcasing their product performance at each location in the form on an anonymized leaderboard. These tools can be highly valuable and save loads of relationship management bandwidth. Where auto-generated analytic prowess is lacking, a buying team can divvy up categories, crunch the numbers and schedule regular touch points with their brand partners to ensure they are maximizing their product opportunities at the point of sale.

Additionally, when product swaps do happen, it’s important to have already selected the product to be placed, executed the proper onboarding steps, conveyed the forecast demand, and finalized the pricing and terms of the upcoming order. Tight turns on product swap decisions increase your product impressions and accelerate a retailer toward profitable outcomes. As lower performing products enter their first round of optimization, start to tap the recommended product next in line, and alert partners of the good news that they may have their chance to face products at your location. A 30 to 60 day advance notice to the upcoming brand talent will ensure you don’t miss a beat servicing the customer.

Step 4 – Repeat


A category management methodology amplifies the constant change, and arms both the retailer and brand with the advantage of putting the proverbial finger on the pulse. Consistent measurement, feedback, and management are key to learning what your location’s addressable consumer base is looking for in the present and as the consumer base evolves. As the makeup of retail patrons changes through a change in job, living situation, commuting pattern or even brand following, a constant evaluation is required to stay relevant as time passes. This approach is vital to retaining current and future customers and ensuring you can ride the trends as they emerge.

Conclusion

While it takes a lot of effort to become the next Red Rocks Amphitheater or Brooklyn Steel, every retailer has to start somewhere on their journey. Begin with understanding what type of fans are in your area and what type of talent you need to host to be the local or regional destination for your cannabis enthusiasts. Place your assortment performance under the microscope and understand what brand talent is resonating with your current community and which ones aren’t quite paying the rent. At the end of each cycle, rinse and repeat while testing new talent and avoiding wasting time on acts who fall short of pleasing the crowd. If you need help, feel free to reach out. We can help get you pointed in the right direction in SKU evaluation and process automation.

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