Sister store cannibalization is when different stores owned by the same parent company serve overlapping territories and earn sales that would’ve gone to the other location.
Say you have a lemonade stand. Business is going well, and the local demand for drinks is high. But then your sets up a Kool-Aid stand just a couple blocks away. They reach some people who didn’t see your stand, but they also earn sales that would’ve otherwise gone to you.
With a more prominent location, a better stand, more flavors, a little marketing, and better service, they may even cannibalize so many sales that the lemonade stand is no longer worth your time. There’s too much overlap between the areas you serve and the consumers you’re trying to reach.
Now suppose you actually own both of these drink stands. Your friend was helping your business grow. But since many of their sales would’ve gone to your lemonade stand, they’re not generating enough net new sales for your business to continue growing.
While it’s obvious that nearby stores compete with each other, it’s difficult to calculate the degree to which their sales overlap. Retailers and restaurants constantly overlook and underestimate the impact that a new location will have on their parent company’s bottom line, making it difficult to accurately evaluate opportunities.
In this article, we’ll look at the importance of calculating sister store cannibalization, why businesses often get this wrong, and how to ensure you always get it right.
When you’re weighing potential sites, you’re not just looking for good investments. You’re trying to prioritize the best possible locations. And if sister store cannibalization doesn’t factor into your location strategy, you could wind up with site models that appear to represent a huge opportunity for your business, but in reality represent a moderate opportunity for your parent company. Depending on the severity of the sister store cannibalization, your new location could even drive a sister store into the red or force them to close.
Site selection usually involves analyzing physical characteristics of the facility or site, evaluating the surrounding trade area and the unique population within it, and forecasting sales based on similar sites. And while most businesses evaluate the impact nearby competitors and other locations have on their site’s potential sales, they either overlook or miscalculate the impact a site could have on their parent company’s overall sales.
Sister store cannibalization is about understanding how much net new sales a location would bring to your parent company, which can dramatically alter the opportunity a site represents.
It’s one thing to understand the importance of sister store cannibalization. Accurately measuring it is another. Even with site selection software, most retailers can’t incorporate all of the criteria they need to holistically analyze locations. If you can’t build models that include all of the factors that influence performance, you can’t draw reliable comparisons between two different locations. The margin of error will be too high, because your model overlooks too many variables.
This means that even if you accurately assess the overlap between the areas your new location and any sister stores serve, you couldn’t really evaluate how the competition between these stores would play out in the overlap.
Additionally, some software calculates cannibalization by simply taking a percentage of projected sales based on how great the area of overlap is in relation to the total potential of the area. But you don’t want to make major investments based on simplistic estimates. Instead, you should be using mobile and demographic data to isolate the potential sales the area of overlap represents—what customers live, work, and spend time in that area? How much time? Then you can use factors like visibility, accessibility, and other site features to create detailed comparisons that help you project the actual store cannibalization
Tango Transactions and Tango Predictive Analytics equip businesses of all sizes with the tools they need to handle real estate transactions from start to finish—including comprehensive site modeling and location analytics. You can incorporate all the criteria you need to draw accurate comparisons between sites and across your portfolio, helping you understand the impact of various site characteristics. Combining mobile and demographic information with your customer data, you can build highly accurate sales forecasts and zero in on specific regions within a target trade area.
Together, these components let you see how a specific area of overlap between your proposed site and a sister store would play out: how much sales will you take from them, and how much will they take from you?
When you’re equipped to understand a site’s total impact on your parent company’s bottom line, you’ll be able to make better selections every time.
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