Retail Dogma

Cannibalization

When you start growing your retail business and open more locations, cannibalization starts to become something you watch out for.

Here we will explain why cannibalization could be considered a side effect, rather than a problem, and how you can minimize it, or even use it to your advantage.

What is Store Cannibalization?

Cannibalization in Retail

Store cannibalization happens when sales at one of your store locations drop as a result of opening another location for the same brand nearby. It is almost impossible to avoid having the new locations affect the same store sales of older locations, especially if they are close to each other and share some customers.

Before making the decision about opening a new store, part of the due diligence process should include measuring cannibalization and the expected loss of revenue as a result.

Online Sales

Cannibalization can happen with opening new locations for your brick-and-mortar store and also by shifting some of your retail business online. Once you have online shopping and advertise it to your customers, you can be sure that some of them will switch their store buying to online orders, and this will result in loss of sales at your brick-and-mortar locations.

Why Is It A Problem?

The main problem with cannibalization is that you are increasing your cost base by opening new locations. You will be paying more rent, more wages, more admin fees..,etc. If the overlap of sales between the two locations is high, it simply means you have just doubled your costs but did not double your revenue by acquiring new customers, instead your sales are now split between the two locations.

This can result in loss for one, or even both, of the locations, as the revenue will not be enough to cover the costs.

How to Avoid Cannibalization?

You can avoid cannibalization by doing thorough research & due diligence before opening new stores, and being strategic about every new location you open. The new store will need to add new customers that have not been served by the existing stores.

Start by asking those questions:

  • Am I going to be serving new customers?
  • Can those customers come to my other locations easily?
  • Is my competition present in this area?
  • Will the revenue cover my operating costs?

In the last few years I have closed two stores and opened one new location.

The reason I have closed the first location and didn’t replace it with another one was because I already had another location in the same area, serving the same customers. This has resulted in loss for both of those locations, and by closing one of them customers swiftly shifted to the other one and we have seen the increase in revenue from the next year. This location, where they shifted to, became profitable again.

On the other hand, the reason I closed one location and replaced it with another one in the same area but at a better mall, was because I didn’t have any stores in this area. Also customers in this area didn’t come to my other locations across the country, so it was evident that most of the sales I will be getting from this location will be incremental to my business.

Cannibalize on Purpose?

Some retailers will accept some extent of cannibalization for a bigger purpose.

Exposure

The reason I have asked in the questions “Will the revenue cover my operating costs?” and didn’t say generate profit, is because you might accept to break even on a location, or even make small loss, for a bigger gain somewhere else.

For example, my flagship store is in the biggest and most important mall in the country. This location has a very high rent and the costs are not covered by the sales. Customers of this central location live in areas that are close to my other stores, so they are also shopping at my other stores. However; I wouldn’t mind breaking even at this location, or having a small loss, because just by being present in this mall I am getting a huge exposure for my brand. I treat the location loss as a marketing expense!

What better marketing opportunity do you want than a big window with your name and products at the most visited mall in the country?

Market Share

Another reason retailers might accept a degree of cannibalization is to protect market share.

When another mall opens in the country I ask my self: “Are my competitors going to be there? Are my customers going to buy from them?

Remember that if customers are buying from your competition they are not buying from you. It’s a pie after all.

So in some cases you will accept keeping a location open, just to protect your market share and try to make up for it in another way.

This takes us to the next point

Higher bargaining power

One of the ways to balance the effect of cannibalization on your business is by using your scale to get better deals from your suppliers. Negotiating as a single store operator is totally different than when you are a multi-unit operator. Using this bargaining power, you will be able to reduce your costs on may lines and improve your profitability.

This does not only apply with suppliers, but on many different levels. For example when you become a bigger employer you will probably be able to attract talents at lower costs.. same applies also to dealing with landlords.

You might find at the end, that what you are losing with cannibalization is made up for by the cost savings you achieved by being a bigger retailer.

Putting competition out of business

Some retailers will embrace cannibalization and get offensive in their expansion, just to put their competition out of business. Then after they have dominated the market, they will use the previous point to reduce their costs and become profitable.

This strategy, however, requires someone with deep pockets & big investors to be able to sustain going for a long time without making profits, while acquiring more market share every day..

Think Amazon?!

Consolidation

Finally, when a retail business realizes that it had expanded too fast without proper diligence, they will start to see that cannibalization is actually killing their profits, and could even kill their entire business.

In the last few years, a lot of retailers went on closing stores left & right for the same reason. This is however because in the past they were opening stores left & right, just for the sake of achieving top line growth. With the rise of e-commerce and with the playing filed being leveled for everyone, those retailers started to feel the pinch of that strategy, as their stores became unprofitable.

The wise strategy in this case is to start consolidating your stores and looking on which ones to keep and which ones to close.

In his book “Onward“, Howard Schultz spoke about the issue of Starbucks’ over-expansion, and how he had to make some painful decisions of closing stores and laying off employees, in order to save the company. I recommend reading this book in general if you want to turnaround a struggling retail business.

Read More: Same Store Sales: Understanding LFL Comparison

Bottom Line

Cannibalization is a side effect of a retailer’s growth strategy, but with proper planning and research it can be minimized, and in some cases even embraced for the sake of bigger wins.

Read our article about moving part of your retail business online and our cost comparison between brick and mortar retail vs online retail