CHAP 7: RETAIL SITE LOCATION

I. What factors do retailers consider when determining where to locate their stores?
 (Evaluating Specific Areas for Locations)
The best areas for locating stores are those that generate the highest long-term profits for a retailer. Some
factors affecting the long-term profit generated by stores that should be considered when evaluating an
area include:
a. Economic Conditions
Because locations involve a commitment of resources over a long-time horizon, it is important to examine
an area’s level and growth of population and employment. A large, fully employed population means high
purchasing power and high levels of retail sales.
But population and employment growth alone aren’t enough to ensure a strong retail environment in the
future. Retail location analysts must determine how long such growth will continue and how it will affect
demand for merchandise sold in the stores.
Also, it is useful to determine which areas are growing quickly and why. For instance, the east side of
Seattle, Washington, has become a desirable retail location because of its proximity to Microsoft’s
corporate headquarters.
b. Competition
The level of competition in an area clearly affects the demand for a retailer’s merchandise. This is
because when the location will carry less competition and huge targeted population, then the store will
operate successfully.
Ex: Walmart’s early success was based on a location strategy of opening stores in small towns
with little competition. It offered consumers in small towns quality merchandise at low prices.
c. Strategic Fit
Population level, growth, and competition alone don’t tell the whole story. The area needs to have
consumers who are in the retailer’s target market—who are attracted to the retailer’s offerings and
interested in patronizing its stores. Thus, the area must have the right demographic (household type,
income, age, and ethnicity), and lifestyle profile. The size and composition of households in an area can
be an important determinant of success.
d. Operating Costs
The cost of operating stores can vary across areas.
Operating costs are also affected by the proximity of the area being considered to other areas in which the
retailer operates stores.
Ex: if a store is located near other stores and the retailer’s distribution centers, the cost of
shipping merchandise to the store is lower, as is the cost and travel time spent by the district
manager supervising the stores’ operations.
The local and state legal and regulatory environment can have a significant effect on operating costs.
 Ex: Some retailers are reluctant to locate stores in California because they feel that the state and
local governments, the political process of voter-initiated referendums, and a legal environment
that fosters class-action law- suits result in higher operating costs.

 How Many Stores to Open in an Area?

When making the decision about how many stores to open in an area, retailers must consider the trade-
offs between lower operating costs and potential sales cannibalization from having multiple stores in an
area.
1. Economies of Scale from Multiple Stores
Most retail chains open multiple stores in an area because promotion and distribution economies of scale
can be achieved. A retailer’s total promotional costs are the same for newspaper advertising that promotes
20 stores in an area or only one store. Multiple stores in an area are needed to justify the cost of building a
new distribution center.
Opening multiple stores in an area can increase sales per store as well as reduce costs.
Finally, the management team can have a greater span of control over a regional market; managers can
easily visit the stores and assess competitive situations.
2. Cannibalization
Although retailers gain scale economies from opening multiple locations in an area, they also suffer
diminishing returns associated with locating too many additional stores in an area.
Because a primary retailing objective is to maximize profits for the entire chain, retailers should continue
to open stores only as long as profits continue to increase or, in economic terms, as long as the marginal
revenues achieved by opening a new store are greater than the marginal costs.

 Evaluating a Site for Locating a Retail Store

Having decided to locate stores in an area, the retailer’s next step is to evaluate and select a specific site.
In making this decision, retailers consider three factors:
The characteristics of the site
The characteristics of the trading area for a store at the site,
The estimated potential sales that can be generated by a store at the site.
The first two sets of factors are typically considered in an initial screening of potential sites. The methods
used to forecast store sales, the third factor, can involve a more complex analytical approach.
1) Site Characteristics
Some characteristics of a site that affect store sales and thus are considered in selecting a site are
a) The traffic flow past the site and accessibility to the site
One of the most important factors affecting store sales is the number of vehicles and pedestrians that pass
by the site, or the traffic flow.
When the traffic is greater, more consumers are likely to stop in and shop at the store. Thus, retailers
often use traffic count measures to assess a site’s attractiveness. Traffic counts are particularly important
for retailers offering merchandise and services bought on impulse or on frequent trips.
More traffic flow is not always better; rather, traffic flow is a question of balance. The site should have a
substantial number of cars per day but not so many cars that traffic congestion impedes access to the
store.
The accessibility of the site, which can be as important as traffic flow, is the ease with which customers
can get into and out of the site. Accessibility is greater for sites located near major highways, on
uncongested highways, and at streets with traffic lights and lanes that enable turns into the site.
Natural barriers, such as rivers or mountains, and artificial barriers, such as railroad tracks, divided or
limited-access highways, or parks, may also affect accessibility.
b) The characteristics of the location
Some factors associated with specific locations that retailers consider when evaluating a site are:
(1) Parking: The amount and quality of parking facilities are critical for evaluating a shopping center and
specific site within the center.
An issue closely related to the amount of available parking facilities but extended into the shopping center
itself is the relative congestion of the area. Congestion is an excess level of traffic that results in customer
delays. There is an optimal level of congestion for customers. Too much congestion can make shopping
slow, irritate customers, and generally discourage sales.
(2) Store visibility: refers to customers’ ability to see the store from the street.
(3) Adjacent retailers: Locations with complementary, as well as competing, adjacent retailers have the
potential to build traffic. Complementary retailers target the same market segment but have a different,
non-competing merchandise offering.
• Employee parking availability
• Shoppers that use cars
• Parking by non-shoppers
• Typical length of a shopping trip
c) The costs associated with locating at the site
Restrictions and Costs:
- Retailers may place restrictions on the type of tenants that are allowed in a shopping center in their lease
agreement. Some of these restrictions can make the shopping center more attractive for a retailer.
- Operating hours
- Signage
• Rent
• Common Area Maintenance Fee/Insurance
• Advertising Fee
Locations within a Shopping Center:
- Locating within a shopping center affects both sales and occupancy costs, in that the better locations
have higher occupancy costs.
- In a strip shopping center, the locations closest to the supermarket are more expensive because they
attract greater foot traffic. So, a flower shop or sandwich shop that may attract impulse buyers should be
close to the supermarket.
- The same issues apply to evaluating locations within a multilevel, enclosed shopping mall. Stores that
cater to consumers engaging in comparison shopping, such as shoppers buying fashionable apparel,
benefit from being in more expensive locations near the department store anchors, which are destinations
for comparison apparel shoppers.

2) Trade Area Characteristics

a) Measuring the Trade Area for a Retail Site
Retailers can determine the trade area for their existing stores by customer spotting. Customer spotting
is the process of locating the residences of customers for a store on a map and displaying their positions
relative to the store location.
b) Sources of Information about the Trade Area
Two widely used sources of information about the nature of consumers in a trade area are
(1) Demographic Data from U.S. Census Bureau (census block)
- A census is a count of the population of a country as of a specified date.
- Every 10 years, census takers attempt to gather demographic information (sex, age, ethnicity,
education, marital status, etc.) from every household
(2) Geographic Information System Suppliers (GIS)
- Is a system of hardware and software used to store, retrieve, map, and analyze geographic data;
a GIS also includes the operating personnel and the data that go into the system.
- The key feature of GIS data is that they are identified with a coordinate system (latitude and
longitude) that references a particular place on Earth.
- The data in the systems include spatial features such as rivers and roads, as well as descriptive
information associated with the spatial features, such as the street address and the characteristics
of the household at the address.

c) Competition in the Trade Area

In addition to needing information about the residents in a trade area, retailers need to know about the
amount and type of competition in the trade area.
Although GIS vendors provide data on the location of competitive retailers, there are also other sources
for this information.
- Most retailer Web sites list not only all current store locations but future sites as well.
- Directories published by trade associations,
- Chambers of commerce,
- Chain Store Guide (published by CSG Information Services, www.csgis.com), and
- Economic Development Councils
- Governments.

3) Estimated Potential Sales for a Store Site

a) Huff Gravity Model
- The objective of Huff’s approach is to determine the probability that a customer residing in a particular
area will shop at a particular store or shopping center.
- To forecast sale, the location analyst multiplies the probability that the customer will shop at a particular
place by an estimate of the customer’s expenses. Then, all the estimated expenditures in an area are
aggregated to estimate sales from the area
- The mathematical formula for predicting the probability of a customer’s going to a specific store
location is

λ = An exponent to T i reflects the relative effect of travel time on different kinds of shopping trip
j

b) Regression analysis & c) The analog method.

Multiple Regression Analysis = Factors affecting the sales of existing stores in a chain will have the same
impact upon the stores located at new sites being considered.
Analog Approach = retailer describes the site and trade area characteristics for its most successful stores
and attempts to find a similar site.
II. What is a trade area for a store, and how do retailers determine the trade area?
1. Trade area is geographical area from where the store placed is likely to get customers. The trade area is
normally divided into three layers:

 The primary trading area is the geographic area from which the shopping center or store site
derives 50 to 70 percent of its customers.
 The secondary trading area is the geographic area of secondary importance in terms of
customer sales, generating about 20 to 30 percent of the site’s customers.
 The tertiary trading area or fringe (the outermost area) includes the remaining customers who
shop at the site but come from widely dispersed areas.
2. Trade area refers to the area from which the business firms expect to generate major sales from the
people from that area serving as the firm’s customers. The retailers determine the trade area for a store by
considering several factors like accessibility of the trade area to the targeted customers, the natural and
physical barriers present in the trade area, type of shopping area that exists in the trade area, the type of
stores located in that area, the nature of the merchandise sold, the assortment offered, and the location of
alternative sources for the merchandise, and the kind of competition present there. These are the factors
that affects the retailers’ determination of the trade area.

III. What factors do retailers consider when deciding on a particular site?

Having decided to locate stores in an area, the retailer’s next step is to evaluate and select a specific site.
In making this decision, retailers consider three factors:
The characteristics of the site
The characteristics of the trading area for a store at the site,
The estimated potential sales that can be generated by a store at the site.
The first two sets of factors are typically considered in an initial screening of potential sites. The methods
used to forecast store sales, the third factor, can involve a more complex analytical approach.

IV. How do retailers forecast sales for new store locations?

Three approaches for using the information about the trade area to estimate the potential sales for a store
at the location are the Huff gravity model, regression analysis, and the analog method.

V. Where can retailers get information to evaluate potential store locations?

Two widely used sources of information about the nature of consumers in the trade area are data
published by the U.S. Census Bureau and data from geographic information systems (GIS) provided by
several commercial firms.
1/ True Value Hardware plans to open a new store. Two sites are available, both in middle-income
neighborhood centers. One neighborhood is 20 years old and has been well maintained. The other
was recently built in a newly planned community. Which site is preferable for True Value? Why?
Trade area referred to a structural-demographic and geographic area where the business acquires most of
its sale and majority of customers. Analyzing trade are customer mapping is using mapping analyst is
perform to more customer relation.
The recently built neighborhood would be the best site for Value Hardware to open a new store. It is
because the other site already has some hardware store. After all, it is well maintained. The recently built
neighborhood will also require hardware in the future as they support and change the community. By
choosing the newly constructed area, they will avoid unnecessary competition and establish loyal
customers, which will create future sales in the year to come.
2/ Trade areas are often described as concentric circles emanating from the store or shopping
center. Why is this practice used? Suggest an alternative method. Which would you use if you
owned a store in need of a trade area analysis?
The reason why this trade area of concentric circles is being used is as follows. Primarily, it helps the
retailer to select the best location or site for the store where they can get a maximum number of
customers. Secondly, it helps to understand the population and the economic base of the customers.
Thirdly, trade area analysis using the concentric circle method helps to identify the competition in the
same field.
An alternative for this drive-time analysis model is the consumer focus approach. In these methods, a
focus group from different zones is being made. It helps to find the relative preference of the different
members in the focus group. It will cover all the aspects and factors that affect the trade area definition
constituted of. The facilitator asks the members not to think about their own thought, but also the other
people fall in their same community. This way a better definition can be drafted out.
A consumer focus group would be the best choice for defining the trade area. The concentric circles are
not always the true face of the story. The customers near the store may buy the product if they feel it
convenient. But, to be profitable in -, the retailer should make sure that the customers nearby hold certain
interest in their product or service; if the retail store and the service they offer is meeting the customer
preference. If not, then the concentric circle definition will fail in the long run. Thus, a focus group is
always a better option for this. Through the focus group, the fittest area can be identified by the retailer
and he can select a sit nearby.
3/ Under what circumstances might a retailer use the analog approach for estimating demand for a
new store? What about regression analysis?
A retailer might use an analog approach when trying to determine where a new store should be
established based on characteristics of other stores. This sill not give the retailer a good estimate of the
financials that will accompany this process but will provide valuable information that will help determine
what factors make a successful store or not. A regressions analysis would be best for determining the
financial requirement for establishing and maintaining a new store and predicting how much profit in
sales a different area will produce.
4/ Retailers have a choice of locating on a mall’s main floor or second or third level. Typically, the
main floor offers the best, but most expensive, locations. Why would specialty stores such as Radio
Shack and Foot Locker choose the second or third floor?
The specialty stores, Radio Shack and Foot Locker would choose the second or third floor because they
offer specific products that other stores in the mall can’t offer. Since they are not a very expensive high in
brand they wouldn’t be on the first floor so that made them be classified on the second or third floor.
5/ What retail locations are best for department stores, consumer electronics category killers,
specialty apparel stores, and warehouse stores? Discuss your rationale.
Retail locations are as follows:
1) Shopping malls are a physical building business that has different stores. These stores are connected
with each other where customers can walk easily to purchase the products or services.
2) Big box store is a store that is managed, owned, and operated by the retailer that occupies a big
physical space and focuses on economies of scale, and aims to generate huge sales revenue by providing
varieties of products to customers.
6/ If you were considering the ownership of a Taco Bell franchise, what would you want to know
about the location in terms of traffic, population, income, employment, and competition? What else
would you need to research about a potential location?
If I am considering an ownership of Taco Bell franchise, the location details that I would like to know
are:
Traffic: what is the traffic volume at that location? This means on an average how many cars pass by the
location on a daily basis? Are these cars mainly passenger vehicles or transportation vehicles?
Population: what is the population of the locality/city? What is the density of the population in and
around the Taco Bell location?
Income: what is the average household income of the localities surrounding Taco Bell? Does it fall
within the range of target demographics’ income?
Employment: what is the employment index of the city where I plan to open Taco Bell? Are there good
talents available for hire at an affordable wage rate?
Competition: what are competitions in the area? Are there many local vendors that serve taco? Shall we
face competition from other fast-food joints such as McDonalds, Burger King or KFC? In case there are
no competition, what is the reason behind competitors not opening a franchise at nearby location?
The additional information I would like know about the location are
Crime rate: is the locality safe? What is the crime rate of the area?
Cultural factor: how are people of this town? How is their health consciousness level? Do people in the
town prefer fast food? Is the location surrounded by residential areas or business centers?