Tuesday, April 12, 2016

Thursday, March 3, 2016

Spatial Economics and Where to Locate a New Brewpub

Migration is my bell-weather:
questionable quality, but great location
and lots of punters despite a lot of local competition.  
Recently I was chatting to a fellow who is planning on opening a new brewpub in Portland.  A discussion ensued about whether it is better to find a nice untapped neighborhood or locate near other brewpubs.  There are really two aspects to this question that, to my mind at least, relate immediately to economics: location theory and externalities.

Location theory is pretty straightforward at first.  Imagine a city being one big circle with people distributed evenly within that circle.  If you are the first brewpub in Portland there is a strong incentive to locate centrally to minimize the average distance from customers.  In Portland density is not uniform and there are lots of natural barriers to travel that make it more complicated but to a first approximation, this is essentially correct.  Now what if you are the second brewpub?  Should you try and distance yourself from the first to set yourself apart?  Well if you do, you have to go nearer to an edge of the city and you potentially lose customers.  So the interesting result is that, in general, the best move is to move in next door and share the customers.

The easiest way to conceptualize this is to think of a long linear boardwalk (a la the Hotelling model) where there is a hot dog vendor right in the middle.  If you are another vendor where do you set up?  Well suppose you set up half way between the existing vendor and one end.  Assuming the hot dogs are the same and you are charging the same price then customers will simply come to the closer one (and we will assume that for those customers for whom the two vendors are equi-distant will split evenly between the two carts), you get all the customers between you and the end and, between the two carts, you get the customers that are nearer to you.

Now, is this the best you can do? No. If you move a bit closer to the one in the middle, you'll get more customers between you and the end - all of which buy from you - and the cut off point between your customers and the other stand's gets closer to the stand in the middle.  Thus you sell more hot dogs by moving closer.  This is true as long as there is some distance between you and the other stand.  The end result is that you end up right next to each other.  

There are, of course, lots of strong assumptions here (uniform distributions, same product and price, low enough prices that all customers want to buy, etc., etc.) but next time you are traveling around to smaller towns and see two supermarkets located near each other, you'll have an idea why (this was true, for example, in Ithaca, NY where I lived for 5 years).

Is this applicable to the brewpub market?  Not entirely because you would not expect to divide up customers by traveling distance alone and density of brewpub customers varies a lot.  So you probably face the trade off of finding a neighborhood with no brewpubs to locate in and capturing most of the local custom versus sharing the customers in a high brewpub goer density market.

Which brings us to the other aspect I mentioned: externalities.  Most people think of smokestacks and smog when they hear the term, but externalities can be good as well.  In the case of brewpubs, I tend to think neighboring brewpubs compete for customers but they also bring more potential customers to the neighborhood.   So the presence of one more brewpub in a small area with existing brewpubs increases the total demand for all of them (though it may well diminish the individual demand as you are dividing the customers by a bigger number).

In the end then there is no right answer but, all else equal, my instinct would be to try and stay pretty central Eastside - very high density of brewpub customers, thriving existing brewpubs.  Especially starting up, you need folks to discover you. I would be very hesitant to locate too far afield as I might capture the local market but not attract any others and it might be hard to make a reputation that would get people to come from other neighborhoods. That said, there are still many pretty close-in neighborhoods that are, as yet, untapped or barely so.  I would think that there are still some sweet spots in Portland.  Good neighborhoods with no pubs.  Or, perhaps even better, one with just one pub where a second would boost the custom for both. 

Of course, if it were me and I was a great brewer that was going to start an exceptional brewpub there is one obvious choice: Sellwood.  Yes, that's it - Sellwood.  Sellwood is the clearly the best place for a great brew-pub.  You could not do better than Sellwood.  Unless your beer is going to be mediocre then Sellwood is not for you.  Stay away.