Do business density and variety determine retail performance?

Abstract

Outlet location plays a crucial role in retail strategy. In this paper we study the relationship between spatial density (concentration) of retailers in the trade area and their economic performance. This analysis will help managers figure out the economic potential of starting a retail business in a given area, reducing business start-up risks. We find that retail businesses located in high and low retail density zones enjoy higher performance levels, consistent with competitive advantage arising from agglomeration economies and local market power respectively. We also find that retail businesses located in intermediate density areas use a differentiation strategy based on business variety (diversification across stores). Outlets located in areas with the highest variety enjoy performance levels similar to those achieved in the agglomeration and low density areas. The results suggest that retail companies should jointly consider variety and density to determine location.