From what I've read, the theory is that the Cannibal Colony was a town that was wiped out during a starvation event, with the residents resorting to eating the dead. Thus, they all ended up in hell together, and recreated their town as it was when they were alive.
Another theory is that when an Overlord gains ownership of a person's soul, that person takes on some of the physical characteristics of the Overlord.
Cannibal Town may combine these two theories.
Sometimes creators will throw random crap into their work purely because they like the look, or they want to see what the audience will make of it. A famous example of this is the birds nest scene in
The Company of Wolves.
Angela Carter, the writer, is famous for her multilayered narratives, but when she got together with Neil Jordan, the movie director, they decided to see what would happen if they came up with something completely without intended meaning.