Have you ever noticed that where there is one gas station, there are often two or three? Instead of spacing out each station a couple miles apart, you will come into an area, find three stations on one intersection, and then no others for miles around.
Being (physically) close to your competition seems to be wrong: wouldn't you want to be as far away from competition as possible?
For many types of businesses, it is better for prospective customers to know where they can find a wide variety of something, than for them to locate each individual business. For example, consider the diamond district in New York City. In a few blocks are many businesses all selling diamonds. Or car dealerships that tend to cluster together.
By being close to the competition, you make it easier for customers to find you, and also allows you to distinguish yourself from the competition...and keep your eyes on how they are doing. If a customer is dissatisfied with your competition it is much more likely he would visit you next door than if you were ten miles away. It also creates loyalty for your business over those 'other people' who go to the competition.
As you consider where to locate your business, take a good look at being close to your competition.