Economies of density

Economies of density

The economy of density is the economic effect that opening stores intensively in a specific area reduces costs such as transportation costs and advertising costs .

In order to obtain the economic effect of density, the minimum requirement is whether or not it is possible to secure sales that exceed the operating costs of stores and distribution centers. Opening the first store in Kanto, the second store in Tokai, and the third store in Kansai seems to be effective for brand advertising, but it is actually an inefficient example.
For example, if the central area of ​​the business is Kanto, the transportation center that will be the delivery base will also be Kanto, so initially it will be transported to Tokai or Kansai far from the base Kanto, or to various places. You have to create a new delivery base, which increases the initial cost.
In addition, when advertising, it costs more to run commercials at each local station and newspaper advertisements by region. These can be wasteful and costly at startup.



Relationship with dominant strategy

The economy of density is often confused with dominant strategy, but there is no notion of difference.
Dominant literally means “dominant”, which is a strategy aimed at concentrating stores of the same brand in the same area and enjoying the economic effects of density .
In the case of the franchise model, executing the dominant strategy not only reduces business costs, but also streamlines sales guidance at the headquarters, so it is said to be compatible with retail and restaurant chains.
Seven-Eleven cites the following five points as the effects of the dominant strategy.

  1. Improvement of chain awareness
  2. Increased visit frequency
  3. Increased logistics efficiency
  4. Securing management advice time for member stores
  5. Improved advertising efficiency



Economic benefits of density

Cost reduction

For example, suppose you have a store in a remote area in addition to the area you are based in as described above. Then, advertisements and distribution centers will be needed at each location.
On the other hand, suppose you have a store in a nearby area in the same market. Then, the fact that the same store is located in a nearby area is itself an advertising effect. In addition, the close distance between stores is also effective in transporting goods, and distribution costs can be reduced.
In particular, the density economy has an excellent cost reduction effect on transportation costs, so it is said to be particularly effective in the retail and service industries that require logistics and advertising in each region.
In addition, by adopting the dominant strategy, it is possible to flexibly respond to model stores that meet the characteristics and demands of the region, so it is possible to reduce the development cost of opening new stores in regions that have already been developed.



Block the entry of other companies

If we can create strengths by increasing the density between stores in a specific area, we will create cost advantages such as transportation costs and advertising costs as mentioned above, and use that as a source of funds for further differentiated product development and strong sales promotion. Allows you to invest in, by concentrating more stores while considering density limits, new entrant brand peers will not be able to focus on store development , You will not be able to enjoy the economic effects of density. It also has little effect as an advertisement.



Density Economic Disadvantages

Density uneconomical

On the other hand, if the store opening density is too high, sales competition between stores and costs will increase . (Cannibalization). This is most noticeable in retail and restaurant chains, where the accumulation and construction of know-how to maximize the economic benefits of density is key.

In addition, in the delivery of online online shopping, which has grown rapidly in recent years, the number of deliveries handled by delivery companies has increased explosively in order to meet demand, and in addition to the increase in labor costs and outsourcing costs for delivery, in addition to this, The way drivers work is also becoming a serious social issue.



Example of representative company of density economy

Convenience store

Convenience stores may open new stores in one area less than tens of meters away.
Compared to the case where the stores are dispersed in multiple regions, it is more efficient to deliver products from the distribution center to each store and the transportation cost is lower if the stores are opened centrally.
It also aims to reduce sharing costs such as advertising costs by consolidating the same business in the same area.

Seven-Eleven has consistently opened stores with a dominant strategy since the first store opened in Japan in 1974, and from July 2019 it will open its first store in Okinawa, where there is concern about the dominant strategy, and by 2024 250 stores will be opened in Okinawa Prefecture. It is said that this is because it was decided that Okinawa Prefecture could also realize a dense economy based on the accumulation of know-how at factories and distribution centers under the dominant strategy of about 50 years. .. The company also continues to focus overseas, and while Toyota is arguably the most famous Japanese company overseas, it is not unlikely that Seven-Eleven will follow suit.


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Economies of density

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