Selecting appropriate market and location

- Prof. Hitesh A. Patel

“The way employees treat the customers is a direct result of how they themselves feel they are treated.”

Chapter objectives

1. Processes involved in selecting a retail market and site

2. Analyze a retail trading area

3. Various types of sites available to retailers

4. Difference between a planned and an unplanned shopping district

5. Various characteristics that influence retailer’s site selection

• Selecting a market area and specific location are two important decisions for a retailer

• The ultimate goal is maximum customer access• Market and location selection depends upon target market• Retailer need to understand who its current customers are, who

its competitors customers are and who makes up the potential customer bases

• People who are alike tend to live in neighborhood and have similar behavior and psychographic traits

• Geographic location matter because cost-effective product delivery and adaptation of websites to fit local market interests/ needs are necessary

Selection of right location

• 3 step process of: 1. Regional analysis, 2. Trade area analysis and 3. Actual site analysis

• Regional analysis:- A region represents a large geographical area. It could be a

part of the country, state, city, designated market area- Designated market area is composed of countries assigned

exclusively to that market area- DMAs were developed by A. C. Nielsen Company to help

measure media reach, and are defined according to population’s total TV viewing hours

Trading area analysis

• Trading area means ‘a geographic area containing customers of a particular firm for specific goods/ services’.

• A trade area should account for more than 50% or higher sales • Trade area can be a nation/ single neighbor block• Size of area depends on retailer’s objectives, like, how many

customers are needed to achieve profitability? What sales is required to achieve breakeven?

• Ray Kroc of McDonald’s insisted that franchisees live in trading area so they would understand the local market

• Often the trading area is broken down in primary, secondary, tertiary or fringe areas

• Primary area should produce at least 60% of business, secondary area additional 15-20% and fringe areas the remainder

• Main thing to look for in a trading area is a customer base that matches target market. Other variables include;

- Population of trading area- Availability of labor force for clerical, managerial and line

works- Rules/ laws that govern the area- Types of schools- Area’s economy- Number and size of competitors- Promotion network- Transport facilities- Supplier proximity

Geographic Information Systems

• GIS is used to determine trading area and making location decisions

• GIS software programs allow retailers to identify key geographic areas and to combine with psychographic/ demographic information

• Data may include information on competitors, consumer purchase behavior, no. of consumers, effective buying income

• Geographic barriers such as bridges, tunnels, rivers are included in such systems

Approaches for defining trading area: Reilly’s law of retail gravitation

• Establishes ‘point of indifference’ between two cities’ locations that help the retailer project the physical trading area

• Argues that a customer living between two cities will consider both trading areas for shopping based on distance of each area from home and the size of each area

• inventory and selection may be more important than distance, so the consumer will travel little more to get to the bigger city

• Travel distance being equal, consumer will choose the city with more population because more product assortment is available

• The point of indifference is the distance at which the consumer is indifferent about shopping at either location

• Reilly’s law of retail gravitation:

Dab = d / (1 + √Pb / Pa)

Where,

Dab = point of indifference between cities a and b

Pa = population of city a

Pb = population of city b

d = distance along most traveled route between cities a and b

Huff’s Gravity Model

• Huff’s gravity model/ huff’s law of shopper attraction states that consumers will shop at a store more often if the size of the store is increased and the distance to shopping area is decreased.

• The theory says that because the center is larger, it may have larger/ wider assortment of goods and services

• Distance has the opposite effect on probability of patronage

• All things being equal, consumer wants a shopping area close to home

• Huff’s Gravity Model (Huff’s Law of Shopper Attraction

n

PiJ = (SJ / TiJλ) / ∑ (SJ / TiJ

λ) Where; j=1

PiJ = Probability of consumer traveling from origin (i) to given shopping center or store (j)

SJ = sq. ft. of selling space in shopping location, expected to be devoted to particular product being sold

TiJ = travel timeλ = exponent reflecting effect of travel time on different types of

shopping trips (i.e. one may travel more for medical product)n = no. of shopping locations available

Index of Retail Saturation Theory

• It is strategically sound to access how deeply competitors are entrenched in a given market area

• IRS theory helps the retailer to access the level of demand and supply in various trading areas

• A trading area in which supply and demand are in equilibrium shows retail saturation

• Retail saturation means consumer needs are just being met with the existing retail facilities

• When that trading area has too few stores, the area is said to be under stored

• If too many stores/ selling space is devoted, the area is said to be over stored

• IRS is simply the sales per sq. ft. of retail space for a trading area for a given product line

• If IRS high, the area is under stored; if it is low, the area is over stored

• Index of Retail Saturation;IRS = (H * RE) / RF

Where;

IRS = index of retail saturation for given trading areaH = no. of households in given trading areaRE = annual retail expenditure for the retailer’s line of products

per household RF = retail sq. footage of a particular product for the trading area

Actual site analysis and selection

• 3 types of sites are available;1. Freestanding (isolated)2. Planned3. Unplanned

• Freestanding sites: the retailer moves into an area with no other retailers in the immediate vicinity

• Generally the store is located off the main road, highway or street

• Large retailers and medical retailers utilize isolated sites• Advantage is limited competition resulting in lower rental• It is harder to attract traffic to a freestanding site

Planned business sites

• Generally planned business site/ district is centrally managed/ owned

• The key to successful planned business site is balanced tenant mix which offers complementary merchandise to the consumer

• Planned business districts are developed to attract consumers from greater distances

• Have at least one anchor store and enough parking space to attract traffic

• 3 types of planned business sites are regional centers, community centers and neighborhood/ lifestyle centers

• Regional centers: attracts customers from an area of 5 to 15 miles• Provides general merchandise and is typically enclosed with

parking space• Malls have balanced tenancy, convenient, free parking and vast

selection of stores• Generally about 50 stores, besides one anchor store make up

regional center• Should have about 4,00,000 sq. ft. of gross leasable area (GLA),

though most regional centers are larger than this• Megamalls/ superregional centers – two of the world’s largest are –

the West Edmonton Mall in Canada and the Mall of America in Minneapolis

• Mall of America took $ 650 mn. to build, has 2.5 mn. sq. ft. of GLA and more than 4 mn. sq. ft. in total

• Community shopping centers tend to be between 100,000 to 400,000 sq. ft.

• House a smaller branch department store, large discount store, a category killer or combination of these stores as an anchor

• Have a diverse tenant mix, that includes banks, pharmacies, hair salons and specialty stores

• Neighborhood centers are planned shopping districts with a smaller anchor store and focus more on convenience goods

• Lifestyle centers is a neighborhood center targeted to upper-income shoppers, are typically outdoors with a main street type of ambience, tenants sell nonessential items, building and landscaping costs are higher than other retail developments and parking in front of the stores

• A lifestyle center is typically one-third size of a traditional regional center

• Airport malls is a community shopping center located in an airport

• 2 models for airport malls: Prime model and Developer model

• In Prime model, the airport is responsible for management of retail facilities whereas, in the Developer model, an outsider company serves as the mall manager and works to draw top retailers to the airport

• The shops in the developer model are owned and operated by individual retailers, who do their own hiring

Unplanned shopping sites

• Unplanned shopping sites result when two or more retailers move into the same area or in close proximity to each other

• Central Business Districts are city center areas/ downtown areas of city

• Secondary Business Districts generally a miniature CBD, located around major transportation intersections of cities

• Neighborhood Business Districts generally relies on convenience products as the main product mix and provides shopping for a neighborhood

• Strip shopping Districts have stores visible from the road and arranged in a long ‘strip’

Characteristics of the available site

• Traffic: 2 types of traffic patterns – vehicle and pedestrian• Vehicle traffic - look not only no. of vehicles but also types of vehicles- The easier to get to the site, more business it will generate- Quality of streets and roads surrounding the site- Level of congestion in the street- Parking facilities - Are there one way streets?• Pedestrian traffic- Heavy pedestrian traffic make excellent choices for retail

location- Consider gender, their age, what are they wearing?, are they

walking alone or with others?

• Transportation considerations- Availability- Can trucks deliver inventory with ease?- Public transportation available for customers?• Site availability- Physically available?- Conditions?- Terms of rental agreement?

Thank you!!