Chapter 7 Market Selection and Retail Location Analysis

1. Chapter 7 Market Selection and Retail Location Analysis

2. Selecting a Target Market • With the increased presence of alternative ways to reach customers, both geographic space and cyberspace must be considered. • The counterpart to location on the Internet is the "ease of access" a consumer has to the site • The Internet is becoming a major force in retailing • Sales expected to reach a little more than 5% over next decade.

3. Market Segmentation • The method retailers use to break down heterogeneous consumer populations into smaller homogeneous groups. • Because any single retailer cannot serve all potential customers profitably*, it is important that it segment the market and select a target market(s) • Recall the 3rd pillar of a market orientation* • Target market • A group(s) of consumers that the retailer is seeking to serve.

4. Market Segmentation • Although a retailer may identify several segments within any given market, not all targets should be considered for targeting. • For a segment(s) to be considered attractive enough for becoming one’s target market, it must meet all three criteria. • It must be measurable • It must be accessible • It must be substantial

5. Reaching One’s Target Market • Two Basic Retail Formats: • Store-Based Retailers • Retailers that operate from a fixed store location and require customers to travel to the store to make a purchase • Nonstore-Based Retailers • Retailers that reach the customer at home, work, or any place other than at a traditional store

6. Potential Retail Formats

7. Business Districts • Central Business District (CBD) • Characteristics: • Usually located around a geographic point at which all public transportation systems converge. • Make-up usually depends on history, past retail trends, and luck. • Usually their attractiveness is in decline, but they can become enhanced by increased planning, community support, and adaptation to enhance non-shopping attractions.

8. Business Districts (cont.) • Central Business District (CBD) • Strengths: • Easy public access • Wide assortment of products sold • Proximity to commercial activities • Weaknesses: • Inadequate parking (not only for customers, but also delivery) • Older stores (often in decaying conditions) • Higher rent/taxes • Potentially higher crime rates

9. Business Districts (cont.) • Secondary Business District (SBD) • Characteristics: • Smaller than a CBD • Revolves around at least one department/variety store • Located at a major street intersection

10. Business Districts (cont.) • Neighborhood District (ND) • Characteristics: • Typically smaller than a SBD • Evolves to satisfy convenience • Generally many small stores centered around one supermarket/variety store • Located on a major artery of a residential area

11. Shopping Centers / Malls • Characteristics: • Centrally owned • Planned • Balanced tenancy • Large amounts parking

12. Shopping Centers / Malls (cont.) • Strengths: • Heavy traffic • Cooperative planning and sharing of costs • Access to highways • Typically have clean and neat environments • Decreased crime rates

13. Shopping Centers / Malls (cont.) • Weaknesses: • Inflexible hours • Higher rents • Restrictions on merchandise which can be sold • Potentially too much competition

14. Free-Standing Locations • Characteristics: • Locate along major traffic routes • Lack of adjacent retailers selling competitive products • Typically large, well-known retailers because of the difficulty in attracting & holding customers in an isolated location

15. Free-Standing Locations (cont.) • Strengths: • Lack of direct competition • Generally lower rents • Freedom in operations and hours • Facilities that can be adapted to the retailer’s own needs • Inexpensive parking

16. Free-Standing Locations (cont.) • Weaknesses: • Lack of drawing power by complimentary stores • Difficulties in attracting customers for the initial visit • Higher advertising and promotional costs • Operating costs that cannot be shared • Stores that may have to be built rather than rented • Zoning laws

17. Geographic Information Systems (GIS) • Computerized system that combines physical geography with cultural geography. • Creates thematic maps • Maps that use visual techniques such as color, shading, and lines, to display cultural characteristics of the physical space

18. Components of a GIS

19. Three Steps of All Retail Location Decisions

20. Market Identification • Three Retail Location Theories • Retail Gravity Theory • Saturation Theory • The Buying Power Index

21. Retail Gravity Theory • Seeks to understand how large urban areas attract customers from smaller rural communities & determine the breaking points at which customers would be indifferent between shopping in either city. • Formula: • Where: • Dab is the breaking point from A, measured in miles along the road to B. • d is the distance between A and B along the major highway • Pa is the population of A • Pb is the population of B

22. Saturation Theory • Seeks to understand how the demand for goods & services of a potential trading area is being served in comparison with other potential markets. • Index of retail saturation (IRS) - Ratio of demand for a product divided by available supply. • IRS = (H × RE) /RF • IRS - Index of retail saturation for an area. • H - Number of households in the area. • RE - Annual retail expenditures for a particular line of trade per household in the area. • RF - Square footage of retail facilities of a particular line of trade in the area.

23. Buying Power Index • An indicator of a market’s overall retail potential & uses a weighted average of buying income (i.e., personal income, including all non-tax payments [e.g. social security], minus all taxes), retail sales, & population size. • BPI = 0.5(the area’s percentage of U.S. effective buying income) + 0.3(the area’s percentage of U.S. retail sales) + 0.2(the area’s percentage of U.S. population) • Reflects only the demand levels of the two proposed trading areas and not the supply levels; thus, it doesn’t reflect saturation levels. • Doesn’t account for competing products or stores in nearby cities.

24. Other Demand & Supply Factors to Consider • Market demand potential: • Population characteristics; Buyer behavior characteristics; Household income; Household age profile; Household composition; Community life cycle; Population density; and Mobility • Market supply potential: • Square feet per store; Square feet per employee; Growth of stores; and Quality of competition

25. Site Analysis • An evaluation of the density of demand and supply within each market with the goal of identifying the best retail site(s). • Estimating the Size of Trading Area • Important factors to consider: • By selling specifically tailored merchandise, the trade area shrinks • As mobility increases, the size of the trade area increases. • As size and assortment increases, the size of the trade area increases. • As distance between competitors increases, the size of the trade area increases. • Natural and manmade obstacles (e.g. rivers and highways) can abruptly limit the size of an otherwise large trade area

26. Description of the Trade Area • Information about areas is easy and relatively cheap to gain from information retailers (e.g. MapInfo.com) • Demand Density – the extent to which potential demand for a retailer’s goods is concentrated in one area (e.g., census tracts, ZIP code areas, or parts of the community) • Supply Density – the extent to which potential competitors of a retailer’s goods are concentrated in one area • Site Availability – even though demand may be greater than supply in a region, sites might not be available (zoning laws, no roads available, no space, etc.)

27. Example of a Demand Density Map

28. Example of a Store Density & Site Availability Map

29. Site Selection • Nature of Site • Involves its price, history, etc. • The retailer needs to investigate why it’s available before potentially choosing it. • Traffic characteristics • Parking availability • Ease of reaching the store (traffic patterns, roads, congestion at peak times, etc.) • Types of neighbors • Store compatibility – “Cluster” theory • Cluster theory doesn’t work for retailers requiring a membership (gyms, etc.)

30. What You Should Have Learned…Chapter’s Learning Objectives • The criteria used in selecting a target market. • The different options for effectively reaching a target market and the (dis)advantages of business districts, shopping centers, & freestanding units. • What a GIS is & its potential uses in a retail enterprise. • The various factors to consider when identifying the most attractive geographic market for a new store. • The various attributes to consider when evaluating retail sites within a retail market. • How to select the best geographic site for a store.