What’s the Perfect Product Assortment?
There’s a saying that advises that you will only get out of something what you put into it, but when it comes to product assortment that’s only half true. According to a recently released report from Headset, in most Canadian cannabis stores, only around 20% of products contribute to around 80% of sales. On top of that, the report estimates that, depending on the market, up to 20% of a store’s products may be stale, meaning none have sold in the last 3 months. What are the other 80% of products doing for your store? How much of it is stale? How can you optimize your inventory?
The Pareto Principle
You may have heard of the Pareto Principle, or the 80/20 rule—it’s the premise that 80% of your results come from 20% of the effort. The idea rings true in theory, and Headset has the data to back it up.
According to the report, 39.4% of top-selling products in Alberta retailers contributed to 80% of sales, on average, while the remaining 60.6% of products only contributed to 20% of sales. Luckily, compared to US retailers, Canadian stores are much better at maintaining efficiency in their inventory because only 4.9% of stock was considered stale in Alberta.
In British Columbia, retailers seem to have inventory assortment down to a science, because out of an average of 261 products per store, 38.6% of them were fast sellers, contributing to 80% of the sales, and of the remaining 61.4% of products, only 3.9% of them hadn’t sold in the last 90 days.
So, how do they do it?
ABC-XYZ Grading System
If you’ve done any learning about product selection, you likely know about the ABC-XYZ grading system.
“The core concept of ABC-XYZ analysis is products are not created equal, and therefore their inventory should be managed in accordance with their relative value,” the report explains. “ABC-XYZ analysis is a two-dimensional framework for assigning a grade or relative value to individual products.”
Imagine a three-by-three grid with ABC on the y-axis and XYZ on the x-axis.
“The ABC dimension rates products based on their relative contribution of sales within a store’s category.”
A product in a category’s top 70% of sales would have an “A” grade, or a high sales value, a product in a category’s 70%-90% of sales would have a “B” grade, or a medium sales value, and a product in the bottom 10% of a category’s sales, or 90%-100%, would have low sales value giving it a “C” grade.
“While ABC grading is a powerful tool for understanding a product’s value, retailers shouldn’t focus their inventory planning solely on a product’s sales value,” Headset suggests. “If we took ounces of flower as an example, we know these products have high item prices and therefore would show much larger sales volumes than an eighth product, but ounces are purchased very infrequently compared to eighths. We address this by adding the second dimension, XYZ, into a product’s grading.
“The XYZ dimension rates a product based on the frequency it shows up in customer baskets, which is measured by basket penetration. This matrix provides retailers with the ability to easily understand how important a product is to customers as well as their store’s revenue.”
For example, Headset found that the sales share vs. SKU share ratio of high performing SKUs was +23.8%, meaning that these SKUs “over-perform in sales given their share of shelf space.”
At a different retailer, however, products with the same “good” rating had a negative ratio when it came to sales share vs. SKU share, accounting for 59.3% of SKUs but only bringing in 57.1% of sales. This same retailer appeared to be using products with a low price but high basket penetration to drive sales, and while that works, it may not be the most efficient method.
Use What You’ve Got
At first glance, the concept may seem confusing or full of retail jargon, but it’s actually fairly easy to implement—all you need is your POS system. Any system worth its salt should have detailed reports about when products were received, when they were sold, and for how much. By analyzing this data, you can determine which product has which grade in your store, and how you can make sure more high-value purchases head out the door.
# of Products in Stores
ON – 270
AB – 270
BC – 261
SK – 253
Products Contributing 80% of Total Sales vs. Products Contributing 20% of Sales
SK – 36.1%, 63.9%
ON – 37.9%, 62.1%
BC – 38.6%, 61.4%
AB – 39.4%, 60.6%
Proportion of Inventory that is Stale – No Sales in 90 Days
SK – 7.8%
ON – 6.0%
AB – 4.9%
BC – 3.9%
Photo courtesy of Spiritleaf – Whyte Ave, Edmonton