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?