Chapter 8

Retail Site Locations

Ch#7 Different types of Locations
Ch#8 How retailers choose specific sites to locate their stores?
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Three Levels of Analysis

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Factors Affecting Selection of a Store Site

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1) Economic Conditions

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Poverty Headcount Rates

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Economic conditions continued

■ The growth of population and employment

■ How long the growth will continue, and how it will

effect demand for merchandise sold in its stores

■ Which areas growing quickly and why

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 2) Competition

Walmart’s early success was based on a location

strategy of opening stores in small towns with little
competition.

Some retailers are going urban:

• Lack of competition
• High level of disposable income
• Large, untapped labor force

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 3) Strategic Fit

■ Demographic, lifestyle profile, size and

composition of households in an area

families with kids

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Whole Foods as a must-have amenity in luxury condominium
towers in New York
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4) Operating Costs

• Vary across areas

• Affected by proximity of
area considered vs.
other areas
where retailer operates
• Local and state legal
environment has effect

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How Many Stores to Open in an Area?

Economies of Scale vs. Cannibalization

One promotional costs for all stores open stores as long as

profits increase

Justifies cost of distribution center

Increases sales per store

Target needs of regional market

Management has control of market

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Trading Areas of Current & Proposed Outlets
(trading-area overlap)

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Possible dispute between franchise and
franchisors on cannibalization issues

■ Cannibalization diminishes returns from locating too

many stores in an area
■ Franchiser’s goal:
 to maximize sales of all stores (because loyalty is based on total
store sales)
 No concern about cannibalization
■ Franchisee’s goal:
 to maximize the sales and profits of its store(s)
 Concern about cannibalization
■ An exclusive territory is granted to reduce conflict

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Evaluating a Site for Locating a Retail Store

When evaluating and selecting a specific site, retailers consider:

•1) characteristic of the site

•2) characteristic of the trading area
•3) estimated potential sales that can be generated

Stockbyte/Punchstock Images
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1) Site Characteristics

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Traffic Flow and Accessibility

When traffic is greater, more

customers shop

Good for convenience retailers

Not necessary for destination

retailers

Too much can impede access to

store

Accessibility to store is as
important as traffic flow
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Convenience of Going to Site Accessibility

• Road pattern and condition

• Natural and artificial barriers

• Visibility
• Traffic flow
• Parking
• Congestion
• Ingress/egress (Entry/Exit)
©McGraw-Hill Companies/Jill Braaten, photographer

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What Should Retailers Consider regarding
Parking?
Observe shopping center at various times
Employee parking availability
Shoppers that use cars
Parking by non-shoppers
Typical length of a shopping trip

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The McGraw-Hill Companies, Inc./Andrew Resek, photographer
Adjacent Tenants

■ Complementary (also competing) adjacent

retailers build traffic
■ What other retailers would Save-a-Lot want to
be located near?
 All target price-sensitive consumers
 Bata and Apex
■ Principle of Cumulative Attractiveness

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Locations within a Shopping Center

■ Affects both sales and occupancy costs

■ In a strip shopping center – closest to the
supermarket for impulse buying
■ In a enclosed shopping mall – retailers who sell
comparison shopping goods locate close to the
department store anchors
■ Locate stores that appeal to similar target
markets because consumers shop at places with
a good assortment of merchandise

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Grouping Retailers in an Enclosed Mall

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JAMUNA FUTURE PARK

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Restrictions and Costs

■ Restrictions
 Signage
 Tenant Mix
 Operating hours

■ Costs
 Rent
 Common Area Maintenance Fee/Insurance
 Advertising Fee

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Trade area characteristics

■ A contiguous geographic area that accounts for

the majority of a store’s sales and customers
 Primary zone
• 60 to 65 percent of its customers
 Secondary zone
• 20 percent of a store’s sales
 Tertiary zone
• customers who occasionally shop at the store or
shopping center

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The Size & Shape of trading Areas
The Segments of a Trading Area

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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Zones in a Trade Area (irregular polygon)
jagged shape

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Factors Affecting the Size of the Trade Area

■ Accessibility
■ Natural & Physical Barriers
■ Type of Shopping Area
■ Type of Store
■ The nature of merchandise, assortment, location
of alternative sources for the merchandise
■ Competition
■ Parasite Stores

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Measuring Trade Areas

■ Customer Spotting
■ Use Census Data (census block)
■ Geodemographic Information Systems

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Customer Spotting

Purpose: to spot, or locate, the residences of

customers for a store or shopping center

How to obtain data:

• credit card or checks
• customer loyalty programs
• manually as part of the checkout process
• automobile license plates

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Geographic Information System (GIS)

GIS – a system of hardware and software used to store,

retrieve, map and analyze geographic data along with
the operating personnel and the data that goes into the
system.

■ coordinate system (latitude and longitude)

■ spacial features (rivers and roads)
■ some firms offer services combine GIS with updated
census data, consumer spending patterns and lifestyles
 ESRI (www.esri.com)
 Claritas (www. Claritas.com)
 MapInfo (www. Mapinfo.com)

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 GIS Components
Physical Geography Cultural Geography
Data
Latitude/Longitude Demographics
Land/Water Inputs Man-Made Structures
Terrain Consumption Patterns
Rainfall/Snow Work Patterns
Temperature Leisure Behavior
Deviant Behavior

GIS
(Data Aggregation and
Analysis via Computer)

Output
Maps and Other Displays
of Information

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 Illustration of Site Selection Using
Geodemographic Data: Educational Toy Store
(SimplyMap - Geographic Research Inc.)

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Proposed locations

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Variable List in SimplyMap

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Selected Variables

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Population 6-11 Years Count

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Population 6-11 Years Percent

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Population 6-11 Years Density

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Income over $100k

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Education - Graduate Degree Percent

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% Families, Married with Children Under 18

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Spending on Toys

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Query

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Query Result

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Report

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Competition in the Trade Area

■ Need to Know Amount and Type of

Competition
■ Sources for Measuring Competition
 The Internet - lists current locations and
future sites.
 Yellow Pages
 Other Sources:
• Directories published by trade
associations
• Chambers of commerce
• Chain Store Guide
• International Council of Shopping Centers
• Urban Land Institute
• Local newspaper advertising departments
• Municipal and county governments
• Specialized trade magazines
• List brokers
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Indices for Assessing Sales Potential

■ Market Potential Index (MPI)

 Number of Households Purchasing a Product or
Service in a Trade Area
■ Spending Potential Index (SPI)
 Average Amount Spent on a Product or Service by a
Household in a Trade Area

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Steps in Evaluating Sales Potential of a Site

■ Define Trade Area

 Drive Time vs. Geographic Distance
 Primary, Secondary, Tertiary
■ Method of Estimating Sales Potential/ Demand
 Reilly’s Law
 Huff Model
 Analog Approach
 Regression Analysis

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 Reilly’s Law

Reilly’s law of retail gravitation, a

traditional means of trading-area
outlining /marking/drawing/ delineation,
establishes a point of indifference
between two cities or communities, so
the trading area of each can be
determined

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Numerator /denominator

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Huff’s Gravity Model

Based on the premise that the probability which a

given customer will shop in a particular store
or shopping center becomes larger as the size
of store grows & distance or
travel time from customer shrinks

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Huff’s Model Formula

S j  Tij b
Pij  n
 S j  Tij b
j 1
Where
Pij  Probabilit y of a customer at a given point of origin i traveling to a
particular shopping center j
S j  Size of shopping center j

Tij  Travel time or distance from customer's starting point to shopping

center
b  An exponent to Tij that reflects the effect of travel time on different
kinds of shopping trips

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The exponent “b” reflects the relative effect
of travel time versus store size.
■ When “b” is equal to 1, store size and travel time have an equal but
opposite effect on the probability of a consumer’s shopping at a
store location.
■ When “b” is greater than 1, travel time has a greater effect, and
when b is less than 1, store size has a greater effect.

■ The value of “b” is affected by the nature of the shopping trips

consumers generally take when visiting the specific type of store.

■ For instance, travel time or distance is generally more important for

convenience goods than for shopping goods because people are
less willing to travel a great distance for a quart of milk than they are
for a new pair of shoes.

■ Thus, a larger value for “b” is assigned if the store being studied
specializes in convenience shopping trips rather than comparison
shopping trips.
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Application of Huff Gravity Model

5000 sft

10000 sft

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Application of Huff Gravity Model

PRC = 10,000/5 2 = .889

10,000/52 + 5,000/102

POH = 10,000/152 = .182

10,000/152 + 5,000/52

.889 x $5 million + .182 x $3 million = $4,910,000

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Regression Analysis and Analog Approach

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.

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Regression Model for Estimating Store Sales

■ Stores sales = 275 x number of households in trade

area (15 minute drive time)
■ + 1,800,000 x percent of household in trade with
children under 15
■ + 2,000,000 x % of households in trade area in
Tapestry segment “aspiring young ”
■ + 8 x shopping center square feet
■ + 250,000 if visible from street
■ + 300,000 if Wal-Mart in center

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Application of Regression Model

Store Sales A = $7,635,000

= 275x11,000 + 1,800,000 x 0.7 + 2,000,000 x 0.6
+ 8 x 200,000 + 250,000 + 300,000

Store Sales B = $6,685,000

= 275x15,000 + 1,800,000 x 0.2 + 2,000,000 x 0.1
+ 8 x 250,000

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Illustration of site selection:
Edward Beiner Optical

Analog Approach
■ Do a competitive analysis
■ Define present trade area
■ Analyze trade area characteristics
■ Match characteristics of present area with
potential sites

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Competitive Analysis
for Edward Beiner Optical

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Potential Locations
for Edward Beiner Optical

Best Site is “D”

ACORN: A Classification of residential Neighborhoods

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