Why don’t all chains spread nationally?

Matt Yglesias asks:

What prevents the supermarket (or drug store) market from being
consolidated into three or four (or five, or whatever) big truly
national chains? Basically, these places are all the same anyway.
There’s no local character embedded in the Giant brand. Why not reap
further economcies of scale by merging?

He notes that many chains operate only in parts of the country:

We’ve got Duane Reade in New York, along with CVS and Rite-Aid. Here in
DC there’s CVS and a little Rite-Aid, but no Duane Reade and no
Walgreens. I’ve seen Walgreens in Long Island, but not in NYC, DC, or
Boston. I infer from Phoebe’s post that they exist in Chicago. In
Florida there’s a chain drug store called Eckerd, which I noticed they
also have in the Norfolk area. In New York, supermarkets are
D’Agostino, Gristedes, or Food Emporium. Here in DC, they’re Safeway or
Giant. In Norfolk, I saw Food Lion, which I’d heard of because of the
famous lawsuit, and which I also saw when I went to the Outer Banks.
But none of the supermarkets I know from the NYC or DC markets. In the
Boston area, the only supermarkets I saw were Star Market…[TC: what about Wegmans?  Get a car!]

I can think of a few reasons for "incomplete" chains:

1. There is an optimal chain of control and monitoring is costly.  Think of successful companies as based on some fixed factors, such as an excellent CEO.  The value of that factor can only be spread so thinly, which limits the size of the chain.

2. Privately-owned companies offer significant advantages, both on the regulatory front and in terms of coherent control.  You don’t have to please the shareholders with a good quarterly earnings report each period.  Yet privately-owned firms will have a harder time finding the capital to expand.

3. Competing often depends on region-specific skills.  Even if the interior of a Giant is  homogenized, success will depend upon contacts with local distributors, a good pool of local workers, good working relationships with local governments and zoning boards, and so on.

4. Path-dependence matters.  Most suburban areas have room for only so many supermarket brands.  The ones that started first — for purely historical reasons — have a continuing competitive advantage.

5. Many local chains are simply local brand names belonging to a larger national chain with different names across different regions of the country.

6. What are the big advantages of consolidation anyway?  Most of the advertising is local not national.  And to the extent the underlying wholesale markets are competitive, large purchases won’t get you much of a bulk discount.  This, by the way, is one reason why Wal-Mart will decline as trade with the Chinese becomes increasingly common.


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