Last month’s OCS announcement about lowering their margins came with very little insight – but a lot of concern. We’ve heard from numerous retailers and have concluded that, without a pricing floor in place, any significant discounting of the OCS’s pricing model will result in a loss of revenue for retailers:
Lower prices mean smaller mark-ups, resulting in lower overall generated revenue
Value brands who utilize predatory pricing will simply continue to offer the lowest price possible, allowing this price drop to set the bar even lower for pricing. Independent retailers cannot compete with predatory pricing
There is a solution that RCCO would like to propose to the OCS in advance of their margin reduction in September 2023: Margin Floors.
Margin Floors would simply mean ensuring that the overall monthly mark-up per store has a set minimum. Many of the value brands that utilize predatory pricing have margins as low as 6%, while subsidizing their monthly overhead by kickbacks in the form of data sales. There are many data programs out there for independent retailers, but none of them allow us to compete at the level of the value brands – we need to rely on our margins to cover our overhead.
Data sales work for the value brands because their business model relies on volume sales. Utilizing a very minimal margin, they can ensure they get a volume of sales – and have brands pay for that volume. RCCO would like to propose that an overall minimum average mark-up be implemented across all retailers. This minimum would be set at a margin that would allow for a healthy operating cost structure based on sales to cover overhead. Retailers would be free to continue doing data sales to further supplement their profitability, but they would no longer be able to rely on data sales as their main revenue source.
RCCO is recommending Margin Floors over Pricing Floors as this model allows retailers the flexibility to adjust prices, have sales, utilize loss leaders, and still remain compliant. With a Pricing Floor, the strategy would require numerous exemptions to accomplish this, but with a Margin Floor a retailer would simply have to ensure that all products average out to the prescribed margin floor each month. This would be a simple enough metric to review.
Failure to comply would have to come with fines and disciplinary measures to match the significance of non-compliance, ensuring it wouldn’t be cost-effective to opt for non-compliance.
There are many factors to explore when discussing Margin Floors, but we would like retailer input to gauge support in proposing Margin Floors to the OCS and we ask for your feedback.
Answer this quick survey on Margin Floors and whether or not you think they’d be beneficial for the cannabis industry! ⤵️
