October 28, 2015

What Happens When New Stores Open?

Quiz: When you open a new store in a new market, what happens to e-commerce sales in that market?

(a) E-commerce sales increase, because in an omnichannel world, customers simply spend more, often up to 9x more, when you give them more channels.

(b) E-commerce sales decrease as sales migrate out of the website to a new store, then resume a normal trajectory.

Well, if (a) were true, then retailers would be opening stores all over the place, because new stores would generate incremental online sales and would generate in-store sales and the math would be multiplicative and you couldn't help yourself but to double your store portfolio.

But that doesn't happen, does it? If it did, the biggest retailers wouldn't be closing stores all over the place.

Retail is a big game of whack-a-mole. When you open a store, you cannibalize e-commerce sales, you cannibalize sales from other stores in the market, and you grow in-store sales in the geographic ring where the new store is opened. The math is almost never multiplicative, as the pundits suggest it is. Cannibalization almost always happens. The smartest businesses understand cannibalization, and they account for it.