|Is there a first-mover advantage? (June 24, 2008)|
Being the first to branch in a developing market has advantages, but research shows that followers are often better off
What does the research say?
What bankers want to know, of course, is whether there really is a first-mover advantage to be gained in branch banking. Pitney Bowes MapInfo produced a statistical analysis of whether this advantage exists. Using the Branch Source Dataset from Highline Data, we identified a sample of first-mover and follower branches that opened from 1993 to 2000. From this, we analyzed the growth history of the branches opened in the same markets.
The findings indicate that there are some short-term advantages available for the first movers, but over time the followers are able to attract a greater level of deposits compared to their incumbent peers, and the latter effect appears sustainable over the long term. The first chart depicts the change in the first-mover advantage ratio based on the age of the branch. Each first mover and follower is compared at the same ages rather than at the same point in time to allow for equal maturation of the follower compared to the first mover. The results show that first-mover branches achieve relatively higher deposits than followers in the early years after opening, but are soon outpaced by follower branches. First movers outperform their followers where the bars in the graph are below the line representing equal performance, while the followers are performing better beginning in the fourth year where the bars are above the equal performance line.
These results suggest a long-term advantage to follower branches. We also performed a simple net present value analysis based on these findings. Assuming constant revenue-to-deposit ratios for all branches, 12% discount rate and common expenses, first movers generate a lower net present value.
Lone entrants under perform
Earlier we mentioned that decreasing customer switching costs and a high degree of information availability could limit potential first-mover advantages. In addition to those, banking products are infrequent purchases, such that it may not be a significant advantage for a bank to open their branch a year or two earlier than a competitor because that may not yield them access to superior sales opportunities. If the typical customer makes a banking decision once every 3.5 years, then there should be sales opportunities available to the branch whether it is the first to a local market or not.
Most importantly, the first-mover branches assume greater risk than the followers. The first clue that significant risk exists in acting first is that our study identified 214 first movers with followers compared to 1,072 lone entrants. The five-to-one ratio of lone entrants to first movers suggests that most of the markets entered were not as fruitful as those banks initially believed. In one sense, the followers have the opportunity to observe which markets have been entered and potentially which markets have been entered successfully.
It is certainly possible that followers are able to gain knowledge of the market potential by observing the performance of the first-mover branch. Evidence of this learning potential for followers was found in the research.
The results suggest that the order of followers is positively related to the advantage ratio, meaning that the second follower to the market gains a greater advantage relative to the first mover than the first follower in a market. This is interpreted as evidence of opportunities for followers to gain knowledge from the actions of the first movers and from the development of the market.
This knowledge allows the follower branch to avoid much of the downside risk of entering less profitable markets. Once this additional knowledge is coupled with the commodity-like nature of retail banking, the result is that follower branches have at least equal opportunity as their first-mover peers, with less risk involved.
Patience and planning
In many markets today, the most likely option for being the first branch to market is to be part of a new development. This can be a particularly risky approach given the dependence on developer’s plans and new households being occupied early enough in the life of the branch to make it profitable. To the extent that development and retail use patterns shift over time, the follower branch could benefit by having more information before entering the market and be able to gain an advantage over the first-mover branch that has assumed the initial risk of the market.
The issue cannot be simplified to a set of rules that suggests always or never open the first branch in a new market. But, the findings suggest there is no evidence of long-term first-mover advantages in branch banking, and that should be enough to remind banks that they need to put location-intelligent research behind branch planning decisions. BJ
[This article was posted on June 24, 2008, on the website of ABA Banking Journal, www.ababj.com, and is copyright 2008 by the American Bankers Association.]
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