Richard Florida
by Richard Florida
Thu Apr 23rd 2009 at 9:27am UTC

Home-Base Effect

There’s an undeniable home-base effect for leading consumer brands. So, Starbucks does better in Seattle; Wal-Mart in Arkansas; Heinz ketchup in Pittsburgh. Here’s the abstract for the detailed study published in the Journal of Political Economy.

We document evidence of a persistent “early entry” advantage for brands in 34 consumer packaged goods industries across the 50 largest U.S. cities. Current market shares are higher in markets closest to a brand’s historic city of origin than in those farthest. For six industries, we know the order of entry among the top brands in each of the markets. We find an early entry effect on a brand’s current market share and perceived quality across U.S. cities. The magnitude of this effect typically drives the rank order of market shares and perceived quality levels across cities.

Tyler Cowen comments; and Andrew Gelman has maps which depict a similar diffusion away from home-base effect for Starbucks and Wal-Mart.

I wonder though if this is just a home-base effect, as brands take hold where they are established and get picked up more slowly elsewhere, or if there might be another (deeper) process which would explain why certain kinds of brands – say like Starbucks and Wal-Mart – crop up in particular locations to begin with.

Your thoughts?

10 Responses to “Home-Base Effect”

  1. Andrew Gelman Says:

    Could some of this be the effect of employees and investors in the company, as well as local pride? I doubt Heinz Ketchup currently employs a lot of people in the Pittsburgh area, but over the years it must add up to a lot of people. Then add in their friends and relatives, along with people who get business from Heinz (suppliers and the like), and that’s a whole bunch of Pittsburghers with some connection to Heinz.

    Also, Heinz ketchup is something that anyone can buy. The very fact that it’s (a) substitutable with other items and (b) just different enough to be distinguishable (it doesn’t taste _exactly_ like other ketchups, it’s not a pure commodity), might make it particularly susceptible to this sort of effect.

  2. Rob Says:

    When visiting new cities, it feels pretty lame to spend time going to generic chain restaurants and stores, kowing that you could visit those places any time back home. But it seems OK, even right, for Seattle’s visitors to hang out at Starbucks. There seems to be a sort of novelty to being in the place where it all started; a uniqueness in an otherwise completely generic environment.

  3. Jay Paleja Says:

    The attachment of brands to places seems to invoke an “authenticity” that is not apparent anywhere else. Building on Rob’s point, its true that brands that grow up in certain areas are native species and thus are part of the culture of a specific place.

    Given this, what brands bring authenticity to Toronto? One apparent one is Tim Hortons which started in Hamilton and is HQed in Oakville. Although this has been hijacked by the country as a whole.
    Another would be local beers which have had strong uptake in recent years (Steam Whistle, Mill St., Amsterdam).

  4. David Sky ( @seemsArtless ) Says:

    I agree with Jay and the idea of “authenticity”; as a Torontonian I drink Steam Whistle, but now that it is available farther and farther outside Toronto it doesn’t seem quite as special. Anyone around the world can drink Heiniken, but I used to be part of an elite group that recognized how special Steam Whistle was (of course replace “Steam Whistle” with your own local brand).

  5. Patrick Says:

    How else could Dunkin Donuts be so prolific in greater boston, even when those superior krispy things came around. For that matter, how could Red Sox fans support a local brand, that consistently disappointed them until 2004?

    Still I think it varies by place. I (without a speck of proof) doubt that the local advantage for Cold Stone Creamery is very large in Tempe. And I KNOW that there are just as many cowboys fans as cardinals fans in the greater phoenix area.

    Maybe attachment to place, which is influenced by history and social capital and density and public space- is a key variable here?

  6. Chihiro Says:

    I agree with what other people have said. At the initial stage of the company growth, it hires local residents, and those who are hired buy the product of the company to help it grow. This builds the foundation of the market share. Once the company becomes successful, it moves its factory elsewhere but the loyalty remains as buying a local brand is almost like building a personal brand that states “I love my town.” These activities also signal his dedication to the town and they may be helping create a bong among local residents. In addition, the product may be just well suited to the taste of the local as many companies starts selling their products locally before it expands.

  7. NIkolai Kondratieff Says:

    My thoughts are that it doesn’t take much to get a paper published in the Journal of Political Economy these days.

  8. Yali Wei Says:

    It takes only five more days for me to complete my MBA study here at Rotman School of Management, University of Toronto. With my clock ticking for the last two exams, I can’t help thinking what the teachings and studying in this school has become part of me.

    Culture can be taught. Or we are taught by certain cultures to sustain some of the cultural elements. It sometimes feels like Neo in the Matrix movie, when he jumped off the skyscraper in the virtual world, being taught to make a decision beyond the convenient illusion our eyes see. Sometimes we live within one culture by our own choices. Sometimes it is a decision beyond our own. Sometimes we just happen to live within a culture.

    In our Venture Capital Strategy class, we were taught that home town advantage is one thing venture Capitalists tend to value on entrepreneurs. And many venture capitalists form syndicate to increase their geographical coverage while maintaining a sense of home town base. If some of my classmates make to the venture capital industry after a few years, home town advantage would be more salient because of the knowledge imbued through the class education and the rationality being taught. Is there a possibility for an arbitrage opportunity here? For example, many graduate students and researchers at University of Toronto are not originally from Toronto. Will the lack of home town advantage put this group of people at disadvantage for starting up new ventures? Highly likely if they pitch their ideas to investors who believe so and have no much knowledge of these entrepreneurs, especially when their venture ideas are at very early stage of business development. Interesting enough, there is a research group at Ryerson University that dedicates their efforts to study transnational ventures. One culture may teach us to like products produced locally while it also teaches us to look for arbitrage opportunities.

    When I was enjoying my riding days in Vancouver, I always wanted an Arc ‘teryx jacket (a Vancouver local high end outdoor soft good brand). Not only for the cool logo, but also for its functional design and slim style. Nevertheless, I ended up getting a summit series jacket from North Face because my value drivers were also on the colors and price tag that Arc’teryx was not offering. For a home-base effect to take place, the brand must have sufficient target customers locally as well as sustainable competitive advantage over other entries. I have no data but I doubt North Face has more concentrated customers in the San Francisco Bay area than locations like Vancouver for its snow sports soft goods.

    What if we look at a broader scale, say home country. Based on PBS (http://www.pbs.org/kqed/chinainside/quiz.html), the country that has the most KFC stores is not the US, but China, with about 1700 KFCs and opening 200 more per year than the US in 2007. Realizing its competitive advantage is in the market size, China has been playing the strategy of letting the world compete in China, which is similar to what the USA did around 1880s.

    What we value about short physical and/or cultural distance remains to be tested by the globalizing broadband networks. I have been living in Louisville, KY; Cupertino, CA; Beijing, China; Vancouver, BC; and Toronto in the past 12 years. Product origin has no effect in my decision of purchases. I tend to believe the cultures we have been taught, and living within, could be substantially re-shaped by better connections.

  9. Laura Sampson Says:

    I think the driver behind the success of local brands may have less to do with “brand authenticity”, and more to do with supply and demand. A new business is created when the entreprenneur recognizes a need that is not been filled by the current market. Perhaps Starbucks does so well in Seatle simply because it was created to suit their lifestyle and needs best.

    To become a successful nation-wide brand, it had to first become extremely popular within its hometown. If a brand is created to meet the needs of a particular region, then naturally it will do best in that region, despite expansion elsewhere.

  10. Fraser Says:

    It seems that there are at least 4 plausible explanations for this phenomenon.

    1. Temporal – Brands are introduced first at “home” and then expand gradually from this core. Closer to home => more time to capture market and grow loyalty
    2. Patriotism – people intentionally buy local out of pride
    3. Customization for local customers – initially based on need in home-base market, employees understand the local market better given that they live in it, “home” customers are used for testing etc. Customer preferences change with distance.
    4. Corporate focus – the farther from corporate the less control (e.g., sales force slacking-off), higher barriers to monitor/understand the market, less importance given to expanding than defending home turf.

    It would certainly be interesting to determine the relative importance of these factors, and to see a comparison to brands/products/industries that do not display this pattern.