When we talk to our clients, one of the most common questions they have is: “How do the locations of my competitors impact my site selection process?” Like most important questions, the answer for each business is different.
If you have a few minutes, watch this great video explaining Harold Hotelling’s model of spatial location. In short, the video has you imagine that you are an ice cream vendor on a secluded beach. Where should you set up shop to maximize your revenue? The middle of the beach, so that you are as close as possible to each customer. Now suppose a second ice cream vendor, identical to the first in every way, comes to the beach. Where should they put their stand to maximize their revenue? Surprisingly, it turns out that their best location is right next to you in the middle of the beach.
To get the intuition behind this result, consider a beach that runs perfectly west to east. You are one of two vendors that sell ice cream at the beach. Your products are identical, so customers will buy from the nearest vendor. Lets assume your competitor places their stand so that 60% of the beach is west of their stand. If you place your stand just west of their stand, then you are now closer to 60% of the available customers, leaving your competitor with only 40% of the market. Your competitor will respond by moving just west of your stand, and this series of moves will continue until you both wind up in the middle of the beach, each serving 50% of the beachgoers and unable to improve your marketshare by relocating.
Now, the real world is more complicated than a pair of ice cream vendors on a beach, but the next time you are driving around town, take note of how often you see gas stations, drug stores, or grocery stores just across the street from each other. For a quick experiment, I used my home address just northwest of Austin, Texas and paired up three sets of similar companies to see how close they were to their nearest competitor. Here are the results:
1. CVS and Walgreens were, on average, 0.958 miles apart, with an average drive time of 3 minutes to the nearest competitor.
2. Walmart and HEB (a large Texas-based grocery chain) were, on average, 0.633 miles apart, with an average drive time of 3.33 minutes to the nearest competitor.
3. Home Depot and Lowe’s were, on average, 3.46 miles apart with an average drive time of 8 minutes to the nearest competitor.
If the results above seem surprising, keep in mind that: “This is the same logic as the regional mall… You bring all the customers to one location and fight over them.”
At IdealSpot, we are currently building a comprehensive database of every business location in the United States. As the work progresses we will be able to evaluate how competitor locations play into the site selection process across different industries. Delivering powerful insights like this is one of the ways IdealSpot is leveling the informational playing field for our clients.