Thursday, August 25, 2011

Urban Retail Cannibals

Think about a chain of retail stores such as a Starbucks or Safeway.   What is the optimal spatial distribution of these stores? If you place two Starbucks close to each other, do they end up cannibalizing each other's business so that total Starbucks' sales do not rise much but Starbucks pay the costs of running two stores and employing two sets of workers?  If the Starbucks CEO worried about this then he wouldn't operate two stores close to each other.

So, this was a long winded intro for this recent article about Safeway introducing a second supermarket in the general Rockridge area (about 1 mile from Berkeley).

Data can be useful.  The Safeway had data on who shops at each supermarket and from their customer "barcodes" (that offer savings if you sign up and give your zip code of residence) --- a good GIS researcher can map out where the customers live relative to where the store is and here is the punchline;

"Based on this information, Safeway concluded that the College Avenue store's customers live within an average of 2.7 miles from the supermarket. The distance between the two stores is exactly 1.2 miles. In other words, Safeway's own tracking data shows that it will be relying on many of the same customers to keep two massive supermarkets afloat."

This smells like cannibalism to me.  I would be happier with Safeway's MBAs if somebody could make a map and show that there is a competitor supermarket close to where the new supermarket will be built. Is Safeway competing with itself here or does it have a plan to lure new business (from where?) or to lure it from another supermarket?  How will this phantom supermarket respond to the new competition? If they drop their prices then consumers win but the Safeway will end up with low profits and will regret having opened the new store.

We want more jobs in the U.S and this Safeway will employ new workers but the issue arises, how do managers make decisions concerning how they predict what will be profitable new entry decisions?  What does Safeway know (that makes them confident to make this multi-million dollar entry investment) that the author of this article doesn't know?


DRDR said...

It's not be so simple as taking business from other supermarkets. The article is describing expanded Safeways, which compete in many areas.

I now live in Menlo Park where there are Safeways 3 miles apart. One is an expanded Safeway, which has a pharmacy, take-out food, a big organic section, and a big produce section. The other is a smaller Safeway which has none of the above, and there's a leeching CVS located right next door.

So it's not just about competing with supermakets similar to Safeway, it's also about competing with pharmacies, Whole Foods, even fast food. These Safeways compete with competitors' existing stores and prevent the entry of future stores.

Matt Young said...

Fewer people drive and Safeway is likely competing with smaller quick stop markets. More lower prices within walking distance of more customers.

x said...

What about protecting economic rents?. The big box non-union superstores (like Walmart and Target) will not be coming into the East Bay anytime soon - local politics and land acquisition costs make it really difficult for those type of entrants to break into the market. City councils in both Berkeley and Oakland would do almost anything to keep them out.

Thus there two major potential competitors are probably Raley's/Bel-Air/Nob Hill and Lucky/Savemart. These are the large chains with the buying power and size to effectively compete with Safeway and generally compete with Safeway in the rest of Northern and Central California.

But the East Bay is a tough market to crack. There are only a limited number of spaces suitable to build a grocery store, land prices are high and regulatory hurdles are tedious. While Nob Hill and Lucky might wish to compete with Safeway in the East Bay, they don't have enough locations in the East Bay to effectively amortize the cost of advertising. This gives Safeway pretty big pricing power in the East Bay.

Re-investing in new stores is a signaling device, letting Nob Hill and Lucky to avoid making further investments in the area. But its also a shrewd idea. The new stores help Safeway compete better against small local independents like Andronico's or the Berkeley Bowls. It signals to both of them that there are limits on how much they can go upmarket to try to avoid competing with Safeway on price.

The East Bay is valuable to Safeway. Its an area with no big box stores that will undercut it on price and with few major grocery store competitors. Its has the market power to pretty much set prices in the area as it chooses. Why not defend a market that is only going to get more valuable to Safeway in the future?

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