Why are petrol stations in close proximity to one another?

Why are petrol stations in close proximity to one another?

As we had plenty of free time during last year’s lockdown period (2020), we did a quick analysis of petrol station clustering in Malaysia. Methodology was simple; consider the stations are in a cluster if they are within 500 meters of each other. Data was scrapped from map providers.

We discovered that Shell and Petronas (the two largest O&G companies) is the most popular pair of petrol stations in close proximity with one another.

If you are at a Shell station, you will have a 30% chance of seeing a Petronas station. If you are at a Caltex station, there’s only 17% chance of seeing a Petronas station.

So why do competitors tend to cluster together?

Well this boils down a theory called Hotelling’s Model of Spatial Competition (Google it to find an excellent video on TedEd):

• A commercial area with many competing businesses attracts more customers than an area with a single business.
• If competing businesses are spread evenly across a large area, customers need to visit each business to get what they are searching for. This would be inconvenient to the customers because they may or may not find the item in the first one or two providers. The customer might even get frustrated/exhausted and decided not to purchase at all.
• Having competing businesses in close proximity allows customers to ‘shop around’ and ensures customers will at least buy something.
• Naturally new competing business will open nearby because the crowd is there. The business wont have to spend much for marketing for customer discovery because it could just ride on existing marketing and customer base of their competitors.

Now you would argue that this scenario is moot for petrol stations as they are selling regulated products (fuel price is capped). Well, do you know that petrol stations value foot-fall into their retail stores? This also explains why stations nowadays are mini-malls; they sell anything from chicken rice, to fast food and car wash.

So dont be mad on having competitors. They help the market to grow.