Market saturation is a situation that arises when the volume of a product or service in a marketplace has been maximized in its current state.
At that point, a company can only achieve further growth through product improvements, by taking market share from existing competitors, or through a rise in consumer demand.
When a market becomes saturated with stores there are no new customer acquisition opportunities for any firm operating in the marketplace. Thus, over-building occurs in situations where the market cannot absorb new construction.
The root cause of market saturation is growth. For example, in rural or isolated areas, scarcity causes people to travel further distances to obtain their goods and services.
Consider a town of 3,000 people within a 3-mile radius that has two intersecting rural highway arterials and several local connector roads. Typically, support services and other businesses often cluster around such intersecting highways, forming a retail center for the region.
Here, consumers may travel 10 miles or further to shop at this destination. So, if someone wanted to build a car wash here, they would need to consider demand of the town’s population (3-mile radius) as well as consumers living in market range (10-mile radius).
For example, if the population density in market range is 50 persons per square mile, the total potential market for this site location might be 15,000 (3,000 + 12,000). So, if 3,000 people can support one wash (four wands and one in-bay), we would expect market range to support up to a total of five such facilities.
A developer first in might attempt to short-circuit this potential outcome and create a barrier to entry by building one big wash that has the capacity of several smaller ones. Arguably, this would give a new entrant cause to think twice and perhaps consider a site location somewhere else in the region.
In many urban and suburban areas, the dynamic is somewhat different. For example, over the last several years, I’ve had an increasing number of people approach me about market saturation. This included people who found a suitable location for a new wash only to discover that someone else was planning to build nearby or build on a subordinate lot for less cost. It also included existing operators who faced a new entrant planning to build close by (almost always an express exterior).
To illustrate, let’s evaluate the expansion strategy policy for a small chain of exterior express car washes in the southeastern United States. Here, the problem of how many stores to build, in what period of time, and in what region isn’t solved through happenstance. Rather, the firm has a plan to select a region where new stores will be installed, number of units to be built, and implementation timing.
For example, this chain’s approach to site location strategy is “piggy-backing” onto other retailers’ strategies. At one location, the chain placed a new store within 1,000 feet of an existing full-service wash. At another, it placed a new express within one mile of a full-service and 1.5 miles of another express. At another location, it placed a new wash within 2,000 feet of a full-service and exterior wash, and at yet another it placed a new wash within one mile of five conveyor washes.
So, it’s crucial for developers and operators to understand the nature of investors willing to build in saturated markets and/or next to an existing wash. For example, there is a pair of operators in Chicago-land that some time ago announced publicly their intent to be kings of the $3 wash. To paraphrase: If someone thinks they are going to come in here with a $4 or $5 price, they have another thing coming.
One course is to compete on the basis of low price. However, to succeed at this, a firm must become the low-cost provider of the product or service. However, if there is a mortgage to pay, giving away free washes won’t work. Alternatively, firms can resort to creativity. The problem with creativity is most car wash innovation is equipment solutions — and anyone can buy those.
Bob Roman is president of RJR Enterprises – Consulting Services (www.carwashplan.com). You can reach Bob via e-mail at firstname.lastname@example.org.