Owning a pet store is all about delivering high-quality products and services to your customers: the loving pet parents and their fur babies, of course. Savvy owners know that not all products are created equal, however, in terms of quality or revenue generation.
That’s why it’s crucial to have a system where you can evaluate and rank the products you offer based on their performance, profitability, and other characteristics based on several KPIs. And, while it may sound like a daunting task, it can be as easy as ABC.
That’s right; we’re talking about the ABC analysis, a widely-used inventory categorization system that helps modern businesses, in the pet retail space and beyond, establish what products are most important to their success.
Join us as we explore the topic of ABC analysis for pet store inventory!
Understanding ABC Analysis
Before we can unpack what ABC analysis accomplishes for a small business owner and their pet store, we must first define what it is and understand how it works.
ABC, an acronym for “Always Better Control,” analysis is a technique used in inventory management that categorizes merchandise into three distinct categories. Each is assigned a letter grade based on its overall importance in terms of the store’s net revenue and value.
Categorizing inventory for pet stores using the ABC analysis helps owners understand their inventory better and, as a result, narrow their focus in order to maximize profitability, ordering efficiency, and results.
Categorizing Inventory
A comprehensive ABC analysis takes various criteria into account, including, but not limited to:
- Sales volume: How much of this product is moving on a weekly basis?
- Value: What’s the margin of the item? How much net profit does it produce?
- Contribution margin: How much does the profit of this item contribute to the overall bottom line of your sales day, week, and/or quarter?
Category A will be awarded to items that are high value, in high demand, or, if you’re lucky, both. Approximately 10% to 20% of your inventory may be suitable for this rank, and the products in this class may contribute a whopping 66.6% to 70% of overall value to your operation.
So, the Category A items reign supreme in your store, but does that mean the rest are for the birds (figuratively speaking, of course)? Well, not exactly. Splitting the remaining inventory further provides further insight on what is important to the store’s overall performance.
Category B items are not as integral as Category A, but important nonetheless. On average, they will contribute 23.3% to 25% annual consumption value, making them important but not as imperative as their A-class counterparts. It’s likely that around 20% to 30% of your products will be B-class.
Then, we have Category C, consisting of items that contribute in the neighborhood of 5% annual consumption value. These items will have the most minimal impact on overall net revenue, but could comprise nearly 70% of your inventory!
At a glance, it seems like you’d do just fine throwing all the Category C items in the trash and only ordering prestigious Category A items, but that’s not the big picture. Having a variety of different products attracts a greater variety of customers, and will ultimately be good for your store, even if some products aren’t as successful as others.
Benefits of ABC Analysis for Pet Stores
Performing an ABC analysis for your pet store offers various benefits for your business.
First and foremost, it is a tool for improving inventory management. Armed with the knowledge of which products perform best and generate the most profit, we can focus most of our inventory tracking on Category A items. We can implement more aggressive sales strategies to further compound the overall revenue and, if done properly, bring profits to record highs.
ABC analysis, in this regard, allows us to allocate resources more efficiently, as you’ll want to give more of your ordering budget to the money-makers while ordering only “just enough” of items in the B and C categories.
Speaking of ordering, ABC analysis provides the opportunity for better forecasting, so your highest earners don’t go out of stock and drive your customers to seek them somewhere else. Expecting the high performers to, well, perform lets us stay one step ahead of the game, creating a win-win-win type scenario:
- The customer finds what they’re looking for
- You receive the customer’s business, earning revenue and reinforcing your brand identity as a reliable, dependable option for pet parents
- Your customer’s pet gets the high-quality products they deserve
An ABC analysis will take some effort, but the results can be transformative for your business.
Implementing ABC Analysis in Pet Stores
So, have we sold you on the merits of this tried-and-true inventory categorization technique just yet? If so, you’re probably wondering how you can actually implement it in your operation, and, don’t you worry, we’ve got your back there!
Here are a few quick steps for implementing ABC analysis for your pet store.
Gather Data
Successful business owners are nothing if not number crunchers at their cores. Many consume data en masse in order to get a snapshot of the business’ health at any given point in time. That may sound like tons of work, but, with a high-quality POS system like eTailPet, you can get it done in a pinch!
So, begin by collecting key metrics on sales volume, gross and net revenue, and inventory levels for each product in the store.
Analyze Data
You’ve got your numbers, but what do they mean in the grand scheme of things?
Generally speaking, the movers and earners will get an easy A, but don’t forget to consider a product’s life cycle into the equation before making snap judgments. For example, a product in its launch may show paltry numbers compared to another that is well into its maturity.
How much you trust products in their pre-growth phase all depends on your risk tolerance, but don’t be afraid to go with your gut in some scenarios and, when in doubt, consider working with a business consultant or inventory management specialist to ensure you’re giving appropriate grades to each SKU based on the data.
Set Policies and Procedures
Assigning the letter grades to each product will feel almost like a twisted version of the Harry Potter sorting hat ritual, but it’s incredibly important, because once everything is in its respective category, we’re going to set policies and procedures on how to manage it moving forward.
Are you satisfied with the current inventory threshold of Category A items, or should you order a little extra to ensure you’re never going out of stock with the hottest items? Can you stand to order less of the Category C items, even if it means a customer or two may find it out of stock and seek out your competitors?
Asking yourself questions such as these will help you tweak the inventory so that you’re giving your shining stars their best chance to shine while giving the bottom-of-the-barrel stuff just enough to stay afloat. It’s a delicate balance, but trial-and-error will help you refine your strategy.
Regular Review and Adjustment
ABC analysis is not a “set it and forget it” type of business strategy. As with most strategies, it requires regular review and adjustments to fully optimize its effectiveness.
Changes in inventory performance may indicate you need to reestablish the letter grades you originally assigned and adjust your inventory management strategies for products that are entering a state of decline. This may be a result of changing market conditions or customer buying habits shifting.
Keep an eye out for things that may also negatively impact product performance, including manufacturer or distributor supply chain issues, problems sourcing specific pet food ingredients or materials for merchandise, market trends, manufacturer discontinuations, and more.
Remember— the market is a dynamic place and the situation can change on a dime. Savvy pet store owners expect these changes and are ready to pivot at a moment’s notice to remain competitive.
ABC Analysis in Practice
We know what you’re thinking: this all sounds great in theory, but does it really work when put into practice?
ABC analysis is one of the most widely-used systems for managing inventory. Some of the largest and most successful global retail operations that use ABC analysis include:
- Walmart
- Dell
- Toyota
- Amazon
According to the Aberdeen Group, proper implementation of an ABC classification system could reduce overall inventory costs by nearly 20%, trimming the fat to help a business realize more profit each quarter.
Another study, performed by Georgia Tech, found that performing an effective ABC analysis could result in a net reduction of inventory carrying costs by a staggering 50%, establishing the technique as an undisputed asset to any pet business’ performance.
See for Yourself
Categorizing inventory for pet stores using an ABC analysis provides various benefits for the business owner, customer base, and their beloved pets. Properly implementing the ABC system lets you finetune your focus, so you’re giving most of your attention to the most crucial SKUs, thus maximizing efficiency and profitability.
Using a powerful POS system, such as eTailPet, to assist in implementing and tracking your ABC analysis allows owners to employ sophisticated strategies to get the results they’re after.
But, don’t take our word for it; try incorporating ABC analysis into your inventory management strategy today! The results will speak for themselves.