How to reduce direct channel cannibalization when opening retail stores
In a world where two channels — direct sales and retail locations — need to coexist, how do you make the tough decisions about how to grow your retail concept? Especially, when in many situations, you can lose between 30% and 90% of your direct channel business in areas where you open retail stores?
The challenge lay in assessing risk by asking the following questions:
How will the retail location perform?
How much of that revenue at the retail location is actually new revenue?
How much of it is just taken out of the direct channel?
The key to success in identifying a quality retail location is to find the right customers who will use the store more than the direct channel. Successful multichannel retailers need to invest in locations for stores near customers who are likely to increase their shopping most, not just transfer it from one channel to the other.
So how do you identify the right customer/retail location combination to drive incremental sales?
There are three different analyses that are required to assess the risk of direct channel sales transfer when opening new retail locations: customer profiling; drive-time analysis; and retail site features review.
In general, there is a trend for customers to use a concept more frequently when there is a retail location near by. However, this increase usage is often directed at the retail channel transferring sales from catalog and Internet channels.
As with any retail company, knowing your core customers and segmenting them by channel preference and shopping behavior will provide valuable insight into which customers are most at risk of switching channels.
In today's multichannel world, there are three types of shoppers: direct only (catalog or Internet), retail only and multichannel (those who shop a combination of retail stores, catalog, and/or Internet).
Understanding the types of customers who are in the area where you are considering opening a store will enable you to determine the value of this location.
The old retail adage that determines success is location, location, location. This is no different today, but for different reasons when considering expanding your concept beyond the direct channel.
The proximity of the store to the customer plays a tremendous role in how much sales is transferred out of the direct channel. The difference in a 40% to a 65% shift in channel sales can be influenced by as little as 10 minutes of drive-time.
With that in mind, it's critical to understand a store's trade area and drive-time of existing customers when considering a new location.
Finally, the features of a site can greatly influence the shift from the direct channel to the retail channel.
In our experience, outlet locations transfer fewer sales out of the direct channel than standard retail locations, which tend to result in smaller losses in the direct channel.
Other factors that result in lower impact on the direct channel are the quality of the location and the existence of competitive retailers.
Traditionally, direct-only merchants look to add retail locations to boost sales and build stronger brand recognition. While this has proven to be a sound strategy, it is not without its risks of transferring existing customer sales to a more expensive channel.
However, with adequate analysis and planning, quality retail locations can be identified and added to the mix to drive incremental sales of both new and existing customers.