In Parts One, Two and Three of my series on Retail Inventory Management, I talked about adding vendors, replacing vendors as well as methods of quality control and tips as to how to constantly be achieving the perfect store inventory. Part Four of the series I will add to these points by discussing what types of product we will actually stock and pricing guidelines.
The perfect inventory, what does that mean? The perfect inventory, to a degree, lies in the eye of the beholder. We must make decisions every day about a variety of tasks, situations, problems, employee issues, etc. The decisions we make regarding our inventory, both cash committed as well variety is never ending and never complete. But lets not worry about a destination, I want to focus on the journey.
There are factors that will affect and may limit your inventory. I am fortunate in that I have rarely had to worry about the amount of cash I had tied up in my inventory; much of the time I could carry whatever I felt was needed.
One of several determining factors is our monthly sales rate. If we are trending upward, I will increase inventory levels, if we are trending downward, as we do, for example as we are entering the winter months, inventory levels will need to be reduced somewhat. Sometimes its hard to know what comes first, not having adequate inventory in stock creating lower sales, or lower sales creating the need to to reduce inventory. You do not want to cause sales slowdowns by not having enough inventory but at the same time, you must be assured the cash tied up in inventory is needed and will lead to gross profits. Its a tough thing to know and evaluate.
As we come out of winter and begin spring, we will begin to see tourists and concert goers, we ratchet up inventory. Historically, my retail store’s best months are May – October. We will also change the composition of the inventory as we progress from one season to another throughout the year as well.
We will always stock certain items; flower, pre-rolls, drinks, topicals, capsules, edibles, tinctures and RSO to name a few, but we will adjust quantities seasonally. For example, we will carry more of the larger quantities of flower, many more ounces case in point. Our customers will stock up themselves as sometimes the weather here can be inhibiting and they may be “stuck” at home until the roads can get cleared of snow.
Drink sales go down in the winter but increase in the warmer weather. Anything that is mobile like pre-rolls and cartridges sell better in the warmer weather too simply due to the fact people are outdoors fishing, camping, attending concerts and the like. Also, we carry different types of edibles seasonally as well; less melting chocolates in the spring/summer for example. It is really a function of knowing your customers (demand) and seasonal weather. Achieving the perfect inventory mix is a constantly moving target. It is a challenge (but its a fun challenge). It keeps your head in the “game”.
As for pricing, this is more of a precise process although it can and will likely vary by state. We have a 37% excise tax in Washington to be collected at the point of sale. This is in addition to a state sales tax set at a base of 6.5%. Varying amounts are added to the base by each county. In my county, the total sales tax is 8% again added to the total and collected at retail. We price all items in an “out-the-door” fashion, that is to say all taxes are quoted in our price structure so the total is the total.
Without getting into a full blown math class for you all, suffice it to say if we triple our cost of goods coming into our shop, this will result in a 50% mark up after calculating state taxes. We have a profit calculator set up as a spreadsheet so its easy for Margo, my purchasing manager, to calculate our pricing. In this spreadsheet, we make some assumptions that are intended to build in a little extra margin to help us deal with discounts, employee purchases, etc. so at the end we can actually be at 50% cost of goods sold (COGS). For example, we assume a 40% federal income tax rate. This is slightly high as even with 280E, the maximum tax rate will be 39.8%. Plus, unless we grow substantially in total sales (our gross revenue in 2018 was $1,300,000), we will actually be hitting an effective tax rate of approximately 34%.
When pricing our freshly arrived inventory, we will always look for opportunities to “tee it up” some by pricing at a 42-44% COGS. (Many retail shops in our locale will price at 4x or even 5x cost out the door. This to me is an insult to growers who are struggling to make payroll and pay basic bills and taxes. I want to help them by selling their product faster so as to help them with their won cash flow issues.)
We understand this may not always work so we watch carefully the velocity of sales (how rapidly the product is selling) and make price adjustments as needed. Remember, in business our primary job is to maximize profits. This in turn is a function of both gross profit and the pace at which we are “turning” inventory. I would rather make a 50% mark-up and turn my entire inventory in 30 days rather than holding out for a 70% margin but taking 90 days to accomplish it.
Local competition is a factor in our pricing, although vendors seem to naturally shy away from being in more than one store in our small town, direct product competition is rare although the same types of products are assumed to be found in every shop. We also try to have a “loss leader” or two to attract new customers or to reward existing customers. For example, we have worked with a local grow to make available ounces of flower priced at $99. And we have have happy hour every day along with daily college student, senior citizen and military discounts.
Like Lee Iaccocca famously said, “Lead, follow or get out of the way”. If you aren’t getting better every day, then you’re beginning to die. Put your creative energies to work every day to make things just a tad better today than yesterday and a tad better tomorrow than you were today. Challenge yourself to be your own toughest critic. Look through your customers eyes and ask yourself, “How would I see this shop if I were a customer?”. Be honest and be hard on yourself; your competition won’t show you any mercy so return the favor.
Also, encourage your employees to voice concerns and make suggestions as to how to improve. Create an environment where no one cares who gets the credit for good our great ideas.