Should You Be Concerned That Your Branch Trade Areas Overlap?
One of the common situations we see with branch networks is that they are either too sparse within a market or too tightly clustered together. As we’ve discussed in previous blogs, it’s important to have some scale to a branch network to improve your probability of achieving outsized results. But building more doesn’t mean building more just down the street from each other. Branch spacing is important as well.
Let’s start with branch trade areas. Every branch serves a portion of a market. The denser the local population around the branch, like in more urban neighborhoods, the smaller the trade area. The more rural and less dense areas, the larger the trade area. Think about some extreme examples, like midtown Manhattan NYC compared to a small town in Nebraska. In midtown trade areas are about 4-5 blocks in any direction. That works out about what an average person can traverse in 10-minute walk (including going down the elevator). In that small town in Nebraska, it might be 5-6 miles in any direction. This time we assume they’re driving, so about a 10-minute drive. These differences can be measured.
We’ve developed 1000s of trade areas in our careers, experimenting in several different approaches until settling on our current approach. In fact, we’ve done so many trade areas we can estimate a trade area size for potential new sites by examining some local characteristics.
Back to the question at hand about spacing. If your trade areas in a market approximate a 3-mile radius around a site, then the next nearest site needs to be 6 miles away to achieve zero or near-zero overlap. While that may sound straightforward, in reality it’s more complicated. Many factors affect the shape of a trade area. Natural barriers, such as rivers or shorelines can skew a trade area towards the opposite direction. Man-made barriers such as highways, or large parks and open spaces can act similarly as a barrier. Branches located near a highway entrance will have their trade areas stretched out along the highway as customers can generally cover more ground driving on the highway in the same amount of time. Finally, the proximity of your nearest branches can also influence trade area shape. Imagine the situation where you have two branches one mile apart on a major east-west roadway. The trade area for the western branch won’t stretch too much beyond the eastern branch and vice versa. No reason for customers to drive past the eastern branch to use the western one.
In a developed branch network where you cover much of the market you are likely to have some level of overlap between branches. That is good. While you don’t want to have complete redundancy, or more than 100% overlap, except in rare cases, a small level of overlap should be targeted to provide customers convenience choices locally. We’ve discovered in most locales that an overlap of 50% in growth markets can improve sales production at the local branches. The rationale is straightforward. You have developed a locally convenient branch network making it easier for your customers and more attractive for your prospects. That benefit doesn’t increase much when you get more overlap (i.e., diminishing returns).
A simple rule of thumb is having the next nearest branch located near the edge of the trade areas of its nearest branch. That approach will give you overlap for about 40% or each trade area.
I mentioned some potential exceptions to that rule. In a growth market where you are trying to build a customer base, going denser will help you get there faster. In a mature slow-growth market where you already have a high penetration, you can reduce overlap as you optimize your local network back towards no overlap but should consider adding low-cost remote ATMs near the edges of trade areas as transactional infill touchpoints. Your customers will appreciate it.