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Trading-Area Analysis

Trading-Area Analysis. Understanding Retail Trade Analysis . by Al Myles, Economist and Extension Professor Department of Agriculture Economics Mississippi State University November 8, 2007. Retail Trade Analysis.

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Trading-Area Analysis

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  1. Trading-Area Analysis

  2. Understanding Retail Trade Analysis by Al Myles, Economist and Extension Professor Department of Agriculture Economics Mississippi State University November 8, 2007

  3. Retail Trade Analysis Is a way to identify market trends within a local community, including the degree of surplus or leakage of dollars within specific retail sectors. -

  4. Why Retail Trade? Retail trade is one of the most important indicators of economic activity in a community or county because local citizens spend a large part of their incomes on goods and services. The measures of retail trade and spending reflect consumers’ preference for the retail mix in the area and show how well the economy is doing overall. Since retail is one of the major economic forces in the country, local officials often want to know how they compare with their competitors.

  5. Purpose of Retail Promotions Keeping Local Dollars at Home

  6. Indicators of Retail Activity Sales Tax Collections Market Capture Gap Analysis (Potential sales-Actual Sales) Pull factors Sales leakage

  7. Introduction -Defining a town’s trade area is an important first step in developing a strong retail sector. -This is the foundation of retail market analysis. It helps existing businesses to identify ways to expand their own market. -Increasing retail sales is one way an area can: capture dollars increase income improve employment multipliers of its local industries.

  8. Defining the Trade Area -Whatever the reasons for existing retail sales, city and county leaders can help local businesses improve these trends. -To determine the potential for increasing retail sales, one should establish the trade area.

  9. A trade area is the geographic region from which a town draws the majority of its retail customers. This can be done in several ways: • Conducting a traffic flow study, • Using a retail gravity model, • Using a zip code method, and • Using commuting data to define the trade area boundaries. Of these methods, COMMUTING and RETAIL GRAVITY approaches present the least amount of work to implement.

  10. Traffic Flow…. Is the random canvassing of parking lots at major locations in town at different times on different days and over several weeks. The locations might include The downtown area,  Major shopping destinations such as shopping malls and centers, Wal-Mart Super Center, Home Depot, Krogers’, and  Other popular establishments in town.

  11. One should combined the results of vehicle license plates from the different locations to obtain a composite count of vehicles from surrounding counties and compare them to regional commuting data. Results from a traffic study will usually reveal the major towns and counties that comprise the local trade area or market.

  12. To determine the major communities in the local market one should: • Rank order the number of cars from various counties in the region, and • Select the top five or six localities based on the highest frequency and/or maximum percentage (10% or more) of license plates in the area.

  13. Commuting… Commuting time to work by local residents is another way of delineating a community’s retail trade area. Converting commuting time to work into spatial distances or miles and plotting these data on a map, provide a visual picture of the geographic size of its trade area.

  14. Figure 1. Trade Area: Major Commuting Counties

  15. Figure 1. Trade Area: Immediate Commuting Counties

  16. Reily’s Law… Another easy way of defining the retail trade area is to use a gravity model. In retail trade analysis, the most popular method is “Reily’s Law of Retail Gravitation.” Reily’s law is a rule-of-thumb used to ESTIMATE the distance customers will travel to PURCHASE goods and SERVICES after comparing price, quality, and style.

  17. The law assumes that people desire to shop in larger towns, but their desire declines the farther the distance and time they must travel to get there. Thus, LARGER TOWNS DRAW CUSTOMERS FROM FARTHER DISTANCES THAN SMALLER TOWNS. The maximum distance a customer will travel to shop in a smaller town can be calculated using the following formula.

  18. Population and Travel Distances in Community A’s Trade Area.

  19. Figure 1. Picture of Community’s Trade Area

  20. Estimating Total Market Size Once the physical boundaries of the trade area have been identified, one should estimate the total market size. The total market consists of populations in the host community plus population from surrounding towns in the trade area.

  21. Additional customers can be derived using the formula: 3.14 X (Average Retail Trade Miles)2 X Average County Population Density Example: Community A’s population = 22,000 Average trade area retail miles = 8.46 Average trade area population density per square mile = 51.45 Number of new customers = (3.14 x ((8.46)^2) x 51.45) =11,563 Total retail customer base = 33,372 (22,000 + 11,563)

  22. In using this approach, there are a few caveats: Areas with large populations and densities per square mile can distort the actual situation in retail trade analysis. Reily’s Law is less accurate when involving larger towns.

  23. Using Information About Market Size After defining the trade area, one can ESTIMATE the local sales potential and COMPARE them to actual sales in the area. The following formula can be used to estimate potential retail sales.

  24. By comparing POTENTIAL with ACTUAL retail sales, one can determine whether the city has room for retail growth. One should compare retail sales over SEVERALYEARS to determine the LONG-TERM health of retail sectors in the city.

  25. Determining Retail Power Trade Area Capture (TAC) Information about the trade area can help one to estimate the ability of Community A’s merchants to capture the retail business of people in the area. Trade Area Capture (TAC) is an estimate of the number of people who shop in the local area during a certain period.

  26. Pull Factors… Knowledge of the trade area is the first step in retail market analysis. Knowing the trade area, one can determine the size and pulling power of local merchants in the market using a concept call pull factors. Pull factors are ratios that estimate the proportion of local sales that occurs in a town.

  27. Pull Factor (PF) = Trade Area Capture City Population The most common method of calculating pull factors is as follows:

  28. What Is Happening Locally?

  29. Summary This presentation shows how a few simple techniques can be used to determine the geographic size of a town’s trade area. A trade area will often extend beyond its own geographic borders.

  30. Questions? Questions? Questions?

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