Retail is an art. It’s common to see stores with similar locations, assortments, and prices drive shockingly different revenues. What is it that makes customers choose one store over others that appear so similar? When stores are competitive on the basics, customers choose based on how the retail experience makes them feel. The only pot shop in town could throw a cash register on a display case and turn a handsome profit. The best stores in crowded markets have to work hard to stand out, but they are usually rewarded with 2-3x the average sales and 5-10 points of extra profit. In retail, it pays to be an artist and an innovator.
We’ve seen the same pattern play out consistently in new cannabis markets across North America. In the early days following legalization, curious consumers will pay 2-4 times current illicit-market prices for the variety, peace of mind, and novelty of legal weed. In this environment, even terrible retailers realize short-term profits.
As markets mature, they enter a second, more sobering phase. Rising supply drives down prices. Increased retail competition leads to discounting and margin compression. The novelty of “legal weed” fades, and the illicit market proves resilient thanks to low prices. Consumers gravitate to retailers who earn their trust by offering consistent value, inventory, and service. The performance gap widens between winners and losers. Soon the market is littered with retailers on life support, desperately searching for an investor or buyer.
A rising tide sinks boats that can’t float.
Case Study: Seattle
Washington state cannabis sales in 2020 were up an incredible 30% over 2019. The top ten stores in Seattle (all in at least their third year of business) saw sales rise by more than 40%! On the other end, 33% of Seattle stores saw sales decline, with 18% declining by double digits. Even in a market with 30% overall sales growth, a third of existing retailers are facing declining sales and a crippling loss of market share.
The cannabis market is no different from any other retail market; only the pace of development is different (thanks to the size of the existing illicit market). As markets mature, customers vote with their wallets. The results aren’t close. How does a cannabis retailer thrive in a competitive market? Retail winners and losers are separated by their ability to efficiently deliver on something as fundamental as it is overlooked: a compelling customer promise.
The most important measure of a retailer’s readiness to expand is NOT current store revenues. The most important indicator of future success is your ability to consistently deliver on a compelling Customer Promise.
What is your customer promise?
It’s common sense to suggest that happy customers drive financial success. Many retailers make the mistake of trying to delight every customer, and in doing so end up delighting no one. Successful retailers understand the importance of carefully selecting a compelling customer promise, communicating that promise clearly, tracking performance against the local competition, and consistently following through on delivery. I’ve toured hundreds of cannabis retailers across North America and seen the books for half of them. Retailers delivering on a compelling customer promise are rare, and often shockingly successful.
Common customer promises include: largest selection, lowest prices, highest quality, best value, deepest discounts, most convenient, exclusive products, knowledgeable staff, and best shopping experience. Even a promise to be the cannabis retailer “for people like you” can be compelling for customers who identify strongly with a consumer niche (seniors, veterans, environmentalists, social activists, medical patients, partiers, connoisseurs, etc.).
Some retailers make their customer promise explicit through marketing materials, customer communication, and brand and design choices. Others quietly live by a strong internal code that drives behavior and decision making. Even retailers that have never consciously defined their “customer promise” still communicate who they are and what they value through every choice they make about how to manage and present their business.
Unfortunately, it’s also true that most cannabis retailers are unable to articulate a unique or compelling customer promise. I’m often told that a store has the “best staff” or “best assortment,” but when pressed to defend that claim with evidence, the owners and managers stare back blankly. These companies have an aspiration, but no clear competitive advantage. As performance stagnates and staff loses heart, they grasp at an ever-changing menu of tactics in search of a winning strategy.
Some cannabis retailers are clear on who they want to be, and they work hard to deliver on their promise. But the competition is often just as motivated. The only way to win in a competitive market is to be clear about where and how you intend to win, and then closely track competitive behavior to ensure that you’re staying one step ahead. In a mature market where customers are familiar with local retail options, there is little value in being the store with the second lowest prices. You may be able get away with this in a new market, but it’s just a matter of time before word spreads and your customer finds your competition. It’s critical to commit to customer promises where you have the will and ability to deliver better than your local competition.
Failing to consistently deliver on your claimed customer promise is worse than having none at all. Inconsistency destroys customer loyalty and drives away business. Even one bad experience can shake a customer’s relationship with your brand and cause them to consider alternative stores. The last time I shopped at Lowe’s was eight years ago. I bought a microwave at 20% off and was shocked to discover that Home Depot’s regular price was even lower. Both stores are convenient to me, so I’ve never been back to Lowe’s. They broke my trust. It’s not enough to have great prices some of the time.
One of the more common and pervasive failures occurs when a company’s culture does not match up with or support their customer promise. A retailer that claims to offer the best quality or value, but refuses to mark down stale product, they communicate to staff and customers that they’re willing to trade customer satisfaction and loyalty for short term profits. A retailer that promises great customer service undermines that promise if they clear inventory by urging budtenders to “promote” unpopular products with questionable efficacy. (Both examples are the norm in this industry, not the exception.)
On the flip side, a strong culture that is aligned with your customer promise is a powerful way to ensure long term performance, employee engagement, and customer loyalty.
Efficiency is a catch-all for your ability to make the customer experience as smooth and easy as possible: easy to find, free parking, quick service, clear and informative signage, easy to shop merchandising, etc. Efficiency in this case is not a measure of cost, but of customer experience. Making all product information available at an in-store digital kiosk may be supremely efficient for the retailer, but it’s a tremendous source of friction and frustration for a senior who just wants to talk to a real person. The opposite of efficiency is anything that creates friction or irritation in the customer’s experience. If two stores have similar assortments and prices, customers will overwhelmingly choose the one that makes shopping easier for them.
A well-realized customer promise IS your competitive advantage. It will attract employees and customers who value the same things you do. Retailers who find their niche and serve it better than anyone else take the first crucial step to building an iconic brand and an enduring business.