When you manage the inventory of a cannabis dispensary—or, in fact, any inventory—running into slow-moving SKUs is inevitable. Whether you have too many SKUs for the sake of variety or you’re testing the waters with a new product, there’s always a chance some of your products won’t sell immediately.
And even if you decide to stock them until they get sold, as a quick alternative, it also means your cash flow is affected… negatively.
In this article, you’ll learn why slow-moving SKUs are a personal attack on your pocket. And the negative operational outcomes of having too many.
What Is a Slow-Moving SKU?
A slow-moving SKU is a product that has a long sales cycle. Meaning this product isn’t moving effectively through your inventory and it’s taking too long to sell. Each business has its own definition of a slow-moving SKU. But generally, a product is slow-moving when it hasn’t moved off the shelf in 14-30 days.
Other businesses know approximately how much product they should sell each week or month. So, they use inventory metrics like the sell-through rate to get a clue about how a product is performing early on.
A cannabis dispensary has between 1,000 and 10,000 SKUs on its shelves. And thanks to the 80/20 rule or Pareto’s principle, which explains 80% of your revenue comes from 20% of your SKUs, you can infer that inventory managers are more worried about monitoring a specific mix of products.
Yet, this doesn’t mean you shouldn’t keep tabs on your slow-moving SKUs. These can be effective indicators that something has shifted. For example, when high-performing products become slow-moving, it can be because your marketing channels are underperforming or the competition just got tougher.
Monitoring your slow-moving SKUs can help you plan for the many challenges that come with them besides the clear financial burden. Here are three issues associated with having slow-moving SKUs.
#1. Restricted Cash Flow
Your dispensary cash flow is determined by the money that goes in and out of your company. The cash you receive, like your income, is considered an inflow, and the cash you spend or expenses are outflows.
If your cannabis dispensary spends money on products (an outflow), but these become slow-moving products that don’t sell (no inflow), the cash flow of your business is stopped. And if your cash flow is restricted by products that are holding off money, you can’t operate your business effectively.
But this is where your cash on hand comes in handy!
Your cash on hand is the amount of money your dispensary has access to push through in the event of not generating enough revenue. It’s like a savings account you use only when you have expenses that can stop your business from running.
Having cash on hand allows you to:
- Pay your invoices: Like invoices from your providers, vendors, your staff’s salary, and the rent of your establishment. Without these things, your dispensary wouldn’t survive, and you could incur debt or even get blacklisted for not paying providers.
- Buy and promote new products: Slow-moving products are tied-up capital and their carrying costs keep increasing the more you keep them on the shelves. Having new products generating inflows without financial stress is one of the advantages of having cash on hand.
- Invest in additional areas of your business: This is something you should always have in mind to optimize your processes. For example, if you’re having trouble tracking your inventory, an inventory management software could be a good start!
In summary, cash on hand gives you flexibility in periods where sales aren’t the best. So make sure you have cash on hand.
#2. Unsellable Products, High Discounts, and Slim Profits
You always reach a point at which the costs of carrying slow-moving products are too high. That’s when you feel pressured to get these products off your shelf by offering discounts to salvage some of the money from your initial investment.
The issue here is, by creating urgency for a product that isn’t in demand at your dispensary, you end up reducing your profit margin. If you put out a 20% discount, your revenue is affected and so it’s your profit margin. And if you want to keep your profit margin steady, but still make discounts, it means you have to increase your sales to keep up.
Still, those slow-moving products can’t be left on your shelf. The longer they remain unsold, the more they lose value, becoming obsolete or expiring. So, you’re forced to keep over-discounting to clear out inventory and deal with the “lesser evil”.
#3. Residual Effect On Customer Experience
Legal costs, taxes, and licensing fees make the legal market significantly more expensive than the legacy market. Some consumers prefer to go to legacy operators because of higher prices and the inconvenience in some dispensaries.
With the option of going to legacy operators who offer products at a lower price, customers are more likely to buy from dispensaries if they offer discounts. But when you offer discounts often, instead of creating a sense of urgency or FOMO, customers expect a discount every time they visit your dispensary.
If you stop offering discounts, they’ll just go to other dispensaries with better deals. This makes the competition tougher, as sales are based on discounts and not on your product offerings or brand. And this means you're losing customers to dispensaries that price more competitively on top of the legacy operators.
Besides that, your brand identity blurs as the main focus is price. Some dispensaries stop differentiating their brand and instead take part in this race to the bottom.
- Slow-moving SKUs are tied-up money that could’ve been spent effectively somewhere else.
- Calculate your cash on hand, save it, and use it when you need to cover expenses to keep your business afloat.
- Sometimes making discounts to clear out is unavoidable. You have to free up the space and money that’s trapped on the shelves.
- Work on building your brand as it brings value to your business. Competing with discounts it’s a race to the bottom.