Store Location

Importance of Location in Retail Business

Retail store location is also an important factor for the marketing team to consider
while setting retail marketing strategy. Here are some reasons −
 Business location is a unique factor which the competitors cannot imitate.
Hence, it can give a strong competitive advantage.
 Selection of retail location is a long-term decision.
 It requires long-term capital investment.
 Good location is the key element for attracting customers to the outlet.
 A well-located store makes supply and distribution easier.
 Locations can help to change customers’ buying habits.

Trade Area: Types of Business Locations

A trade area is an area where the retailer attracts customers. It is also
called catchment area. There are three basic types of trade areas −

Solitary Sites
These are single, free standing shops/outlets, which are isolated from other
retailers. They are positioned on roads or near other retailers or shopping centers.
They are mainly used for food and non-food retailing, or as convenience shops.

Unplanned Shopping Areas

These are retail locations that have evolved over time and have multiple outlets in
close proximity. They are further divided as −

 Central business districts such as traditional “downtown” areas in cities/towns.

 Secondary business districts in larger cities and main street or high street locations.
 Neighborhood districts.
 Locations along a street or motorway
Planned Shopping Areas
These are retail locations that are architecturally well-planned to provide a number
of outlets preferably under a theme. These sites have large, key retail brand stores
(also called “anchor stores”) and a few small stores to add diversity and elevate
customers’ interest. There are various types of planned shopping centers such as
neighborhood or strip/community centers, malls, lifestyle centers, specialty centers,
outlet centers.

Factors Determining Retail Locations

The marketing team must analyze retail location with respect to the following issues
−
 Size of Catchment Area − Primary (with 60 to 80%
customers), Secondary (15 to 25% customers), and Tertiary (with remaining
customers who shop occasionally).
 Occupancy Costs − Costs of lease/owning are different in different areas,
property taxes, location maintenance costs.
 Customer Traffic − Number of customers visiting the location, number of
private vehicles passing through the location, number of pedestrians visiting
the location.
 Restrictions Placed on Store Operations − Restrictions on working hours,
noise intensity during media promotion events.
 Location Convenience − Proximity to residential areas, proximity to public
transport facility.
Steps to Choose the Right Retail Location
A retail company needs to follow the given steps for choosing the right location −

Step 1 - Analyze the market in terms of industry, product, and competitors −

How old is the company in this business? How many similar businesses are there in
this location? What the new location is supposed to provide: new products or new
market? How far is the competitor’s location from the company’s prospective
location?
Step 2 – Understand the Demographics − Literacy of customers in the
prospective location, age groups, profession, income groups, lifestyles, religion.
Step 3 – Evaluate the Market Potential − Density of population in the prospective
location, anticipation of competition impact, estimation of product demand,
knowledge of laws and regulations in operations.
Step 4 - Identify Alternative Locations − Is there any other potential location?
What is its cost of occupancy? Which factors can be compromised if there is a
better location around?
Step 5 – Finalize the best and most suitable Location for the retail outlet.

Measuring the Success of Location

Once the retail outlet is opened at the selected location, it is important to keep track
of how feasible was the choice of the location. To understand this, the retail
company carries out two types of location assessments −
Macro Location Evaluation
It is conducted at a national level when the company wants to start a retail business
internationally. Under this assessment, the following steps are carried out −
 Detailed external audit of the market by analyzing locations as macro
environment such as political, social, economic, and technical.
 Most important factors are listed such as customer’s level of spending,
degree of competition, Personal Disposable Income (PDI), availability of
locations, etc., and minimum acceptable level for each factor is defined and
the countries are ranked.
 The same factors listed above are considered for local regions within the
selected countries to find a reliable location.
Micro Location Evaluation
At this level of evaluation, the location is assessed against four factors namely −
 Population − Desirable number of suitable customers who will shop.
 Infrastructure − The degree to which the store is accessible to the potential
customers.
 Store Outlet − Identifying the level of competing stores (those which the
decrease attractiveness of a location) as well as complementary stores
(which increase attractiveness of a location).
 Cost − Costs of development and operation. High startup and ongoing costs
affect the performance of retail business.
Retail Pricing
The price at which the product is sold to the end customer is called the retail price of
the product. Retail price is the summation of the manufacturing cost and all the
costs that retailers incur at the time of charging the customer.

Factors Influencing Retail Prices

Retail prices are affected by internal and external factors.

Internal Factors

Internal factors that influence retail prices include the following −

 Manufacturing Cost − The retail company considers both, fixed and variable
costs of manufacturing the product. The fixed costs does not vary depending
upon the production volume. For example, property tax. The variable costs
include varying costs of raw material and costs depending upon volume of
production. For example, labor.
 The Predetermined Objectives − The objective of the retail company varies
with time and market situations. If the objective is to increase return on
investment, then the company may charge a higher price. If the objective is
to increase market share, then it may charge a lower price.
 Image of the Firm − The retail company may consider its own image in the
market. For example, companies with large goodwill such as Procter &
Gamble can demand a higher price for their products.
 Product Status − The stage at which the product is in its product life cycle
determines its price. At the time of introducing the product in the market, the
company may charge lower price for it to attract new customers. When the
product is accepted and established in the market, the company increases
the price.
 Promotional Activity − If the company is spending high cost on advertising
and sales promotion, then it keeps product price high in order to recover the
cost of investments.

External Factors

External prices that influence retail prices include the following −

 Competition − In case of high competition, the prices may be set low to face
the competition effectively, and if there is less competition, the prices may be
kept high.
  Buying Power of Consumers − The sensitivity of the customer towards
price variation and purchasing power of the customer contribute to setting
price.
 Government Policies − Government rules and regulation about
manufacturing and announcement of administered prices can increase the
price of product.
 Market Conditions − If market is under recession, the consumers buying
pattern changes. To modify their buying behavior, the product prices are set
less.
 Levels of Channels Involved − The retailer has to consider number of
channels involved from manufacturing to retail and their expectations. The
deeper the level of channels, the higher would be the product prices.

Demand-Oriented Pricing Strategy

The price charged is high if there is high demand for the product and low if the
demand is low. The methods employed while pricing the product on the basis of
demand are −
 Price Skimming − Initially the product is charged at a high price that the
customer is willing to pay and then it decreases gradually with time.
 Odd Even Pricing − The customers perceive prices like 99.99, 11.49 to be
cheaper than 100.
 Penetration Pricing − Price is reduced to compete with other similar
products to allow more customer penetration.
 Prestige Pricing − Pricing is done to convey quality of the product.
 Price Bundling − The offer of additional product or service is combined with
the main product, together with special price.

Cost-Oriented Pricing Strategy

A method of determining prices that takes a retail company’s profit objectives and
production costs into account. These methods include the following −
Cost plus Pricing − The company sets prices little above the manufacturing cost.
For example, if the cost of a product is Rs. 600 per unit and the marketer expects
10 per cent profit, then the selling price is set to Rs. 660.
Mark-up Pricing − The mark-ups are calculated as a percentage of the selling price
and not as a percentage of the cost price.
Break-even Pricing − The retail company determines the level of sales needed to
cover all the relevant fixed and variable costs. They break-even when there is
neither profit nor loss.
For example, Fixed cost = Rs. 2, 00,000, Variable cost per unit = Rs. 15, and
Selling price = Rs. 20.
In this case, the company needs to sell (2,00, 000 / (20-15)) = 40,000 units to break
even the fixed cost. Hence, the company may plan to sell at least 40,000 units to be
profitable. If it is not possible, then it has to increase the selling price.

Target Return Pricing − The retail company sets prices in order to achieve a
particular Return On Investment (ROI).
This can be calculated using the following formula −
Target return price = Total costs + (Desired % ROI
investment)/Total sales in units
For example, Total investment = Rs. 10,000,
Desired ROI = 20 per cent,
Total cost = Rs.5000, and
Total expected sales = 1,000 units
Then the target return price will be Rs. 7 per unit as shown below −
Target Return Price = (5000 + (20% * 10,000))/ 1000 = Rs. 7
This method ensures that the price exceeds all costs and contributes to profit.
Early Cash Recovery Pricing − When market forecasts depict short life, it is
essential for the price sensitive product segments such as fashion and technology
to recover the investment. Sometimes the company anticipates the entry of a larger
company in the market. In these cases, the companies price their products to
shorten the risks and maximize short-term profit.

Competition-Oriented Pricing Strategy

When a retail company sets the prices for its product depending on how much the
competitor is charging for a similar product, it is competition-oriented pricing.
 Competitor’s Parity − The retail company may set the price as close as the
giant competitor in the market.
 Discount Pricing − A product is priced at low cost if it is lacking some
feature than the competitor’s product.

Differential Pricing Strategy

The company may charge different prices for the same product or service.
 Customer Segment Pricing − The price is charged differently for customers
from different customer segments. For example, customers who purchase
online may be charged less as the cost of service is low for the segment of
online customers.
  Time Pricing − The retailer charges price depending upon time, season,
occasions, etc. For example, many resorts charge more for their vacation
packages depending on the time of year.
 Location Pricing − The retailer charges the price depending on where the
customer is located. For example, front-row seats of a drama theater are
charged high price than rear-row seats.

How to Measure Retail Performance?

Key Parameters
1. Number of Customers (Customer Traffic) ...
2. Effectivity (Retail Conversion Rate) ...
3. Customer conversion ratio = No of transactions / Customer traffic x 100. ...
4. Average Sale (Average purchase value) ...
5. Average sales order value = Total sales value / Number of transactions.
GMROI (Gross Margin Return on Investment)
GMROI measures an organization’s ability to turn inventory into cash in relation to the
cost of the inventory.

Formula – How to calculate GMROI

GMROI = (Gross Margin / Average Inventory Cost) x 100%

GMROI = ((Annual Sales x (Gross Margin / 100%)) / Average Inventory Cost) x100%

Example

A store has a revenue of Rs.500,000, gross margin of 30%, and average inventory
cost of Rs.100,000.

GMROI = ((500,000 x (30% / 100%)) / 100,000) x 100% = = 1.5 x 100% = 150%

Therefore, this store has a GMROI of 150%.