Real Estate II - thinking about competition ~ Sounds + Food 'n' Retail

Real Estate II - thinking about competition

"The nature of water is that it avoids heights and hastens to the low-lands. When a dam is broken, the water cascades with irresistabke force. The shape of an army resembles water. To take advantage of an army's unpreparedness, attack him when he does not expect it, avoid his strength and strike his emptiness. And like water, man can oppose you."

Tsung Yu in The art of war


art of war competition.pngIn my last article on the subject of real estate, I mentioned four areas which retailers must focus on: population, accessibility, competition, and cost. This was taken from the book Retail Marketing, whose author, Dr. Peter McGoldrick, taught me the subject some years ago.

Of these four, the one I like the most is competition, as, like in the quote, it can be somewhat fluid, it's about people, and it can drive innovation. There's actually two ways to think about competition: as either a destructive, or as a synergetic force. I'll go into both modes of thinking, and hopefully looking at it through the lens of real estate helps.

The nature of real estate competition is quite complex. For one, it is hard to take into account indirect competition such as substitutes, and difficult to guess the response that your presence will have on existing retail outlets. In addition to this, all the other factors—cost, population, and accessibility—can affect your competitive potential. Say that you settle down into an area outside of the city, and a competitor decides to intercept customers on their route to you, by placing their outlet in a more convenient location. Any real-estate strategy has to take these possible contingencies into account, hopefully not allowing them to happen all together.

There are also different ways to think about market-saturation, and I expect most cities can appear fairly saturated nowadays. But not all hope is lost. For one, new business can drive old ones out of business. Second, large areas may contain local pockets which can still present opportunities. And third, new retail-formats (some examples here) can enable large superstores to still compete in smaller markets.

The issue of magnetism is another very important factor. Not all competition is bad, rather certain anchor stores, even if they compete with you, can drive a lot of traffic your way. Studies have shown that the presence of these anchor-stores can severely benefit your store's profitability. These anchors can sometimes be single stores, e.g. a Starbucks, or groupings of smaller stores, e.g. fashion, antiques, etc.

Similarly, grouping with other stores can severely reduce the cost of doing business (e.g. shared parking and security), and also act as a risk-reducing factor.

There should be some caution, however. While a study by Brown in 1991 (see book) showed that shoppers were 35% more likely to visit adjacent stores that were of similar type (vs. the dissimilar kind), this only applied to comparison and convenience goods, and more specifically to clothing, department, and variety shops, but not to retail services! And I assume that the latter includes places like coffee-shops and mobile phone-stores.

Hopefully, that was a little more concrete than my last introductory post on this. Of all things relating to entrepreneurship, the real-estate part is the one that is probably the most complex, and it would definitely be advisable to work with real professionals on this—though understanding the issues always helps.

The picture is courtesy of 1000ventures.com


 

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