Question

Scenario

You are the marketing analyst for Better Beans Coffee Company, which has nine stores nationwide. The company wants to build two additional stores. Your executive team has decided that rather than expand to new markets, they want Better Beans to begin opening additional stores in existing markets. While this will create cannibalization in the short term, it will create marketing and operating efficiencies as more stores are opened in each city.
As a scrappy and growing startup, Better Beans does not yet have access to complex marketing analytics software. Fortunately, you are an expert at gathering market data from inside and outside the company and crunching accurate numbers with nothing more than an Excel spreadsheet.
You have been tasked with calculating the two best markets for opening an additional store. You have already calculated two things that allow you to estimate the net additional revenue in each market ueafter adding a second store:
Revenue for a second store in each market
The revenue lost from estimated cannibalization at the first store.
Important note: Due to the high investments already made in existing stores, management has specified that any market where cannibalization is 25% or more should be eliminated from consideration.
Ignoring cannibalization rates for now, what two markets have the highest net revenue increases when adding a second store?
A. Dallas and Portland
B. Los Angeles and Orlando
C. Chicago and Dallas
D. Orlando and Dallas
E. Los Angeles and Portland
What two markets should be chosen for a second store based on management's criteria that the cannibalization rate for the existing store should be less than 25%? Note: Cannibalization rates and net revenue increase amounts need to be considered when making this determination.
A. Los Angeles and Orlando
B. Atlanta and Houston
C. Atlanta and Portland
D. Los Angeles and Portland
E. Los Angeles and Houston
Existing Revenue Second store Cannibalization Revenue Net Revenue
Store Revenue Estimate Drop Due Increase for
Estimate to cannibalization Market(
Second
Store
Revenue
Cannibalization)
Los Angeles 4,050,000 $2,677,500 5% $202,500 2,475,000
Houston 1,950,000 1,522,500 5% 97,500 1,425,000
Orlando 2,800,000 2,175,000 25% 700,000 1,475,000
Atlanta 2,240,000 1,695,000 30% 720,000 975,000
Chicago 2,150,000 1,735,000 40% 860,000 875,000
San Diego 1,900,000 1,505,000 20% 380,000 1,125,000
Portland 1,500,000 1,050,000 20% 300,000 750,000
Dallas 2,450,000 1,702,500 45% 1,102,500 600,000
Boston 3,150,000 2,177,500 35% 1,102,500 1,075,000

Answer 1

Better Beans Coffee Company

1. Two markets that have the highest net revenue increases when adding a second store are:

B. Los Angeles and Orlando

2. The two markets that should be choose for a second market are:

E. Los Angeles and Houston

Step-by-step explanation:

a) Data and Calculations:

Existing Revenue Second Cannibalization Revenue Net Revenue Store Store Estimate Drop Due Increase from

Estimate Cannibali- Market

(Second Store

Revenue

Cannibalization)

Los Angeles 4,050,000 $2,677,500 5% $202,500 2,475,000

Houston 1,950,000 1,522,500 5% 97,500 1,425,000

Orlando 2,800,000 2,175,000 25% 700,000 1,475,000

Atlanta 2,240,000 1,695,000 30% 720,000 975,000

Chicago 2,150,000 1,735,000 40% 860,000 875,000

San Diego 1,900,000 1,505,000 20% 380,000 1,125,000

Portland 1,500,000 1,050,000 20% 300,000 750,000

Dallas 2,450,000 1,702,500 45% 1,102,500 600,000

Boston 3,150,000 2,177,500 35% 1,102,500 1,075,000

b) Cannibalization results from the reduction in sales revenue when a company introduces another similar product or store in an existing market. Before making decisions based on cannibalization, management should study the market dynamics and set measurable criteria for making the choice to go for cannibalization or preservation of an existing market. One of the best criteria for deciding on cannibalization is the net revenue from the second product or store after cannibalization.