Three coins in the fountain; three coffee shops in a block?

After a post-INTA, do-it-ourselves visit to China with Mrs Kat, this Kat is pleased to be back on domestic terra firma. Oddly, perhaps, this Kat’s most lasting trade mark memory of the INTA meeting in Hong Kong was not directly connected to the meeting itself, but rather to a recurring image of three coffee shops, one more or less next to the other, located on a main road in the Wan Chai neighbourhood, here, not too far from the Convention Center. One was a Starbucks outlet, the second was a Pacific Coffee outlet, while the identity of the third shop has since escaped my feline memory. Walking along the road and observing the three coffee shops, this Kat got to wondering—why would three branded companies, each seeking custom from pass-by coffee drinkers, all invest in a shop location within the immediate shadow of not just one, but two competitors? Wasn’t one of the reasons that Starbucks itself brought back its visionary leader, Howard Schultz, here, to once again run the operation was the over-presence of Starbucks outlets on seemingly every corner in various downtowns? It led this Kat to think more about the nature of retail clustering and branding.

There is of course nothing wrong with the fact that certain industries tend to cluster in a given area. From the medieval guilds to the eye-wear manufactures in Northern Italy to the hi-tech component manufacturers in Taiwan to the hi-tech sprawl of Silicon Valley, industry after industry has enjoyed the advantages —manpower, know-how and support services — of clustering. But this tendency to form industrial clusters does not have any direct connection with the brands that may ultimately be associated with the products that are made by the various entities within the cluster. Such clusters are several distribution levels removed from the end customer who ultimately decides to purchase the product based on its brand and trade mark.

For instance, it is this Kat’s understanding that various designer labels for eyewear originate from the same manufacturing location (or a small number) in northern Italy. The overall quality of the eyewear products in the aggregate may well benefit from the manufacturing advantages that are offered by the clustering of manufacture in Italy (though Chinese competition is eroding this state of affairs). But the purchaser ultimately makes his purchase based on the interaction between price and the cachet of the designer label. From this vantage, such clustering actually may have the effect of smoothing out differences between the products, elevating even more in importance the strength of the brands competing for the consumer’s attention.

But the role of brands in an eyeglass store seems quite different from that of coffee shop outlets. There is a clear benefit to the consumer to have a choice of eye-wear brands under a single roof. Moreover, given the fact of inevitable competition, the proprietor of the eyeglass store will likely be interested in promoting its own service mark brand as the place to go when purchasing designer eye-wear (in the pre-brand ages of past, there was a view under Jewish law that the presence of a second competitor in proximity to the first entity might actually constitute a form of trespass on the livelihood of the first entity. The rise of the consumer and the centrality of brands have made that approach inapplicable to some extent. But it can be said that it still survives in concept in the form of the right to exclusive distribution for a defined territory at the level of intra-brand competition, i.e., where only a single brand is at issue.)

That may be well and good for designer eye-wear. But what about branded coffee shops? After all, the clustering is taking place at the consumer level.  At first glance, this retail outlet clustering seems an advantage to the consumer since there is greater choice from his end (sort of like the food court at a shopping mall). The position of the coffee shop purveyors is less clear. Presumably, the brand owners must believe that there is a benefit to the location, even at the risk that you are sharing the location with your branded competitors. Moreover, the brand owners must be convinced that the presence of the three competitors, each being proximate to the other, increases the potential size of the overall pass-by, coffee-drinking market. This is especially so if each of the competitors attracts a somewhat different type of customer, with the result that the presence of the three coffee shops actually provides greater consumer choice in the aggregate.

Still, there seems to be another risk for the coffee shop brands. If your coffee shop is attracting less custom that one or both of its competitors on the Wan Chai road, this will be in clear view of all. To the extent that one places a value on the social dimension of the coffee-drinking experience, then the sight of a (relatively) empty coffee shop cannot be very helpful to your brand image. Unless, perhaps, as suggested above, each of the three coffee shops attracts a somewhat different clientele, such that they are not necessarily viewed as mere substitutes for each other.

In the end, this Kat passed by all three coffee shops and simply continued on for a hundred meters or so to enter the nearest subway station. Presumably, however, a critical mass of passers-by on the road acted otherwise, choosing to enter one of the three proximate shops for a preferred coffee-drinking experience. Still, that Kat wonders—does inter-brand competition of this kind in the coffee shop world make commercial sense?

More on Pacific Coffee, here.

More on Suzy Wong and the Wan Chai neighborhood, here.

More on "three coins in the fountain", here.