While many cannabis retailers focus on bigger and more extravagant locations, small shops can be profitable if they maximize the space they have
The cannabis arms race continues to gain momentum as retail chains — and individual stores — grow in size and scope.
But while shops like Planet 13 and NuWu in Las Vegas gain publicity for their sheer size, some of the leading stores across the country have proven it doesn’t take a massive location to bring in big profits. In fact, retail experts say smaller retail spaces have some inherent advantages when it comes to generating a return on investment: They are cheaper to lease, design, operate and staff. They can also cycle through inventory faster, allowing them to keep up with consumer trends. Plus, smaller locations protect business owners better in an era of falling prices and regulatory uncertainty.
The important lesson is that cannabis retailers don’t necessarily need to be the biggest to succeed, they just need to maximize the space they have.
Small or Micro
The trend of tiny houses, micro stores and pop-up shops hasn’t grown to a point where it has a standard, textbook definition. But according to Nichole Leinbach Reyhle, the founder of Retail Minded, an educational platform, and author of “Retail 101: The Guide to Managing and Marketing Your Retail Business,” the defining principle of a micro retail store is more about the right feel than square footage.
Reyhle says the perceived difference between being a small or micro retail store is often dictated by the surrounding stores. For example, retail stores in airports seem normal despite being a fraction of the size customers would expect in a mall or downtown shopping area.
“You are creating something exciting for the customer, but it feels like it’s different,” Reyhle says. “I would definitely say it has a feeling of intimacy.”
Sales per square foot
In August 2018, MedMen issued a press release highlighting that its cannabis stores surpassed those of tech giant Apple in sales per square foot for the 2017 fiscal year. On average, in its seven stores, MedMen reported earning $6,257 in sales per square foot, compared to Apple’s $5,546 per square foot.
A similar news story in the Puget Sound Business Journal pointed to Uncle Ike’s Pot Shop in Seattle outperforming Apple and Tiffany & Co. in sales per square foot. And in Los Angeles, Buds & Roses owner Aaron Justis told Marijuana Venture his dispensary, at approximately 500 square feet, did roughly $4 million in sales during 2017 — equating to $8,000 per square foot.
Sales per square foot is a cornerstone of a great retail business. It’s a simple, accurate and important measurement for retailers, regardless of whether they sell computers, clothing or cannabis. To calculate sales per square feet, simply take the store’s total annual sales and divide by the total square feet of the business. For example, if a business recorded $1 million in sales for 2017 from a 1,000-square-foot store, then the sales per square foot would be $1,000.
However, the problem is that those calculations don’t take into account scale: Buds & Roses has one store and MedMen had seven at the time of the report; Apple counted more than 500.
In November 2018, when MedMen released its financial report for the first quarter of fiscal year 2019, the company’s annualized sales per square foot had tumbled slightly to $6,188 for its eight stores in Southern California.
Designing a Shoebox
The feeling Reyhle describes is shared between the customer, employees and the products surrounding them; it’s not exclusively tied to space, but more about limiting the distance between the three elements.
“It’s a more inclusive experience for the customer,” she says. “While traditional brick-and-mortar stores are more expansive, these micro stores allow for customers to really experience the entire retail or dispensary outlet because they are seeing everything.”
But small retailers need to capitalize on every inch of a space.
“Look up, look down, look left, look right,” Reyhle suggests. “What are you doing to maximize all those opportunities? You want to make sure customers are experiencing something no matter where they look. The space is too small to ignore any detail.”
In published articles, books and interviews, several leading design experts have offered important tips for small-footprint retail stores to maximize their space:
– Exterior: Having a small retail store has many benefits, but exterior visibility isn’t one of them. Consumer psychologist Kit Yarrow says to consider adding a decorative awning or placing a sandwich board on the sidewalk so passersby know what the business is and what it sells.
– Glass is good: If permitted, have a glass door so people see what they are walking into. Anyone who has burst into small room only to find it’s already packed with people knows the uncomfortable feeling of interrupting a once cozy atmosphere. Shoppers who experience that might leave and not come back, or worse, they might stand there peering over the shoulder of the customer in front of them and ruin their in-store experience.
In her book, “Libby Langdon’s Small Space Solutions,” author and design expert Libby Langdon says windows or a glass door could solve that problem.
– Accent wall: Langdon also suggests using an accent wall to make a small room feel larger. A bold contrasting color, fabric or design is often recommended.
– Vertical fixtures: Langdon and Yarrow suggest using vertical fixtures like drapes or tall decorative lamps since they force the eyes to move on a vertical axis.
– Lighting: Woodwrights Inc., a commercial and retail millwork company in Wisconsin, says lighting “becomes especially important when the store is in short supply of space.” In a customer’s eyes, it’s the difference between an amazing shopping experience and visiting a broom closet.
– Hide the details: Keep the essentials for running the business during business hours in the front of the store. Georganne Bender, co-founder of retail consulting firm Bender & Kizer, says the point-of-sale station should be the hub for all daily commerce and capable of housing everything an employee would need between opening and closing the store. A time-locked depository safe, similar to what many convenience stores use, can secure cash drops from the register while keeping the employee at the front of the store.
– Shelves: Deanna Radaj, design consultant and owner of DeAnna On Design, says shelves can scale from the ceiling to the floor, but they aren’t very useful if they are obfuscated by poor lighting or if the counter blocks the customer’s line of sight. Shelves can hold a lot of inventory, but too many shelves can blend product categories together and ultimately make the store feel smaller. Use vertical breaks in shelving to separate categories.
– Signs: Signs can be fun. Radaj says they can carry the theme of the store in creative ways through fonts and colors. But in a small retail space it’s imperative that they are kept at eye level and clearly denote the category of product they represent. Terms such as “Yummies” might be indicative of edibles, but most customers don’t want to solve a riddle or ask for the location of something right in front of them. Even using the clever names for the company’s in-house brands on signs can be a disservice to the customer who are looking for the categories that are already established in the lexicon of cannabis retail: flower, edibles, concentrates, pre-rolls, etc.
Size matters when it comes to subjects such as rent, employee count and insurance. Smaller locations mean lower overhead. They easily fit in dense urban locations where rent is high. They are less expensive to furnish and have lower costs for security system installations.
The seemingly obvious downside to a small retail location is having a smaller selection, but even that can be misleading. David Armstrong, principal of Inventory Curve, LLC, says smaller retail stores generally cycle through inventory at a much faster rate than their larger counterparts, meaning their stores get new products more often and top-selling products will be restocked faster. On top of that, buying new products comes at a much lower risk because they literally buy less due to the limited space.
Lower sales figures are another misleading “disadvantage” of operating a small retail store. While it’s true that smaller stores sometimes have smaller sales numbers, they often earn higher profits due to the lower operating costs, Armstrong says. On average they can have a much higher sales-per-square-foot ratio than larger competitors.
Also, the lower overhead costs help insulate smaller cannabis retailers from the plummeting price of flower.
Customers benefit from compact stores because navigation is limited, the sales associate is often a few feet away to answer questions and, if properly designed, the store’s entire catalog is pleasantly displayed before them when they enter the building.
Whether the store is in an urban, suburban or even rural area, Reyhle says the benefits of running a small retail operation are universal and can offer a familiar retail experience in a streamlined environment.
“In a traditional store a lot of opportunity for customer engagement can get lost because the navigation of the store might be more complex,” Reyhle says. “Whereas in these micro stores, the customer navigation is a little more defined, so they will be introduced to experiences and inventory more easily.”