Have you ever been driving around, wanting a quick coffee but not seeing any coffee shop for quite a while? But, all of a sudden, you’ll reach a spot where you’ll see several coffee shops clustered in the same area.
This isn’t a coincidence–many retail businesses set up the shop right next to their competitors. But why do competitors open their stores next to one another? Doesn’t it hamper their ability to generate revenue?
The answer is both yes and no. Several factors influence a store’s location, and being close to competitors can actually work to a business’s advantage if the location is right.
In this article, we’ll understand why competitors open their stores next to one another, how it can boost foot traffic and sales despite the competition, and how you can do that too!
Understanding The Curious Case of “Clustering”
We can sum up why the clustering of competing businesses occurs in a simple way- they’ve struck a balance between competition and convenience.
By clustering themselves together, they benefit from shared customer traffic, while offering them the convenience of less travel time, and higher choices to keep consumers interested.
Let’s see a quick example to understand this nuance in detail.
Role of Nash Equilibrium in Competitors Opening Their Stores Next to One Another
Nash Equilibrium, by definition, is a scenario where all players/businesses have no strategic moves left to benefit themselves. And, each player has chosen a strategy, and no change can benefit them, assuming everyone sticks to theirs.
Now let’s see how this definition applies to two competing coffee shops.
Let’s assume that coffee shops A and B are located right across from each other in a prime location. Both offer something unique, but their main goal is to attract the same group of customers: busy commuters looking for a quick coffee.
If Coffee Shop A moves further (in any direction from the prime spot where competing brands are clustered), it could lose customers who value the convenience of reaching the store through minimal driving/walking time, having two options in the same place, and many other factors. The same goes for Café B as well.
This scenario reflects the definition of Nash Equilibrium/Game theory. Both coffee shops found out that the best scenario is to stay close to each other, attracting as many customers as possible, without losing anyone. Both have realized that moving to a new location is of no use to either of them.
In this case, the businesses have to capture the market and retain their customers purely by their business strategy, as the location is already perfect.
How Competitors Opening Their Stores Next to One Another Benefit Them?
This phenomenon of clustering has several advantages for businesses. Let’s dive a little deeper into how.
Increased Foot Traffic
People tend to prefer places where they can have many choices instead of just one. So, competitors opening their stores next to one another will lead to increased foot traffic, acting as a central hub for a particular location.
Shared Customer Base
Clustering allows businesses to tap into the same demographics. This will result in increased sales for your store. To give you an example, people who visit a bookstore or bakery have higher chances of visiting your coffee shop.
Convenience for Customers
Once a location becomes a central hub, people don’t have to spend too much time traveling to get what they want. This ease of access can lead to increased sales as customers are more likely to make impulsive purchases when presented with multiple choices.
Brand Awareness
Being located near competitors increases visibility. Even if customers don’t visit your shop in the beginning, over time, they would in the future just to try out.
Creating a Destination
Once brands are clustered and people start to visit often to the location, the place becomes a shopping destination over time. Many places have become such destinations like Brigade Road in Bangalore, Linking Road in Mumbai, and T. Nagar in Chennai.
So, Can I Open a Retail Store in a Location Just Because Competition Brands are Clustered?
As we discussed, brands opening their stores next to one another brings a ton of benefits. So, It’s a fair question, but the answer is NO. There are many other factors to consider apart from competition.
Opening a store in a clustered area does have some potential downsides like facing intense competition and higher operational costs due to higher rentals of popular, accessible commercial hubs.
A retail business has to ensure that the location where competitors are clustered has not reached saturation, where there is no unfulfilled demand anymore.
So, the key is choosing the right location, where the demand and your ideal customer density are high, and where the rent is affordable for you.
Here’s where our location data plays a crucial role in predicting a retail business’s success at a specific location based on various factors, including competition and more.
How Location Data Can Help Open a Store Strategically in a Clustered Area?
Utilizing our location AI platform provides deep insights into the viability of a location by analyzing key factors such as:
- Competition density: Identify how many similar businesses operate in the specified area and how their presence may impact your store’s success.
- Customer density: Evaluate the number of potential customers in the area, to ensure that the location has enough foot traffic to sustain your business.
- Revenue Prediction: Estimate the potential revenue your store can generate based on location factors and market demand.
- Risk Prediction: Assess the likelihood of challenges or failures in the area, considering factors like competition, market conditions, etc.
Analyzing these helps you avoid oversaturated markets and also helps you identify potential untapped markets where the demand is high but your competition has overlooked.
Our location AI platform lets you in on the avg. income of households of your target location, their spending capacity, etc, and the rent of a commercial space for you to open a store. This helps you mitigate the risk of store closure due to high operational costs.
Also, by analyzing foot traffic trends of a specified location on an hourly, daily, and weekly basis, you can understand at what times the foot traffic peaks to optimize your store opening and closing times.
If you’re a franchisee looking to open a store, you can identify how many existing stores are there in your target location and how it might affect the revenue of your store, helping you avoid cannibalization.
Sign up to analyze 5 sites for free and break down a location’s data sets to make informed, data-backed decisions.
Conclusion
Competitors opening their stores next to one another helps them meet the supply and demand more efficiently by drawing in more customers to a central location.
However, as we mentioned it’s vital to understand a location better with various datasets that we went through.
By leveraging these insights, you can strategically position yourself to thrive in clustered environments, turning competition into your advantage!
