Cannibalization Analysis and Financial Viability Assessment of New Product Introduction in Footwear Market
Overview
This paper analyzes the financial impact of introducing a new sneaker product on existing footwear sales through cannibalization analysis. The study calculates cannibalization rates, costs, and duration to determine project viability, concluding that the 6.9-year cannibalization period exceeds the project's six-year lifespan, making the investment not recommended based on cannibalization factors alone.
What this coursework covers
- Definition and quantification of cannibalization with sales data from 2013-2018
- Cannibalization rate calculation at 14.5% per year and cost analysis of $20,010,000
- Project viability assessment comparing cannibalization duration to project lifespan
- Endorsement revenue data and consideration of alternative financial metrics (IRR and NPV)
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Cannibalization in this context is a drop in the sales revenue, volume of sales, or market share of the existing footwear product due to the introduction of the new product (the sneaker 2013).
The table below indicates the sales of the existing footwear.
Year | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 |
Sales | $138,000,000 | $184,000,000 | $161,000,000 | $276,000,000 | $207,000,000 | $103,500,000 |
Cannibalization | $35,000,000 | $15,000,000 | ||||
Net Revenue | $103,000,000 | $169,000,000 | $161,000,000 | $276,000,000 | $207,000,000 | $103,500,000 |
The net revenue is the first two years is obtained by subtracting the lost sales from the number of sales per year.
Cannibalization rate= 35,000,000-15,000,000 /138,000,000
$20,000,000/138,000,000 = $0.145 or 14.5% per year
The new product cannibalizes 14.5%
Cost of cannibalization is
(14.5/100) *$138,000,000 = 20, 010,000
Number of years the new product will cannibalize the existing one is:
Sales in 2013 = $138,000,000
Cannibalization per year is 20,000,000
Number of years = $138,000,000/20,000,000
=6.9 years
The new sneakers will take 6.9 years to cannibalize the sales of the existing footwear. The period is longer than the overall project’s life span, which is six years, meaning that the investment is not viable. I would not recommend going ahead with the new project. The variables considered when making recommendations are the length of cannibalization and the cost of cannibalization. However, if other factors such as internal rate of return (IRR) and NPV (net present value) were to be considered, then investing in the project would be profitable.
Endorsements per year are indicated in the table below:
Year | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 |
Endorsement | $2,000,000 | $2,000,000 | $2,000,000 | $3,000,000 | $2,000,000 | $2,000,000 |