June 01, 2021

Incrementality of the New Store

Often the online brand opens a store and the store actually works.

Here's an example where the new store cannibalizes online sales and still works.

When the store opened, here were sales within the zip code where the store opened (rolling twelve month basis).
  • Direct = $159,706.
  • Retail = $4,864.
  • Total = $164,570.
Today (about seventeen months later), here's what we see (pre-COVID example):
  • Direct = $135,477.
  • Retail = $87,877.
  • Total = $223,354.
By subtracting the change in sales over time, we can identify the incremental impact of the new store.
  • Direct = ($24,230).
  • Retail = $83,013.
  • Total = $58,783.
On paper, it looks like the new store generates $83,013 in sales. But the Direct (online + call center) Channel generates $24,230 LESS in annual sales. This means the new store is truly generating $58,783.

How much of the sales of the new store are incremental?
  • 58,783 / 83,013 = 71%.
In other words, whatever you "think" is actually happening at the new store is wrong. Instead, 71% of the sales at the new store are incremental, while 29% of the sales are cannibalized from the online channel (in this example).

Is the new store performing at an acceptable level?

Maybe.

Work with your CFO and run a zip-code level p&l. If (in this example) the new store generates 71% incremental sales and 29% sales cannibalized from the online channel AND the resulting sales ($58,783) are profitable, by all means open more stores.

But if discounting sales by 29% results in an unprofitable outcome, then realize that your VC-inspired, pundit-endorsed strategy isn't working. That's how you want to think about this issue.

It's common for about 30% of the apparent sales of the new store to be cannibalized from your online channel. If you discount the sales you forecast for the new store by 30% and the result is still profitable, then by all means, open the store and consider more stores.

Does that make sense?


P.S.: I said there will be non-traditional content this summer. If you like hummus, you'll like this recipe (click here).





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