STORE EXPANSION IN NATIONAL SPACE

Wiley and Swedish Society for Anthropology and Geography are collaborating with JSTOR to digitize, preserve and extend access to Geografiska Annaler. Series B, Human Geography.

http://www.jstor.org

Chain Store Expansion in National Space Author(s): Risto Laulajainen Source: Geografiska Annaler. Series B, Human Geography, Vol. 70, No. 2 (1988), pp. 293-299Published by: on behalf of the Wiley Swedish Society for Anthropology and GeographyStable URL: http://www.jstor.org/stable/490955Accessed: 19-07-2015 14:35 UTC

Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at http://www.jstor.org/page/ info/about/policies/terms.jsp

JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact [email protected].

This content downloaded from 212.219.220.220 on Sun, 19 Jul 2015 14:35:58 UTCAll use subject to JSTOR Terms and Conditions

http://www.jstor.org

http://www.jstor.org/action/showPublisher?publisherCode=black

http://www.jstor.org/action/showPublisher?publisherCode=swedish

http://www.jstor.org/stable/490955

http://www.jstor.org/page/info/about/policies/terms.jsp



CHAIN STORE EXPANSION IN NATIONAL SPACE

By Risto Laulajainen

Laulajainen, R. 1988: Chain store expansion in national space. Geogr. Ann. 70 B (2): 293-299.

ABSTRACT. The rudimentary theoretical basis of chain store expansion in national space is emphasized. A decision-making flowchart based on industry concentration, logistics and advertising backup, market saturation, store image, company size and familiarity with the market is presented. The flowchart does not necessarily follow conventional boundaries of retail segments but leaves much leeway for entrepreneurial experimentation with various formats.

Purpose This article probes the possibility of explaining the spatial expansion of retail chains in national space. First, two widely quoted spatial theories are eval- uated for their explanatory value. Then, observations from recent empirical research are discus- sed. Finally, the observations are consolidated into a flowchart amenable to testing with further cases.

Theoretical setting The natural theoretical starting point for a spatial retail study is the central-place theory (Berry, 1988; Jones and Simmons, 1987, pp. 125-156; Parr, 1988). The theory tries to arrange space in an efficient manner, 'efficient' meaning the mini- mization of consumer expenditure subject to a given set of needs or, alternatively, the maximiza- tion of consumer satisfaction subject to a budget constraint. The outcome is a regular pattern of centers (central-places) at varying and distinct 'levels'. A level is defined according to the number of goods (including services) offered. A higher level center always offers the full range of goods available at lower levels plus some additional ones, typical of its own level.

To minimize travel cost, consumers are basically expected to visit the closest center at the appropriate level. In an environment where the travel cost is small in comparison with the purchase price, the theory loses a good deal of its inherent explanatory power. Such is the case within urban agglomerations.

The question how purchases are allocated between various sellers (i.e. stores) in a center is

avoided by assuming that there is only one store for each type of goods in each center. Stores in sep- arate centers are independent of each other. The system is in equilibrium. It is apparent then that the central place theory offers little help in explaining the expansion of chain stores in national

space. Preferably, it constitutes a framework in which to study such expansion.

The shortcomings of the central-place theory make us sensitive to the additional properties a real-life explanatory model should have: - It should be dynamic. - It should take into account the possible exis-

tence of several similar stores in a center. - It should take into account the fact that a single

organization with a common business idea may comprise several stores. The closest approximation geography offers for

such a model can probably be found within innovation research (Brown, 1981). There is a propagator who operates among potential acceptors. Accept- ance is dependent upon the reception of an impulse, several times if necessary. The efficiency of the impulse varies in different environments and becomes weaker with increasing distance from its source. In a retailing context, the propagator can be equated with a firm, the acceptors with central- places, the impulses with attempts to establish stores, and the environment with the pattern of centers and other circumstances. For example, if the density of centers is low, the impulses are more likely to get 'lost' with increasing distance, other things being equal, and the spread of innovation will be slow

The hierarchical level of a center is likely to affect its propensity to accept an innovation. For example, a very specialized retailing format is viable only in high level centers1. A less specialized one is able to descend the hierarchical ladder, either in a strictly hierarchical fashion or by contagion to the closest smaller centers. Logically, a simple format should be successful anywhere. Our everyday experience tells us that this need not be the case. A single food store in a metropolis is quite prone to fail, its isolation being its weakness. Clearly, a central level is a necessary but not

Geografiska Annaler - 70 B (1988) - 2 293



R. LAULAJAINEN

sufficient condition for good explanation. The density of stores within a center also plays a role.

If the density within a center is important, it appears logical to expect a corresponding impor- tance between centers as well. This is not quite the same thing as the density of centers. The density of centers may be high but that of stores low, i.e. assuming that there is a minimum central level necessary for entry, only few centers have been en- tered.

The reason may be that they are already effec- tively occupied by competitors or that the firm pre- fers rapid expansion to proper.penetration. In the former case, to remain within the innovation paradigm, the propensity of the centers to accept the innovation can be scaled down and the exercise continued in the usual way. In the latter case there is no mechanistic solution, the behavior being the result of managerial judgement and as such unpro- grammable.

The inclusion of managerial judgement takes us from innovation research to economic micro theory (Samuelson, 1964, pp. 491-496). The case we are most likely to encounter in practice is oligo- poly, a competitive situation with sufficiently few actors to pay attention to each others' doings and try to anticipate and counteract them. There are no mechanistic behavioral rules for such a situation and consequently no simple models, spatial or non-spatial, either. Because of the inherent complexity of oligopolistic competition (Rapo- port, 1970, pp. 53-68, for example) and because our spatial data on it are rather scant, managerial judgement with all its connotations is played down in the following discussion.

Empirical results Previous observations A look at empirical studies reveals that the innovation paradigm has, indeed, been the one most readily if not exclusively used as an explanatory rationale. The basic approach is that of contagious expansion incorporating, if necessary, hierarchical elements.

Fairly straightforward contagion is suggested by Brown (1981, pp. 63-68), quoting Friendly Ice Cream, a New England (U.S.) cafeteria chain 1936-1974. The expansion was constrained by the location of processing facilities and capital availability and steered by certain community size cri- teria. Forty-seven per cent of the variance of the stores' opening years can be explained by log dis-

tance to the base alone. Jones (1981) arrives at a broadly similar result with Asda discount food stores in the U.K. 1965-1979. There is a +0.60 rank correlation between a store's opening date and its distance from the base. The attachment to contagion is remarkable considering that most of Asda's merchandize was delivered directly to the stores (drop shipped) thus obviating major warehousing facilities.

In a later study Jones (1988, pp. 147-148) shows how the convenience store chains Misselbrook and Western and 7-Eleven chose to stay close to their 'roots' the first years after their establishment in the 1970s and 1980s, presaging subsequent contagion. As the availability of capital was no problem at least for 7-Eleven, Brown's explanation (above) needs to be reconsidered. Bird and With- erwick (1986, pp. 309-310) observe the cautious initial expansion of Marks and Spencer 'five-and- ten' stores from Leeds to other working-class cities and towns in central and northern England 1884-1900. Jones and Simmons (1987, pp. 149- 153, 180-181), by quoting Canadian examples, generalize this into a tendency of small-town companies to operate in small-town environments, and the other way round.

Some other studies adopt a more qualified stand towards contagion. Watts (1975, pp. 368-375) describes the expansion of Boots pharmacy chain in the U.K. 1849-1924 with the help of isochrones and creates the impression of contagion. The subsequent finding that 'large' places have a better chance of receiving an entry suggests, however, a hierarchical component, how strong is difficult to evaluate, since the lower size limit is a mere 25,000 inhabitants. Erlandsson (T6rnqvist et al., 1986, pp. 291-294) interprets the initial expansion of Hennes & Mauritz, a Swedish apparel chain, as contagion but shifts to the hierarchical mode once the core area is abandoned.

As Watts' and Erlandsson's explanations are in- direct, ex post rationalizations, a certain caution is warranted. It is always possible that there has been no clear locational policy. Jones (1982) ex- tracts this confession from the managers of M.FEI., a U.K. warehouse furniture retailer about their operations 1966-1981. To test possible unconscious hierarchical rationale, he derives a -0.45 rank correlation between the date of entry and the size of agglomeration. To judge the evidence as being 'only limited' is probably correct.

The calculations of Laulajainen and Gadde (1986, Table 3) on three Swedish variety chains,

294 Geografiska Annaler ? 70 B (1988)

? 2




Epa, Tempo and KF, give stronger support to the hierarchical effect and the gradual lowering of the entry threshold in particular. The clearest stand on the hierarchical mode probably comes from Schil- ler (1981, pp. 20-22), studying Mothercare, a U.K. maternity chain. Strictly speaking, Schiller's study is comparative statics rather than true dynamics, comparing the situation of 1973 and 1979 only. Even so, Mothercare's unique features, the practi- cally perfect fit with the urban hierarchy, the policy of building only one branch to a city and the status of being the major specialist in its segment, all speak for an orderly expansion down the hierarchy.

As most of the examples are derived from different retailing segments, variation in the expansion mode, contagion or hierarchy, is only natural. The explanation, however, is more enigmatic. It would be nice, for example, if consumer buying behavior could be used for the purpose. This is unlikely because the emphasis of behavioral studies is on the local level, while the current problem is regional or national (cf., however, below). A fresh look at the problem is, therefore, warranted. Another shortcoming of existing evidence is that most of it originates from countries that are small in area with a well-contoured urban hierarchy and very little possibility of varying the spatial expansion paths. Therefore, the following explanation relies heavily on a recent study conducted in the U.S. in which the spatial histories of some ten retailing segments, many with several companies are de- scribed (Laulajainen, 1987).

The acquisition way The first decision which an expansionary firm must make is whether it should proceed by es- tablishing new units, the greenfield alternative, or whether it is more prudent to go the acquisition way. Acquisition has two spatial implications. The obvious one is that acquisitions can be made only where appropriate objects are available, not neces-

sarily where the company would like to make them (Laulajainen, 1987, pp. 180, 187, 222, 230-233; ibid., 1989). The less obvious, although theoret- ically equally inconvenient, implication is that

large acquisitions in particular tend to cut across theoretical lines of reasoning and simply involve sizable parts of the national territory (Laulajai- nen, 1987, pp. 125, 216, 222; ibid., 1989).

A strong argument for acquisition is that the retailing segment is highly concentrated into a few

companies. If concentrated, it is usually also mature. And if mature, the existing companies tend to have a strong image, further obstructing greenfield entry. Concentration and maturity apply more on the national than the regional scale, while image has a strong regional if not local component (cf., below). Which retailing segments feature these characteristics depends on the time period. At present, conventional department stores and gasoline stations, for example, should qualify (Laulajainen, 1987, pp. 59-61, 169-170).

Logistics Because of the spatial undercurrent of this discussion, it is natural to anchor it to points which are fixed in space, such as warehouses and company headquarters.

Warehouses are important because they involve a fixed cost, which must be allocated to a sufficiently large throughput to keep the operation economically viable. It follows that, in segments where it is desirable to own warehouses, spatial expansion is constrained by them. For example, new stores are only built within an area that can be serviced by a delivery truck making a 24 hour round trip (Laulajainen, 1987, pp. 159, 162-163, 166). When this radius is exceeded, a new warehouse is built to permit further expansion. And once the newbuilding is ready, its distribution radius must be filled with stores to allow reason- able capacity utilization, say 80 per cent. The dominant mode is contagion, implying one single operational area.

Implying but not dictating. There are companies whose operations take place in several non-adja- cent areas. This is possible when each area can

support a warehouse. Such areas are usually cen- tered on large metropolitan markets, because there even a modest market share, say 5 per cent, gives the necessary volume (Laulajainen, 1987, pp. 64, 66, 70). This bias for large markets lends the

expansion a hierarchical flavor without, however, fully authorizing the use of the label.

Retail segments where company-owned warehouses are almost a must are supermarketing and discounting. The reason is the bulkiness of merchandise combined with low margins. It is im-

portant to realize, though, that the rule can be circumvented (Jones, 1981, above). Some manu- facturers insist on drop shipments, warehouses or not. The remaining warehouse space can then be rented from wholesalers. The relevant question is

Geografiska Annaler - 70 B (1988) - 2 295



R. LAULAJAINEN

the relative price and quality (speediness, reliabili- ty, secrecy) juxtaposed with the company's desire to expand rapidly, not the absolute necessity of owning a warehouse (Laulajainen, 1987, pp. 75, 83).

In less clearcut cases than supermarkets and discounters, warehouses can still give the company a substantial competitive edge in the form of sup- plier discounts and broader assortment, the more important the more customer demand peaks. Toy retailing offers a well-known example (Laulajai- nen, 1987, p. 111).

At the opposite end of the spectrum, stores themselves can take over the warehousing function. Furniture has long been marketed in warehouse format, parallel to the normal showroom operations (Laulajainen, 1987, pp. 94-95). More recently, warehouse clubs, essentially huge, limited assortment general stores, have come into the limelight. If contagion is their expansionary mode, there must be some other explanation than the possession of warehouses.

Image The other spatial anchor, the headquarters, com- bines two related forces, the cultural aspect and the corporate image. The cultural aspect manifests itself in the company's familiarity with the market. To some extent, the knowledge can be obtained from statistical sources and the trade press. But more profound acquaintance, for which there is no substitute, can be gained only through actual operations. Obviously, the farther the organization departs from its home ground, the greater the like- lihood of its encountering an unfamiliar environment. Likewise, the larger and stronger the company becomes, the more resistant it is to the inevi- table cultural shocks.

Logically, companies have a strong preference for operating in familiar surroundings (Bird and Witherwick, above). Organizations with roots in small towns hesitate for a long time before enter- ing metropolitan markets and those with big city origins baulk at doing business in a rural environment (Jones and Simmons, 1987; Laulajainen, 1987, pp. 29, 32, 35, 99, 105, 144, 163).

Corporate image is a function of the exclusive- ness, real or perceived, of its merchandise, setting and service included, and the time the company has been operating in a particular market, without necessarily having a physical presence there. The oldest market is usually at or close to the head-

quarter location, and consequently the image is strongest there, further strengthening the rationale of staying close to one's roots.

Quality image necessitates a certain type of clientele, to be found in sufficient numbers only in the largest cities. This is a strong argument for the hierarchical expansion, although it does not completely exclude contagion either, which may simply advance at the appropriate hierarchical level (Brown, 1981; Laulajainen, 1987, pp. 131- 138).

In addition to the length of presence, the strength of the corporate image depends on the in- tensity with which it is advocated, i.e. advertised. True, there are companies which do a minimum of active advertising. They may rely on impulse purchases by the pedestrian traffic, as newsstands do. Passing on information by word of mouth may be sufficient, as the off-price apparel stores have found to their advantage (Laulajainen, 1987, p. 125). Or advertising may be the problem of the manufacturing echelon as in the publishing business. Clearly, the lack of any necessity to advertise removes one important constraint from freewheel- ing spatial expansion. It is important to note here the direct link between consumer buying behavior and the broad strategical issues of a chain operation.

Retailing segments which advertise fairly regu- larly are, nevertheless, the normal case. The wider the coverage of the medium, the higher is its price and the larger the sales volume needed to justify the effort. If the store trade area is wide (consumer buying behavior again), good market coverage by the medium is desirable, and there is little leeway for avoiding the effect of scale economies. If, on the other hand, the store trade area is small, there is at least a possibility of considering less costly media such as tabloids and flyers should the number of stores be insufficient for complete market coverage. Occasional evidence in the trade press suggests that national and regional chains are less open to this possibility than local chains and independent retailers. Therefore, the main rule is to concentrate operations rather than disperse them. The analogy with warehousing is not far away.

Supervision The message is similar when it comes to managerial effort. Any operation needs a dose of supervision. Part of it, and probably the most important part, is face-to-face communication, not just along

296 Geografiska Annaler ? 70 B (1988)

? 2




Greenfield OR Acquisition

HOW -1 0 .1

Close to Contagion Anywhere Large Hierarchy Strict WHERE roots metropolis with contagion hierarchy

Small Warehouses; Warehouses; Quality WHY size Advertising Advertising image

Fig. 1. The three layers of chain store expansion. Source: Author.

established lines of organizational charts but also unprogrammed contacts between top executives and the front line. If operations are dispersed, managers are prone to cut the number of contacts and run the risk of alienating themselves from the field (Laulajainen, 1987, pp. 90, 143, 158, 167, 196, 226, 230). Again the advice is, concentrate and saturate.

Flowchart The discussion has uncovered three layers of questions to be answered when explaining chain store expansion in national space: HOW, WHERE and WHY. The layers overlap to an extent but keeping them apart helps to clarify matters. The layer WHERE answers the geographical question of expansion mode.

The answer to HOW is, either by greenfield entry or acquisition. The choice depends on industry concentration and the strength of corporate images. There is thus a link between HOW and WHY, while it is not possible to see any connection between HOW and WHERE. Indeed, greenfield entry and acquisition seem to be broadly neutral as to the mode of expansion.

The answer to WHERE can be consolidated in- to a bipolar scale with 'close to roots' and 'strict hierarchy' as the opposite poles and 'anywhere' as the indeterminate midpoint (Figure 1). Among the remaining labels the mutual place of 'large metropolis' and 'hierarchy with contagion' is open to discussion.

Five rationales can be offered when answering the question WHY. To an extent they can be allocated to specific expansion modes (Figure 1), sug- gesting, for example, that logistical and advertising costs weigh heavily when expansion is by contagion or large metropolitan markets. The ra-

tionale which has been left out of Figure 1 is supervision. While it is true that managerial time should be economized in the same way as logistical and advertising costs, its unique character discourages, nevertheless, rigid allocation to a particular mode.

Useful as the three-layer scheme is for clarifying concepts and their mutual relations, it is not an operational decision-making tool. For that purpose the rationales (WHY) must be arranged in a flowchart with paths leading into unambiguous modal boxes (WHERE).

The position of the greenfield/acquisition dichotomy (HOW) should also be determined. Fortu- nately, the dichotomy poses few problems, since it is largely independent of both the expansion mode (WHERE) and its rationales (WHY). It is sufficient to make the choice in the beginning and proceed then in the normal way (Figure 2).

When supervision is excluded, for the reason given above, four rationales remain. They can be viewed as decision nodes at which the logic bifur- cates into two. The four nodes can be arranged into 4 != 24 different sequences. The sequences are somewhat too numerous to be examined ex- haustively. A heuristic scheme will suffice as long as it allows an unambiguous decision tree.

The suggested flowchart (Figure 2) is based on the opinion that it is useful to differentiate between the two supposedly most important and common modes, contagion and hierarchy, at an ea- rly stage. This is achieved by the decision variables 'warehouses' and '(quality) image'. It would be just as well to isolate the only expansion mode of small companies in the very beginning, before the rather irrelevant (in their case) questions on warehouses and quality image are raised. Whichever the way, advertising is the only decision variable left and the completion of the flowchart becomes a simple matter.

Geografiska Annaler - 70 B (1988) ? 2 297



R. LAULAJAINEN

Strong image OR Concentrated structure

Toys Dept. stores Books no Gasoline Home impr.no

s Do res

Build Acquire HOW

no Warehouses _yes Apparel Supermarkets Books Discounters

Quality image > Hierarchical WHERE

Advertising .es Contagious OR

Newsstands Large blocks no

Of f - price

Small company Close to roots

no

Anywhere Assumption: Above threshold!

Advice: Saturate!

Fig. 2. Flowchart for chain store expansion mode. Source: Author.

The flowchart has been furnished with labels of retailing segments and formats which appear to follow a particular logic (path) and face a particular decision node. The labels are tentative rather than authoritative, thus reflecting the multitude of retailing formats and management philosophies. Therefore, one should refrain from counting the number of identified segments and formats, seem- ingly ending in a modal box, and using the result as an indication of the prevalence of a particular expansion mode.

What should be possible is to acknowledge the four modes, and their unindicated variants (Figure 1), with the preceding rationales as a fair represen- tation of possible building blocks, anchored to the reality of commercial life and therefore worthy of further enquiry.

1.5 Acknowledgements The article was catalyzed by the questioning of Professor Bart J. Epstein, Kent State University, and Dr. Magnus Thorell, Gothenburg University Business and Law School. Dr. H.D. Watts, Senior Lecturer, University of Sheffield, suggested many useful references.

Note i The supermarket and the car dealer represent different re-

tailing segments, the full-service gas station and the self-service station different formats of the same segment.

References BERRY, B. (1988): Market Centers and Retail Location, pp. 1-21,

in BERRY. B. J. L., PARR. J., etal.: Market Centers and Retail Location. Englewood Cliffs: Prentice Hall.

BIRD, J. H. and WITHERWICK. M. E. (1986): 'Marks and Spencer: The Geography of an Image'. Geography, 71: 305-319.

298 Geografiska Annaler - 70 B (1988) . 2




BROWN. L. A. (1981): Innovation Diffusion. A New Perspective. London: Methuen.

JONES. K. and SIMMONS, J. (1987): Location, Location, Location. Toronto: Methuen.

JONES. P. (1981): 'Retail innovation and diffusion - the spread of Asda stores'. Area, 13: 197-201.

JONES. P. (1982): 'The Locational Policies and Geographical Ex-

pansion of Multiple Retail Companies: A Case Study of M.EI.' Geoforum, 13: 39-43.

JONES. P. (1988): 'The geographical development of convenience stores in Britain'. Geography, 73: 146-148.

LAULAJAINEN. R. (1987): Spatial Strategies in Retailing. Dord- recht: Reidel/Kluwer.

LAULAJAINEN, R. (1988): 'The Spatial Dimension of an Acquisi- tion'. Economic Geography, 64: forthcoming.

LAULAJAINEN. R. (1989): Defence by Expansion. The Case of Marshall Field. Manuscript.

LAULAJAINEN, R. and GADDE. L-E. (1986): 'Locational Avoid- ance: A Case Study of Three Swedish Retail Chains'. Region- al Studies, 20: 131-140.

PARR, J. (1988): Classical Central-Place Theory; Modern Central- Place Theories, pp. 49-118, in BERRY. B. J. L., PARR, J., et al., Market Centers and Retail Location. Englewood Cliffs: Prentice Hall.

RAPOPORT, A. (1970): N-person Game Theory. Ann Arbor: The University of Michigan Press.

SAMUELSON, P. (1964): Economics, sixth international student edition. New York: McGraw-Hill.

SCHILLER, R. (1981): 'A Model of Retail Branch Distribution'. Re- gional Studies, 15: 15-22.

TORNQVIST, G. et al. (1986): Svenskt niringsliv. Stockholm: Liber. WATTS, H. D. (1975): 'The Market Area of a Firm', pp. 357-383,

in COLLINS, L. and WALKER, D. E (eds): Locational Dynamics of Manufacturing Activity. New York: Wiley.

Geografiska Annaler ? 70 B (1988)

? 2 299



STORE EXPANSION IN NATIONAL SPACE

Documents

Transcript of STORE EXPANSION IN NATIONAL SPACE