Wow, Teddy's a real asshole.

And the crazy thing is...he's family!

...This is a terrible explanation, You're comparing two guys with movable carts to buildings, which are.. slightly harder to move.

It explains why the two vendors would eventually be close together, yes, but if you're in a city where you have one spot where you can set up shop forever, then your choice becomes a little more complex.

One of the easier solutions to the question, and the one that I personally find more viable (especially as I work in a restaurant that's close to 3 others) is that people don't like to wait.

If you have your restaurant out in the middle of town, and you get a full dining room within the first hour of dinner service, you may go on an hour long wait. The thing is though, how many people will say "Well, it's going to be an hour, lets sit outside." vs "Well, it's going to be an hour, lets go try somewhere else." Because I'm relatively sure the latter happens more often, especially if there's another place 5-10 minutes up the road.

If, however, you have 3 restaurants all located near each other, the likelyhood of all 3 filling up at exactly the same time is small. Here's the thing though, once you fill up that first restaurant (we'll call it A) restaurant B and C will start to get overflow.

Now it seems like i've defeated my own point, but now, you have 2 more options that are less than a minute away. People will either A) try to go to either B or C, or B) Sit and wait, because they can see the parking lot for those two restaurants are also pretty full.

B) retains more business, and if they choose A) The wheel continues to spin for whichever restaurant fills up first. A fills, B and C get overflow. C fills, B and A get it.

It's a system that actually benefits everyone involved because you'll also likely increase the amount of people you'd have coming to your business just because people know that's where a cluster of restaurants is.

In the long run, it's just a mutually beneficial set up.

@Shepppard

Restaurants like to be next to one another so long as they are different products. It creates a "food destination". Preferably lack of availability or a restriction would prevent users that have a product that is very similar.

Ever notice how most retail developments only have one coffee shop or one sandwich shop? Retail users ask landlords for an exclusive use. For example, Starbucks or Dunkin Donuts will say they can be the only store that sells coffee in a shopping center. Another restaurant may serve coffee as an incidental use - that is it can't be the central part of their business. This makes it harder for a new user to enter an established market.

You seem to be fixated on peak capacity of sit down restaurants. Restaurants have to complete their own analysis of how much square footage to have to accommodate the heaviest dining times, but still cover their costs when seats sit empty. Each square foot adds to their cost.

This video is very accurate in describing how users evaluate and respond to competition within a market.

I have worked in commercial retail brokerage for the last 10 years with several national users - pharmacies, banks, restaurants, and general retail use.

As a final comment, users can and will move. People do not notice as much but retailers relocate when they must to stay competitive or to block another user from coming into a market.

Yeah, I think that's a much more accurate description of what's going on. Another example is how national chains behave when they're trying to break into a new market. Back before Starbucks was everywhere, their strategy in a new town was to build right next to the local coffee shop (and hopefully drive them out of business). People are already in the habit of going to that location for coffee; it's easier to steal someone else's customer base than try to create your own.

But still I have to upvote for a good illustration of a few game theory concepts, even if their premise that it explains business clustering is off.

@entr0py

The premise is not off at all. Starbucks simply skipped all the moving around steps and located in the "middle of the beach" where the existing coffee shop already was, because (it is likely) that is the best spot in the market.

Starbucks, or any business, does not open to "drive them out of business" they open a store to sell their goods and make a profit.

As someone who has worked with several retailers in very aggressive market sectors (pizza, fast casual, etc) I can tell you that the two vital components to any successful retailer/restaurant are 1) Good location 2) Good Operations. A good location means your customer will see you and get to you. Good operations means once they are there they will be served well.

More often then not when we start working with a new client we look at their competition not because we want to "drive them out of business", but because they have already looked at and evaluated the market. We then evaluate their locations and see if that is still the correct location or not. Markets shift for a variety of reasons - housing growth, retail expansion, major retailers relocating, etc.

"It's easier to steal someone else's customer base than try to create your own." Really? I find this to be the silliest argument. There is a limited amount of money people are going to spend on a product. Lets say a town will spend $1000 a day on coffee. If you open another coffee shop they are not going to spend an additional thousand. The $1000 is just going to be divided up. Maybe there is a slight increase because of access, but by and large people are only going to spend so much. Furthermore, people are creatures of habit. They are actually more likely to continue to go where they have been going unless you offer something better. That better might be a combination of easier access, faster service, a nicer interior, cheaper prices, or better product.

In the city I work in there are several grocery chains expanding and opening new stores. Does that mean people are spending more on groceries? No. What has happened is the grocer with the weakest operations closed. Those locations (over 30) have since been taken over by a variety of both national chains and local independent grocers (all who have better operations). This competition has meant better prices and service for customers.

I buy my coffee a block from my house (and I usually just buy the beans they roast on site) from a local shop. It doesn't bother me in the slightest that other people choose to go to the Starbucks up the street. The coffee I buy is better and I pay a premium for it.

Edit: One last thought - Among the many competitive advantages corporate users have is that they can operate at a loss or lower profit than many "local" stores. That being said the same is not quite as true from franchisee business owners (who have different advantages, hopefully).

How about same exact stores so close to each other! At my former workplace, there were two/2 99 Cents stores next to each across the street. LOL.

I believe Vancouver BC was the first or second City where a Starbucks opened on a downtown intersection, diagonally across from a Starbucks.

Caffeine is a drug.

The theory can still work, though. Rather than relocating a cart, imagine it's a new restaurant opening. That new restaurant sucks up a lot of the business of one of the prior restaurants. The prior restaurant goes out of business and the cycle starts again, repeating until there are no better locations to open new restaurants.

@ant This happens pretty frequently. It works when the market is big enough (demand) to support both of them.

Taking it back to the video - a very crowded beach could support two vendors right next to each other.

This is why retailers love good population density.

That reminds me of the last time I was in downtown Houston, there was a street intersection with 3 starbucks, 2 on the corners, one one door down. I thought it was insane, but maybe in the morning and lunch they all fill up?

@newtboy

That is pretty much correct. I've met with the Starbucks people a few times and know people who have worked there or with them.

It is similar to the restaurant discussion above. Everyone wants their coffee at the same time and they can only turn them out so fast.

In addition they want you going to Starbucks, not the Dunkin that is closer to your office.

They may also be in transition in that market - a corner spot may have opened up so they leased that in addition to their two other stores.

Every major retailer crunches a lot of data when picking stores. The metrics are usually very good at predicting sales / market share.

Explain ABC stores in Honolulu now. Teddy was cloned and an army of Teddy was pacified through the promise of retail sales.

Then why does Brick Lane in London have an endless ammount of curry places? They all seem to think "Well this is obviously a good place to open a new curry place, since there are already so many here" instead of "oh no so much competition".

@GaussZ

I've not been to Brick Lane but there are similar areas in Chicago. Chinatown has endless Chinese restaurants on the south side. Devon Avenue on the north has curry place after curry place.

These exist for a few reasons.

First, immigrants often naturally group together in certain areas of a city. This is very true of Chicago if you study the demographic profiles. It is not surprising that people want to open a business in the community they live in and eat food they are familiar with.

Second, these streets become destinations in and of themselves. "Let's go get some curry up on Devon Ave (Chicago) or Brick Lane (London)." You may not even have a particular restaurant in mind - you just go there and see what you find.

I would guess that those restaurants are able to survive because they exist in a community where there is high demand for their goods.

Those businesses are competing with each other but there is enough demand for their product in one area that they can all stay open.

Going back to the beach analogy it is like everyone on the beach wanting a LOT of ice cream AND people travelling to the beach because it is known for its great ice cream (presumably they know how to make the best ice cream, curry etc).

Back to my earlier comment, restaurants do like being next to one another and they would prefer if the product is different. Why?

Imagine there are two retail spaces available in a town that has no restaurants. You want to open a curry restaurant in one of the spaces and sign a lease with the landlord to do so. Ideally you are the ONLY restaurant in town. If people want to eat out they have to come to you. Now the landlord wants to lease out the other space - what would you like to see there most? Another Curry Restaurant, a pizza place, or an ice cream shop?

I can tell you for a fact that fast casual restaurants in the USA love being next to a Starbucks because people got to Starbucks everyday. That means if you sell sandwiches people know exactly where you are. They see you everyday and you are right next door to one of their favorite establishments etc.

Like this from The Simpsons? https://es-es.facebook.com/video/video.php?v=299403866763048