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How To Reduce Shrinkage in Cannabis Retail

Published Jan 26, 2023 09:58 a.m. ET
Source: Unsplash

While shrinkage is common to cannabis and non-cannabis stores, licensed cannabis retailers face unique challenges that other businesses don’t. At the same time, the strict regulatory requirements to maintain their licences can offer cannabis retailers more control than their unregulated counterparts. In order to take a proactive approach to reducing shrinkage, there’s a lot more to think about then it may first appear.

What is Shrinkage?

In simple terms shrinkage is the loss or destruction of inventory before it can be sold to customers. There are multiple reasons why shrinkage occurs, including human error, theft and inefficient operations. Each industry will have its own standard of how much shrinkage is acceptable. However, a 2021 survey of US retailers showed an average shrinkage of 1.44% of sales across all industries at a cost of $94.5 billion.

Causes of Shrinkage

Shrinkage in the cannabis retail environment looks like lost, damaged or stolen merchandise. Obviously a shop owner and management team is going to take every precaution to limit and reduce shrinkage. Indeed, the purpose of this article is to support you in dialling into your loss prevention SOPs so you can keep more of your hard won revenue. Before we share some tips on how to lower shrinkage, here’s a quick glimpse at the typical reasons that shrinkage occurs.

Inefficiency and human error

Depending on how and where you store your inventory, the process by which you receive and rotate inventory and the number of people who have access to it, you may be creating a greater likelihood of shrinkage through inefficiency and human error. However, the key to reducing human error begins with education. With thousands of product skus to choose from with multiple differentials and similar packaging, the most common issue with shrinkage is the potential errors being made on the front lines. Having solid education built into your cannabis retail SOPs will decrease overall shrinkage.

Theft and fraud

One of the sad realities of retail is that theft and fraud are a common occurrence. Even more disheartening is the fact that in the cannabis industry, theft points directly to the employee. Due to the highly regulated restrictions in cannabis retail, all products in the public view are under lock and key, eliminating the customer and any other source from the equation. It’s uncomfortable to think about theft and fraud, especially from those we put the utmost trust into. But it is a part of life and if we set ourselves and team up for success, we can build a culture of accountability. This culture - along with the technology that supports it, can help reduce the occurrence of shrinkage caused by nefarious activities.

Missed opportunities

Reducing inefficiencies in data collection and review

While theft and fraud are well documented as part of shrinkage, there’s also a more hidden cost to inefficiency and that’s shrinkage through missed opportunities. One of those opportunity costs is related to the time and money spent on non-digital SOPs. If you’re still using paper, it’s likely you’re creating more work for yourself and your team. Another missed opportunity comes with siloed digital inputs. If you aren’t pulling in and creating data to track your inventory and sales processes, you might be missing out on what consumers are looking for.

Solutions to Lowering Shrinkage

The shrinkage game isn’t a one and done activity. As we said before, you’ll likely never eliminate shrinkage but there are some processes, protocols and procedures that can reduce your cannabis shop’s shrink rate.

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Inventory Awareness and Controls

In inventory management as in many areas, knowledge is power. To have a continuous awareness of your inventory is key to reducing shrinkage. Accountability begins from the ownership on down to the budtenders and managers. This doesn’t mean you need to walk around with a clipboard all day. It does mean that whomever is given accountability over inventory needs to be able to have up-to-date inventory information at their fingertips. And they need to feel empowered to suggest and implement improvements as they uncover them.

Team Protocols and Processes

Assuming you’re hiring the right people to work in your shop, there are policies you can adhere to that support an environment of integrity and growth. Creating a culture of accountability from the start of employment that will carry you far beyond your employee handbook is crucial. It speaks to the very nature of how you run your business and the people that help you do it. Just like a cannabis grower has strict standard operating procedures (SOPs) for harvesting quality flower, your shop needs SOPs for how things get down, when and by who. By creating checklists and SOPs for not just inventory but for every aspect of your team’s execution, you’ll reduce human error and inefficiency and tie up loopholes that are constantly losing you money. By doing so, you produce a culture of accountability and transparency, ultimately lowering overall shrinkage.

Dashboards and Digital Monitoring

Finding the right technology partners for your inventory management system can be an unexpected time commitment. You’re going to need something that is compatible with both your inventory tracking and your point-of-sale stations. But remember, these are two different tools, and in order to achieve transparency should be used as such. In addition, your dashboard will also need to provide crucial insights to uncover hidden opportunities. Most of all, in an industry with an ever changing employee structure it needs to be user friendly, easy to learn and stand the test of time.

Conclusion

We hope we’ve answered the question of how to lower shrinkage in retail as it pertains to cannabis stores. The pathway to greater profitability at a time when cannabis retailers are struggling to stay open is an imperative one. However, there's no straight line to reduce shrinkage. It will take multiple levers being pulled in coordination, and done so over time for full benefits to accrue. But wherever you are, you can begin to take steps today to reduce shrinkage and increase profits at your cannabis retail shop.

We are eager to get dialled in and create content that is actionable, relevant and effective. If and when you have questions about inventory, operations and how to build a culture of accountability, please reach out to Count Canna’s team and we might incorporate your question into a future blog post.


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