edit: I remembered that I have heard another version, with a different take: "In a street where there are several bakeries, next business that will open up will be a bakery" - I actually like that one more.
I always thought it was a clever way to avoid paying for market research by piggybacking on someone else's.
But, I highly suggest you listen to the whole episode (hour long).
Last time I was in downtown Seattle, Westlake Center (a small shopping mall) had three. Upstairs, downstairs, and a standalone building, all within a couple minutes' walk of each other.
It's probably for the best they've seen the need to close some stores, but I almost wish they weren't, just for the absurdity of it.
http://www.theonion.com/articles/new-starbucks-opens-in-rest...
Now, if you, the new kid on the block, enter this highly competitive market, you need to be extremely clever to be competing while not loosing money and, if so you manage to compete, they would probably copy you before they die themselves.
If however you decide to take a little bit more time upfront and invest more effort to find a place where your service is needed and there is little competition, you'll be making healthy profits. That is why copying does not win in the long term and even the company in question has now had to start to make their own products.
If there's a secret hidden market somewhere well the hard part isn't starting a business there, it's finding it!
Then you find that people go to "bakery street" instead as there's a choice. The 3 stores share the whole market and you get none.