Chapter 99Trading-Area Analysis

Dr Pointer’s NotesDr Pointer’s Notes

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Chapter Objectives

To demonstrate the importance of store location for a retailer and outline the process for choosing a store location

To discuss the concept of a trading area and its related components

To show how trading areas may be delineated for existing and new stores

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Chapter Objectives_2

To examine three major factors in trading-area analysisPopulation characteristicsEconomic base characteristicsCompetition and level of saturation

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Importance of Selecting Right location

• Location decisions are complex, costly and little flexibility once selected

• Location attributes have a large affect retailer’s success

• The right location may help compensate for a less than stellar retail mix.

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Location, Location, Location

Criteria to consider includepopulation size and traitscompetitiontransportation accessparking availabilitynature of nearby storesproperty costslength of agreementlegal restrictions

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Choosing a Store Location

Step 1: Evaluate alternate geographic (trading)areas in terms of residents and existing retailers

Step 3: Select the location type

Step 2: Determine whether to locate as anisolated store or in a planned shopping center

Step 4: Analyze alternate sites contained in the specific retail location type

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Trading-Area Analysis

A trading area is a geographic area containing the customers of a

particular firm or group of firms for specific goods or services.

Proposed trading areas should be evaluated thoroughly

Any trading area overlaps?

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Location-Trading Area

• Trading area overlap – where the same customers are served by both stores

• Need to calculate the net increase in sales to determine if it is worth while to open new store

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Benefits of Trading Area Analysis

Discovery of consumer demographics and socioeconomic characteristics

Opportunity to determine focus of promotional activities

Opportunity to view media coverage patterns

Assessment of effects of trading area overlap

Ascertain whether chain’s competitors will open nearby

Discovery of ideal number of outlets, geographic weaknesses

Review of other issues, such as transportation

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Figure 9.2 The Trading Areas of Current and Proposed Outlets

A B

A. Trading area of existing store

B. Trading area of new store

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GIS Software

Geographic Information Systems software, which combines – digitized mapping with key locational

data to graphically depict trading-area characteristics such as • population demographics• data on customer purchases• listings of current, proposed, and

competitor locations

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Private Firms Offering Mapping Software

Claritas

ESRI

GDT

GeoVue

Mapinfo

SRC

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The Size and Shape of Trading Areas

Primary trading area - 50-80% of a store’s customers

Secondary trading area - 15-25% of a store’s customers

Fringe trading area - all remaining customers

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Figure 9.5 The Segments of a Trading Area

Fringe

Secondary Primary

Store

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Destinations versus Parasites

• Destination stores have a better assortment, better promotion, and/or better image

• It generates a trading area much larger than that of its competitors

• Dunkin’ Donuts: “It’s worth the trip!”

• Parasite stores do not create their own traffic and have no real trading area of their own

• These stores depend on people who are drawn to area for other reasons

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Trading Areas and Store Type

Largest

TRADINGAREAS

Smallest

Department stores

Supermarkets

Apparel stores

Gift stores

Convenience stores

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The Trading Area of a New Store

Different tools must be used when an area must be evaluated in terms of opportunities rather than current patronage and traffic patterns– Trend analysis-projecting future based on past– Consumer surveys- gather information from

residents in the area– Computerized trading area analysis models-

using computers to evaluate potential areas.

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Advantages of Computer Models for Trading Area Analysis

• They are objective and systematic• They offer insights as to how each locational

attribute should be weighted• Useful in screening a large number of

locations• Can be helpful in assessing performance by

comparing forecasts with results.

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Computerized Trading-Area Analysis Models

Analog Model

Regression Model

Gravity Model

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Traditional Means of Delineating Trading Areas

• Reilly’s law of retail gravitation – establishes a point of indifference between 2 cities so the trading areas of each can be determined

Point of difference – geographic breaking point between 2 cities where consumers are indifferent to shopping at either trading area

• Huff’s law of shopper attraction – delineates trading areas on the basis of the product assortment (of the items desired most by consumers) carried at various shopping locations, travel times from the shoppers’ home and etc.

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Limitations of Reilly’s Law

Distance is only measured by major thoroughfares; some people will travel shorter distances along cross streets

Travel time does not reflect distance traveled. Many people are more concerned with time traveled than with distance

Actual distance may not correspond with perceptions of distance

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Huff’s Law

Huff’s law of shopper attraction delineates trading areas on the basis of product

assortment (of the items desired by the consumer) carried at various shopping

locations, travel times from the shopper’s home to alternative locations, and the sensitivity of the kind of shopping to

travel time.

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Table 9.1 Chief Factors to Consider in Evaluating Retail Trading Areas

• Total size and density

• Age distribution• Average educational

level• Percentage of

residents owning homes

• Total disposable income

• Per capita disposable income

• Occupation distribution

• Trends

Population Size and Characteristics

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Table 9.1 Chief Factors to Consider in Evaluating Retail Trading Areas

• Management• Management trainee

• Clerical

Availability of Labor

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Table 9.1 Chief Factors to Consider in Evaluating Retail Trading Areas

• Delivery costs• Timeliness• Number of

manufacturers

• Number of wholesalers

• Availability of product lines

• Reliability of product lines

Closeness to Sources of Supply

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Table 9.1 Chief Factors to Consider in Evaluating Retail Trading Areas

• Dominant industry• Extent of

diversification• Growth projections

• Freedom from economic and seasonal fluctuations

• Availability of credit and financial facilities

Economic Base

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Table 9.1 Chief Factors to Consider in Evaluating Retail Trading Areas

• Number and size of existing competition

• Evaluation of competitor strengths and weaknesses

• Short-run and long-run outlook

• Level of saturation

Competitive Situation

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Table 9.1 Chief Factors to Consider in Evaluating Retail Trading Areas

• Number and type of store locations

• Access to transportation

• Owning versus leasing opportunities

• Zoning restrictions• Costs

Availability of Store Locations

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Table 9.1 Chief Factors to Consider in Evaluating Retail Trading Areas

• Taxes• Licensing• Operations

• Minimum wages• Zoning

Regulations

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Elements in Trading-Area Selection

Population Characteristics

Economic BaseCharacteristics

Nature and Saturationof Competition

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Characteristics of the Population

• Need to have detailed analysis of population• There are many secondary sources of information• Census data –census of population• Survey of Buying Power – annual retail sales by

area, annual retail sales by specific product categories, annual effective buying income and 5 yr population and retail sales projection. Buying Power Index (BPI) weight measure which combines different economic variables that determines the attractiveness of a geographic area

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Table 9.3 Selected Population Statistics for Trading Areas A and B

Characteristics Area A Area B

Total population, 2000 13,732 15,499

Population change, 1990-2000 +8.2 +2.5

College graduates, 25 +, 2000 (%) 41.4 39.2

Median household income, 2000 $61,236 $61,242

Managerial and professional occupations (%), 2000

45.3 45.0

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Economic Basis

• This evaluates a city’s commercial and industrial infrastructure and resident’s sources of income

• Good to seek a city with a diversified economic base

• These factors should be evaluated

percentage of labor force in each industry, transportation, banking facilities, impact of economic fluctuations, future of different industries operating in the city

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Nature and Intensity of competition

• Markets with intensive competitive competition are unattractive

• These factors should be evaluating when assessing competition in an area

1. number of existing stores

2. size distribution of existing stores

3. rate of new store openings, strength and weaknesses of all stores

4. short-run and long run trends and level of saturation

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Nature and Intensity of competition

• Understored trading area – too few stores selling a specific good or service satisfy the needs of population

• Overstored trading area – area has many stores selling a specific goods and many retailers cannot make enough profits to survive

• Saturated trading area – proper amount of stores to satisfy needs of it population

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Measuring Trading Area Saturation

• Trading areas can support only a given number of stores or square feet of selling space per good/service category.

• Ratios that must be calculated/evaluated average sales per store

average sales per store categoryaverage store sales per capita or householdaverage sales per square foot of selling areaAverage sales per employee

Saturation levels per cities can be compared

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Questions