Cannibalization occurs when a company’s store is stealing traffic away from another one of their stores. For instance, let’s say an Old Navy opens up 10 miles away from your house. You really like their clothes so you’re happy to drive 10 miles to shop there. But then a new Old Navy opens up within 2 miles of your house so you don’t have to drive as far to shop there. The store that was 10 miles away has essentially lost a repeat customer (or customers, since there were probably more like you). Therefore the sales in that store will drop and they will have experienced cannibalization–another one of their stores is feeding off of the original store’s traffic.
So why would a company put two stores in such a close proximity to each other? Oftentimes, this occurs when a company thinks that the market is large enough to support both stores. They are willing to do a little less in sales in each store as long as their total sales are still above a certain threshold. This is why Site Perfect Research focuses on net new sales, i.e., the additional sales a new store location contributes to the company once sales transfer losses from existing units is calculated.
Some level of sales transfer can be considered acceptable if the underlying strategy is to push a competitor out of a certain market. Here’s an example: let’s say you live in an area with a fairly large population. Perhaps you have a Sam’s Club and a Costco. Your area might be generating a lot of sales for each of these stores so Costco decides to put two stores in your area and gain 66% of the market. They were originally getting 50% of the total market so building this new store isn’t necessarily improving their business but it is hurting their competitor’s market share. If Sam’s Club can’t sustain itself with just 34% of the total market, it may be forced to close up. In that case, Costco would own 100% of the market.
Estimating the sales transfer loss from existing units due to the addition of new locations is a vital function of a site selection system. While important for all businesses this impact can be especially crucial for franchise companies who wish to maintain the good will of existing franchisees as the locations for new owners begin to encroach on their established service areas.
One common mistake that businesses make is to assume that 100% of sales at the existing unit will be lost from areas closer to the new store. Several factors play a role in keeping sales transfer losses lower than what may first appear likely:
- some customers are attracted to the established store for its position relative to other businesses or services he/she likes to shop (cross-shopping)
- older store is proximate to a customer’s work location – which is more of a factor than proximity to home for him/her in deciding on location for purchasing
- perceived problems by customers with tangential issues such as access, crime, undesirable elements, etc. near new location
- old habits die hard
The illustration below shows a SitePro breakdown of sales transfer projections for an existing store.
Estimating sales cannibalization can get fairly complex when more than one new or existing unit is involved. SPR’s systems, particularly the SitePro application and the custom models embedded within it , are expressly calibrated to estimate sales transfers.