Coffee House Competition

I live in Remuera district, sort of the upper eastside of Auckland. Every few days I walk through the strip of shops to see friends; it appears that coffee shops have filled the streets. The Remuera Shopping Center basically consists of two blocks of retailers, neck to neck, and I have counted seven coffee based beverage establishments cramped in this space.

As they all operate coffee machines and rental spaces of equivalent caliber, they basically belong in a fair non-cooperative game. The same beverages are available in every one, most notably the “Short/Long Black” for Single/Double Espresso, and “Flat White” for Latte.

Did they all simply ignore the little issue of competition? Allow me to break this down into simple figures. With seven of them running simultaneously, any individual store would have a statistical expectancy of only 1/7th of potential payoff in the form of revenue each day.

So, every one of them start the days with 6/7th of potential revenue basically lost due to strategies of competing shops. The obstacle to business growth becomes apparent, or is it only to me? It gets so slow that half of them look empty whenever I walk by.

What about expenses, can these shops somehow lower over all costs by 6/7th, too? Not likely. Commercial property rent in this area runs quite steeply. With the high minimum wage in New Zealand, the store staff puts additional burden upon the businesses.

They are everywhere.
Down in the other direction from my place toward New Market, roughly five coffee shops operate within a three minute stretch. The only one that seems to flourish, Café Monet, serves food along with drinks. They must have good chefs, as I notice more people there for food than coffee. Two out of these five run almost next door to each other, closer to Broadway by the bus stops. They each could easily take up twenty customers at once. I have never observed more than four patrons inside. They now have greeters stationed at the entrance hoping to entice anyone passing by. The greeters remind me of Walmart, except these have thick New Zealand accents and they sound desperate for business.

Oh yeah, a short walk into Broadway and there goes Starbucks, business as usual all day long. Somehow the local shops seem aware enough to stay at least a block away from the giant franchise.

Any game theorist would notice how the shops did not rationalize strategies therefore giving up maximum payoff potentials. They should have done their homework, and seen the odds against them. Minimize risk, extract reward, and the odds will swing your way.