Retail Concepts and the Success of National Chains

When I’m given the choice – which is not very often, I must admit – I choose to spend/invest my money as close to home as possible. What does that mean, in practice? That I like to buy gifts from friends, rather than from stores. That I would rather drink at a neighborhood coffee shop rather than at Starbucks. That (ceteris paribus) I would rather keep my money at my local credit union rather than at Citibank. All of which is entirely normal.

Seth Gitter even has rules which "everyone should follow to help smaller coffee shops," including buying a bagel or pastry if "the place is a non-chain" and you’re staying a while.

Which makes me wonder: Why is it that big national chains, be they gift shops or coffee shops or banks, do so well?

To be sure, there are economies of scale, but there are costs to scale as well, not only in terms of goodwill but also in terms of management overhead, returns to shareholders, that sort of thing. I can think of a few reasons:

  1. Lower cost of capital, and access to much more capital. Large companies can afford big advertising budgets, long leases, and other capital expenditures not available to a small business.
  2. More focus on profit: public shareholders have no interest in giving freebies to friends, or paying staff as much as possible, or generally enjoying one’s business rather than simply profiting from it.
  3. A tried-and-tested formula: most companies never become successful chains, and it’s hard to predict which ones will succeed. But the ones which do succeed are doing a lot of things right, even if they don’t exactly know what they are. A small store, by contrast, is very unlikely to alight on all those things by chance alone.

And then there’s another factor, which I think might be more prevalent in the UK than it is in the US. I was first alerted to it by my colleague Lauren, who blogged on January 18 about an entrepeneur who is "buying retail shop concepts". Lauren’s an industry veteran, so I thought this was just insider-speak until I arrived in London this month, and saw this ad on the London underground:


Here we have a shop whose pitch to potential customers is that they should "experience this new retail concept". I got to thinking, and realized that the retail concept concept, if you will, is actually quite a strong driver of buzz and foot traffic these days. Think of places like the Apple Store or Crate & Barrel’s new CB2 outlet or even (dialing back a few years) Restoration Hardware: these stores are destinations, somewhere that people want to go even if they don’t want to buy anything in particular.

All of which might conceivably explain Starbucks, at a stretch. But I still don’t see how it explains Chase Manhattan.

This entry was posted in economics. Bookmark the permalink.