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How do I Choose a Retail Location? Lesson 3: Competitive Locationing

Updated on December 14, 2013

Question

Why are so many stores of the same type clustered in the same area? How come you can sometimes drive a couple miles without seeing a single coffee shop... but then come upon one street corner where there are several coffee shops?! Why are different gas stations always right across the street from each other?

Why are auto repair shops all located in the same area of a town?! Why are all the fashion shops on the same street?

Wouldn't it make more sense to space similar shops apart from each other, so that everyone has an equal share of the customers? So that there's only one of this type of shop in the area?

Why do businesses choose to be near similar (or even exactly the same) businesses? Does it make sense?

Coffee Shop Street

A street filled purely with coffee shops is a win-win-win-win-win situation. People from all over town come here to grab a coffee and relax.
A street filled purely with coffee shops is a win-win-win-win-win situation. People from all over town come here to grab a coffee and relax.

Answer

Being close to your competition makes perfect sense! Indeed, it would seem to make more sense to space the same type of business evenly apart from each other: instead of three coffee shops on one street corner, it would seem to make more sense to space them about a mile apart, so that each coffee shop has its own territory.

It would seem to make sense to space them apart, but it's actually a less-than-ideal solution. There is actually a lot of academic "game theory" which talks about competition, socially optimal solutions, the Nash Equilibrium, etc. All this academic talk tries to figure out why businesses usually choose to be close to each other; and the conclusion they come to is that it's a situation where none of the stores can cannibalize any of the other stores' customers.

I propose, however, that it all comes down to human psychology.

People love choice. Don't you?

If you were hungry and looking for a restaurant to eat at... would you rather come upon one Chinese restaurant and have to decide to eat there or go hungry... or would you rather come upon a street corner with a Chinese restaurant, a Mexican restaurant and a Japanese restaurant? I'm pretty confident that you'd choose the situation where you had choice! You could browse the menu of each of the restaurants, check out the prices and decide which one you'd be most satisfied with.

In Asia, they've even taken this "cluster of similar businesses" to a level not seen in countries east of the Pacific. Go to Tokyo, Hong Kong or Taipei and find yourself lost in a building with several floors dedicated to consumer electronics; find yourself on streets filled with clothing shops as far as the eye can see; browse dry goods and food products for an entire day. This kind of competitive locationing seems a bit baffling to those who haven't seen it... but I guarantee you that if you lived in one of those cities and needed to buy a new cellphone, there would only be one place that you'd go to. And, you'd know that there would be more choice than you needed, once you made the trek there.

Now, back to the restaurant example. You want to locate your store close to similar types of stores, who would sell to a similar type of customer. Even if you located your store right next to exactly the same type of businesses - it's totally fine! If McDonald's, Burger King and Wendy's were all on the same street corner, you could bet that they'd all thrive. You might even find smaller, gourmet burger shops popping up in and around that street corner... and the area might eventually become known as, "Burger Alley", and everyone in town would go to Burger Alley when they were hungry. Everyone would be making money!

The bottom line is that you should definitely locate your store in an area where stores of the same type are located; and do not be afraid to locate right beside another store selling very similar products.

Akihabara Electronics Street

If you lived in Tokyo, you'd know that the only place to get your electronics would be Akihabara. People even come from around the world to get their electronics here!
If you lived in Tokyo, you'd know that the only place to get your electronics would be Akihabara. People even come from around the world to get their electronics here!

Case Study

The appeal of choice is a very strong psychological instinct in humans.

When was the last time you were driving your car or taking the bus and decided to specifically stop off for this one specific store you noticed? If you needed some baby products and happened to see one, just one baby store... you probably wouldn't make the effort just to browse that one baby products store. However, if you noticed or knew that a certain area had lots of baby products stores, you can be sure that you'd stop to look around.

Whenever my wife and I are walking down the street of an area we're not familiar with and are looking for a place to eat... we tend to shy away from restaurants that are all by their lonesome. There's not many people here! What if there's a better restaurant down the street? How come there are no other restaurants nearby? There's not much choice here...

On the other hand, if we happen upon a cluster of restaurants, you can be sure that we're going to stop and choose one of them. Sure, each of them might seem to have a lower chance of being chosen, but you can be sure that one of them will definitely be chosen. And, with hundreds of customers making the same choice to choose one of the restaurants, your restaurant will always be chosen sometimes.

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