Opening a new store doesn’t always have a positive impact. Sometimes, opening a new store can lead to problems, such as store cannibalization. Store cannibalization can result in a decrease in business revenue and the risk of losing sales to competitors. This is contrary to what businesses aim for when expanding. What exactly is store cannibalization? And how can businesses avoid it? Find the complete explanation in this article.
What Is Store Cannibalization?
In business, cannibalism is a term that refers to the loss of sales or revenue caused by competition between products or locations of the same company. When a new store offers products and services similar to or the same as those sold by a pre-existing store in the same area, it can result in store cannibalization. This refers to the situation where the sales of the existing store are compromised or sacrificed due to the competition from the new store. This is why cannibalization can significantly impact retail networks, as sales shift from one store to another, ultimately leading to a decrease in revenue and profit.
For example, company ABC opens minimarket B, selling basic goods only 100 meters from minimarket A, which also sells similar goods and has been operating for a long time. Due to their proximity, buyers are divided; some go to Minimarket A, and others go to Minimarket B. As a result, sales decline compared to before, and the company loses profits.
How to Measure Store Cannibalization?
Generally, businesses can measure and observe cannibalization between their stores in two ways. These methods involve using a formula or location intelligence software that can visualize stores and show how cannibalism occurs between one store and another.
The formula for Assessing Cannibalization Level
To assess the level of cannibalization, businesses need two sets of data. First, data indicating how much sales are lost from the cannibalized store. Second, data related to how much sales the new store generates in the same period. After obtaining this data, businesses can calculate the cannibalization rate using the following formula:
Cannibalization Rate = 100 x (decrease in sales in the old store) / (sales in the new store)
Notably, the extent of cannibalization depends on the type of products or services sold and the market share held.
Location intelligence helps businesses visualize data on maps, including sales data, store locations, and more, making it easy to identify patterns and make data-driven decisions.
By using location intelligence, businesses can not only see cannibalism occurring but also observe competitors in the area.
Tips to Avoid Store Cannibalization
Let’s now discuss how to avoid store cannibalization after understanding its definition and measuring it.
Conduct Market Analysis
The first thing a business needs to do before deciding to open a new store is employ market analysis. Businesses must understand the size, growth, and segmentation of the market. They should also pay attention to the targeted consumers’ demands, preferences, and behaviors.
After that, businesses can identify competitors’ strengths, weaknesses, opportunities, and threats and observe their response to the new store.
All this information helps businesses ensure enough potential and differentiation for the new store to succeed and avoid cannibalization.
Choose the Right Location
Location is a crucial factor in establishing a new store. Many outlets close because they are in less strategic locations or too close to outlets offering similar products, leading to market cannibalization.
Consequently, businesses must consider visibility, traffic, accessibility, comfort, and compatibility with brand and store concepts.
Avoid locations close to old stores, as proximity may lead to mutual cannibalization of sales, causing confusion among consumers. However, the new store should not be too far away, as competitors might attract consumers, and the business may fail to gain new customers.
Identify Your Business’s Unique Value
Businesses need to determine the unique value between the new and old stores and competitors to avoid cannibalism and direct competition.
Businesses must communicate how the new store will sell something different or better than the existing store and competitors. This differentiation can be based on factors such as the variety of products, services, pricing, quality, experience, and design.
It’s important to note that businesses must also align this unique value with the target market segment and their needs and expectations.
Businesses should perform concept testing on predetermined concepts once they have implemented all the aforementioned tips. There are several ways to conduct concept testing, including surveys, prototypes, focus groups, and pilot stores, to gather customer, stakeholder, and employee feedback.
Monitor the Store
After constructing a new store, it is crucial for a business to closely monitor the impact of its opening on the existing store and the market. By tracking and analyzing key performance indicators such as traffic, sales, customer loyalty, retention, satisfaction, and profits, the business can gain insights into the new store’s success and make informed decisions to improve its overall performance.
By doing so, it becomes possible for the enterprise to evaluate the new store’s success, pinpoint any issues that may have arisen during the store’s development, and implement any necessary corrective measures.
Perform Cannibalization Analysis with LOKASI Intelligence
Cannibalization analysis is essential for businesses looking to optimize their retail networks and avoid cannibalism that could lead to profit loss.
LOKASI Intelligence is a location intelligence and geospatial analytics platform that can help businesses conduct cannibalization analysis. It visualizes the businesses’ owned stores, showing the distance between stores, accessibility, and competitor locations.
Thus, businesses can identify areas that have not been covered and find the right locations to build new stores.
Learn more about how Location Intelligence can assist businesses by contacting via email: email@example.com or WhatsApp: 087779077750.
What is the market cannibalization formula?
Businesses can calculate market cannibalization using the formula: Cannibalization Rate = 100 x (decrease in sales in the old store) / (sales in the new store).
What is a market cannibalization example?
A market cannibalization example is when a company, for instance, ABC, opens minimarket B, selling basic goods only 100 meters from minimarket A, which also sells similar goods and has been operating for a long time.
Due to their proximity, buyers are divided; some go to Minimarket A, and others go to Minimarket B. As a result, sales decline compared to before, and the company loses profits.
Explain what is meant by product cannibalization?
Product cannibalization is the decrease in sales of an old product because the same company introduces a new product that is similar.