CHAPTER 7

Market Selection and Retail Location Analysis

SELECTING A TARGET MARKET

The most critical determinants of success in retailing to be, first, selecting a target market first, selecting a target market and second, evaluating alternative ways to reach this target market evaluating alternative ways to reach this target market . the internet is becoming a major force in retailing . The equivalent of a store on the internet is a retailer’s site on the World wide web (WWW)When stopping at an e-tailer’s visitors firs view the firm’s:Home page

Is the introductory or first material viewers see when the access a retailer’s internet site. It is the equivalent of the retailer’s store front in physical world.Virtual storeIs the total collection of all the pages of information on the retailer’s internet site.Ease of accessRefers to the consumer’s ability to easily and quickly find a retailer’s web site in cyberspace.

MARKET SEGMENTATION

Is the dividing of a heterogeneous consumer Is the dividing of a heterogeneous consumer population into smaller, more homogenous population into smaller, more homogenous groups based on their characteristics.groups based on their characteristics.

TARGET MARKET

Is the group of customers that Is the group of customers that the retailer is seeking to serve.the retailer is seeking to serve.

IDENTIFYING A TARGET MARKET

First, a retailer should be able to measure or describe the selected market segment using objective measures on which data is available, such as age, gender, income, education, ethnic group, religion, and so on.Second is accessibility, or the degree to which the retailer can target its promotional or distribution efforts to a particular market segments.Finally, successful target marketing requires that the segment be substantial enough to be profitable for the retailer.

REACHING YOUR TARGET MARKET

Store-base retailersOperate from a fixed store location that requires customers to travel to the store to view and select merchandise or services

Non store-based retailersIntercept customer at home, at work, or at a place other than a store where they might be susceptible to purchasing.

Central Business District (CBD) Usually consist of an unplanned shopping area around the geographic point at which all public transportation systems converge; it is usually in the center of the city and often where the city originate historically.Secondary Business District (SBD) Is the shopping area that is smaller than the CBD and that revolves around at least one department or variety store at a major street intersections.Neighborhood Business District (NBD) Is the shopping area that evolves to satisfy the convenience-oriented shopping needs of a neighborhood, generally contains several small stores ( with the major retailer being a supermarket or a variety store), and is located on a major artery of a residential area.

Store based

Shopping Center (or Mall)Shopping Center (or Mall) Is a centrally owned or manage shopping district that is Is a centrally owned or manage shopping district that is planned, has balanced tenancy (the store complement each other in planned, has balanced tenancy (the store complement each other in merchandise offerings), and is surrounded by parking facilities.merchandise offerings), and is surrounded by parking facilities.

Anchor storeAnchor store Are the store in the shopping center that are the most Are the store in the shopping center that are the most dominant and are expected to draw customers to the shopping dominant and are expected to draw customers to the shopping center.center.

Freestanding locationFreestanding location Generally locates along major traffic arteries and does not Generally locates along major traffic arteries and does not have any adjacent retailers to share traffic.have any adjacent retailers to share traffic.

Non traditional locationNon traditional location [retailer are identifying non traditional locations that [retailer are identifying non traditional locations that offers great convenience]offers great convenience]

Store-Based

Retail Formats

Business District

Shopping Centers/Malls

Street Peddling

Non store-based

Freestanding Direct Selling

Mail-Order

Non traditional Internet

Automated Merchandising

Systems

EXIHIBIT 7.2Retail Formats for Accessing a Target Market

GEOGRAPHIC INFORMATION SYSTEMS

Is a computerized system that combines physical geography with cultural geography.

Culture Is the buffer that people have created between themselves and the raw physical environment and include the characteristic of the population humanly created objects, and mobile physical structures.

Thematic maps Use visual techniques such as colors, shading ,and lines to display cultural characteristics of the physical space.

Thematic map

USES OF GIS

Market selectionSite analysisTrade area definition New store cannibalizationAdvertising managementMerchandise managementEvaluation of store manager

Exhibit 7.4GIS components

Physical Geographylatitude/longitudeLand/waterTerrainRainfall/snowtemperature

Data Inputs

Cultural GeographyDemographicsManmade structureConsumption patternLeisure behaviorDeviant behavior

GIS (Data Aggregation and analysis via computer)

OutputMaps and other displays of

information

Exhibit 7.5Selecting retail location

Identify the most attractive market

in which to operate

Select the best site(s) available

Identify the most attractive sites

that are available within each

market

RETAIL LOCATION THEORY

Trading AreaTrading Area is the geographic area from which a retailer, or group of retailer, is the geographic area from which a retailer, or group of retailer, or community draws its customer.or community draws its customer.

Retail gravity theoryRetail gravity theory Suggests that there are underlying consistencies in shopping Suggests that there are underlying consistencies in shopping behavior that yield to mathematical analysis and prediction based behavior that yield to mathematical analysis and prediction based on the nation or concept of gravity.on the nation or concept of gravity.

Reilly’s law of retail gravitationReilly’s law of retail gravitation

Based on newtonian gravitation principles,Based on newtonian gravitation principles,

Explain how large urbanized areas attract customers from smaller Explain how large urbanized areas attract customers from smaller rural communities.rural communities.

FORMULATION OF REILLY’S LAW

where Dwhere Dabab is the breaking point from city A, measured in is the breaking point from city A, measured in miles along the road to city B;miles along the road to city B; dd is the distance between city A and city B along the major is the distance between city A and city B along the major highway; highway; PPa a is the population of city A ; and is the population of city A ; and PPbb is the population of city B. is the population of city B. Point of indifferencePoint of indifference is the extremity of a city’s trading area where household would is the extremity of a city’s trading area where household would be indifferent between shopping in the city or in an alternative city be indifferent between shopping in the city or in an alternative city in a different geographic direction. in a different geographic direction.

EXHIBIT 7.6 Trading area for city A

SATURATION THEORY

RetailRetail store saturation store saturation

is a condition where there are just enough store facilities for a is a condition where there are just enough store facilities for a given type of store to efficiently and satisfactorily serve the given type of store to efficiently and satisfactorily serve the population yield a fair profit to the owners.population yield a fair profit to the owners.

UnderstoredUnderstored is a condition on the community where the number of stores in is a condition on the community where the number of stores in relation to households is relatively low so that engaging in retailing relation to households is relatively low so that engaging in retailing is an attractive economic endeavor.is an attractive economic endeavor.

OverstoreOverstore is a condition in a community where the number of store in is a condition in a community where the number of store in relation to household is so large that engaging in retailing is usually relation to household is so large that engaging in retailing is usually unprofitable or marginally profitableunprofitable or marginally profitable.

INDEX OF RETAIL SATURATION (IRS)Is the ratio of demand for a product (households in the geographic Is the ratio of demand for a product (households in the geographic area multiplied by annual retail expenditures for a particular line of area multiplied by annual retail expenditures for a particular line of trade per household) divided by available supply (the square trade per household) divided by available supply (the square footage of retail facilities of a particular line of trade in the footage of retail facilities of a particular line of trade in the geographic area).geographic area).

IRS=(H x RE)/RFIRS=(H x RE)/RF

H – is the number of household in the area.H – is the number of household in the area.

RE – is the annual retail expenditures for a particular lines of trade RE – is the annual retail expenditures for a particular lines of trade per household in the area.per household in the area.

RF – is the square footage of retailer facilities of a particular line of RF – is the square footage of retailer facilities of a particular line of trade in the area (including square footage of the proposed store)trade in the area (including square footage of the proposed store)

IRS (city A) = 17,000 x 6.28 / ( 2,000 + 500) = 42.70IRS (city A) = 17,000 x 6.28 / ( 2,000 + 500) = 42.70

IRS ( city B) = 17,000 x 6.28 / ( 2,500 + 500 ) = 35 .59IRS ( city B) = 17,000 x 6.28 / ( 2,500 + 500 ) = 35 .59

BUYING POWER INDEX (BPI)

Is an indicator of a market’s overall retail potential and is composed of weighted measures of effective buying income, including all nontax payments such as social security minus all taxes), retail sales, and 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 sale) + 0.2(the area’s percentage of U.S Population)BPI(alton-granit city)=0.5(.ooo83)+0.2(.00012) =.000466BPI(Hamilton-Middletown)= 0.5(.000717) + 0.3(.00063) + 0.2(.000112) = .000570

MARKET DEMAND POTENTIAL

In analyzing the market potential , retailers identify certain criteria that are specific In analyzing the market potential , retailers identify certain criteria that are specific to the product line or service they are selling. The criteria chosen by one retailer might to the product line or service they are selling. The criteria chosen by one retailer might not be of use to a retailer selling product line . The major components of market not be of use to a retailer selling product line . The major components of market demand potential are as follows.demand potential are as follows. 1.1.Population characteristics Population characteristics . are the criteria most often used to segment market . The successful . are the criteria most often used to segment market . The successful retailer can obtain a more detailed profile of a market by examining school enrolment ,education, age , retailer can obtain a more detailed profile of a market by examining school enrolment ,education, age , sex, occupation ,race, and nationality.sex, occupation ,race, and nationality.2.2.Buyer behavior characteristics Buyer behavior characteristics . another useful criterion for analyzing potential markets is the . another useful criterion for analyzing potential markets is the behavioral characteristic s of buyer in the market . Such characteristic include store loyalty , consumer behavioral characteristic s of buyer in the market . Such characteristic include store loyalty , consumer lifestyles, store patronage motives , geographic and climatic conditions and product benefit sought.lifestyles, store patronage motives , geographic and climatic conditions and product benefit sought.3.3.Household income Household income . the average household income and the distribution of household incomes can . the average household income and the distribution of household incomes can significantly influence demand for retail facilities. Further insight into the demand for retail facilities is significantly influence demand for retail facilities. Further insight into the demand for retail facilities is provide by angle’s laws, which imply that spending increase for all categories of product as a result of provide by angle’s laws, which imply that spending increase for all categories of product as a result of an income increase, but that the percentage of spending in some categories increases more than for an income increase, but that the percentage of spending in some categories increases more than for others.others.4.4.Household age profile Household age profile . the average composition of household can be an important determinant . the average composition of household can be an important determinant of demand for retail facilities. In communities ted to be young the preference for stores may be of demand for retail facilities. In communities ted to be young the preference for stores may be different from communities where the average household is relatively old.different from communities where the average household is relatively old.5.5.Household composition Household composition . if we hold income and age constant and change the composition of the . if we hold income and age constant and change the composition of the household, we will be able to identify another determinant of the demand for retail facilities. After all, household, we will be able to identify another determinant of the demand for retail facilities. After all, households with children have different spending habit than childless households with similar households with children have different spending habit than childless households with similar incomes .incomes .

Market demand potential

6. 6. Community life cycle. Community life cycle. community tend to exhibit growth patterns over time.community tend to exhibit growth patterns over time.

Growth patterns of communities may be of four major types: rapid growth, Growth patterns of communities may be of four major types: rapid growth, continuous growth, relatively stable growth, and finally, decline. The retailer continuous growth, relatively stable growth, and finally, decline. The retailer should try to identify the communities that are a rapid or continuous growth should try to identify the communities that are a rapid or continuous growth pattern, since they represent the best long run opportunities.pattern, since they represent the best long run opportunities.

7. 7. Population density . Population density . the population density of a community equals the number the population density of a community equals the number of persons per square miles. Research suggest that the high the population of persons per square miles. Research suggest that the high the population density, the larger the average store should be in terms of square feet and thus density, the larger the average store should be in terms of square feet and thus the fewer the number of store that will be needed to serve the population of a the fewer the number of store that will be needed to serve the population of a given size.given size.

8. 8. Mobility . Mobility . the easier it is for people to travel, the more mobile they will be. the easier it is for people to travel, the more mobile they will be. When people are mobile they are willing to travel greater distance to shop. When people are mobile they are willing to travel greater distance to shop. Therefore, there will be fewer but larger stores in the community. That is , in a Therefore, there will be fewer but larger stores in the community. That is , in a community where mobility is low.community where mobility is low.

MARKET SUPPLY FACTOR

In deciding to enter a new market, the successful retailer will spend time In deciding to enter a new market, the successful retailer will spend time analyzing the competition. The retailer should consider :analyzing the competition. The retailer should consider :Square feet per employeeSquare feet per employeeGrowth in store Growth in store Quality of competitionQuality of competitionSquare feet per storeSquare feet per store

Market supply factors

1.1. Square feet per store- Square feet per store- it is helpful to obtain data on the square feet per store it is helpful to obtain data on the square feet per store for the average store in the communities that are being analyzed. These data for the average store in the communities that are being analyzed. These data will indicate whether the community tends to have large – or small –scale will indicate whether the community tends to have large – or small –scale retailing .retailing .

2.2. Square feet per employee- Square feet per employee- a measure that combines two major supply a measure that combines two major supply factors in retailing, store space and labor , is square feet of space per employee. factors in retailing, store space and labor , is square feet of space per employee. A high number of for this statistic in a community is evidence that each A high number of for this statistic in a community is evidence that each employee is able to handle more space.employee is able to handle more space.

3.3. Growth in store – Growth in store – the retailer should look at the rate of growth in the number the retailer should look at the rate of growth in the number of stores for the last one to five years. When the growth is rapid , then on of stores for the last one to five years. When the growth is rapid , then on average the community will have better-located store with more contemporary average the community will have better-located store with more contemporary atmospheres.atmospheres.

4.4. Quality of competition – Quality of competition – the three preceding supply factors reflect the quality the three preceding supply factors reflect the quality of competition. They should attempt to identify the major retail chains and local of competition. They should attempt to identify the major retail chains and local retailers in each market and evaluate the strength of each . retailers in each market and evaluate the strength of each .

SITE ANALYSIS

is an evaluation of the density of demand and supply within each market with the goal of identifying the best retail site(s).

EXHIBIT 7.8 Customer spotting map for a supermarket

DEMAND DENSITY

is the extent to which the potential demand for the retailer’s goods and services is concentrated in certain census tracts, ZIP code areas, or parts of the community.

SUPPLY DENSITY

Exhibit 7.11Store density and site availability map

SITE EVALUATION

EXHIBIT 7.12EXHIBIT 7.12

Checklist for site evaluationsChecklist for site evaluations

Local DemographicsLocal Demographics Population and/ or household base Population and/ or household base Population growth potential Population growth potential Lifestyle of consumersLifestyle of consumersIncome potentialIncome potentialAge makeupAge makeupEducational makeupEducational makeupPopulation of nearby special market, that is Population of nearby special market, that is daytimedaytimeWorkers, students, and tourists, if applicableWorkers, students, and tourists, if applicableOccupational mix Occupational mix

Retail competitionRetail competitionNumber and type of store in areaNumber and type of store in areaAnalysis of key players in general areaAnalysis of key players in general areaCompetitiveness of other merchant Competitiveness of other merchant Number and location of direct Number and location of direct competitors in areacompetitors in areaPossibility of joint promotion with local Possibility of joint promotion with local merchantsmerchants

Site characteristicsSite characteristicsNumber of parking space available Number of parking space available Distance of parking areaDistance of parking areaEase of access for deliveryEase of access for deliveryvisibility of site from streetvisibility of site from streetHistory of siteHistory of siteCompatibility of neighboring storesCompatibility of neighboring storesSize and shape of lotSize and shape of lotCondition of existing Building Condition of existing Building Ease of entrance and exit for trafficEase of entrance and exit for trafficEase of access for handicapped Ease of access for handicapped customerscustomersRestriction on sign usegeRestriction on sign usegeBuilding safety code restrictionsBuilding safety code restrictionsTypes of zoningTypes of zoning

Cost factorCost factorTerms of lease/rent agreementTerms of lease/rent agreementBasic rent payment Basic rent payment Length of leasedLength of leasedLocal taxesLocal taxesOperation and maintenance cost sOperation and maintenance cost sRestrictive clauses in leaseRestrictive clauses in leaseMembership in local merchants Membership in local merchants association required association required Voluntary regulations by local Voluntary regulations by local merchant merchant

Traffic Flow and AccessibilityTraffic Flow and Accessibility Number and type of vehicles passing location Number and type of vehicles passing location Access of vehicles to location Access of vehicles to location Number and types of pedestrians passing locationNumber and types of pedestrians passing location Availability of mss transit, if applicableAvailability of mss transit, if applicable Accessibility of major highways arteryAccessibility of major highways artery Quality of access streetsQuality of access streets Levels of street cogestionLevels of street cogestion Presence of physical barriers that affect trade area shapePresence of physical barriers that affect trade area shape

SITE SELECTION

After completing the analysis of each segment of the desire market and After completing the analysis of each segment of the desire market and identifying the best available site within each market, retailers are now identifying the best available site within each market, retailers are now ready to make the final decision regarding location: selecting the best ready to make the final decision regarding location: selecting the best sites available.sites available.

There is , however, general agreement on the type of things that the There is , however, general agreement on the type of things that the retailer should consider in evaluating sites:retailer should consider in evaluating sites:

Nature of siteNature of siteTraffic Characteristics Traffic Characteristics Types of neighborsTypes of neighborsTerms of purchase or leaseTerms of purchase or leaseExpected ProfitabilityExpected Profitability

Nature of siteNature of siteThe retailer needs to investigate about the site The retailer needs to investigate about the site

Traffic characteristicsTraffic characteristicsThe traffic that passes a site, whether it is vehicular or pedestrian , can be an The traffic that passes a site, whether it is vehicular or pedestrian , can be an important determinant of the potential sales at the siteimportant determinant of the potential sales at the siteThe retailer must also determine whether the population and traffic are of the The retailer must also determine whether the population and traffic are of the type desire.type desire.The retailer should evaluate two traffic-related aspects of the site. The first is The retailer should evaluate two traffic-related aspects of the site. The first is

the availability of sufficient parking, either at the site or nearbythe availability of sufficient parking, either at the site or nearby. . a second traffic-related aspect the retailer should consider is the ease with a second traffic-related aspect the retailer should consider is the ease with which consumer can reach the store site. Are the roadways in good shape? Are which consumer can reach the store site. Are the roadways in good shape? Are there traffic barriers (rivers with a limited number of bridges, interstate there traffic barriers (rivers with a limited number of bridges, interstate highways with limited crossing, one-way streets, heavy street use resulting in highways with limited crossing, one-way streets, heavy street use resulting in congestion that limits exits to the site)? Remember, customer normally avoid congestion that limits exits to the site)? Remember, customer normally avoid heavily congested shopping areas and shop elsewhere in order to minimize heavily congested shopping areas and shop elsewhere in order to minimize driving time and other difficulties.driving time and other difficulties.Type of neighborsType of neighborsWhat neightbor establishment surround the site? There can be bad neighbor . What neightbor establishment surround the site? There can be bad neighbor . What constitutes a good or bad neighbor depend on the type of store being What constitutes a good or bad neighbor depend on the type of store being considering on the site.considering on the site.

Terms of purchase or leaseTerms of purchase or leaseAnother consideration for the retailer at this point is the lease terms. The retailer should review Another consideration for the retailer at this point is the lease terms. The retailer should review the length of the lease(it could be too long or too short), the exclusivity clause (whether or not the the length of the lease(it could be too long or too short), the exclusivity clause (whether or not the retailer will be the only one allowed to sell a certain line of merchandise), the guaranteed traffic retailer will be the only one allowed to sell a certain line of merchandise), the guaranteed traffic rate(a reduction in rent should be offered if the shopping center fails to achieve a target traffic rate(a reduction in rent should be offered if the shopping center fails to achieve a target traffic level), and an anchor clause (which would also allow for a rent reduction if the anchor store in a level), and an anchor clause (which would also allow for a rent reduction if the anchor store in a developing center does not open on time or when you open)developing center does not open on time or when you open)Lease arrangements generally call for either a fixed payment, in which the rental charge is Lease arrangements generally call for either a fixed payment, in which the rental charge is usually based on a fixe amount per month ,or a variable payment in which rent is a specific usually based on a fixe amount per month ,or a variable payment in which rent is a specific persentage of sales with a guaranteed minimum rent . persentage of sales with a guaranteed minimum rent . It is important to the retailer to choose the one that is best under the circumstances- perhaps a It is important to the retailer to choose the one that is best under the circumstances- perhaps a combination of the two method combination of the two method When the retailer decides to locate in a shopping center, it usually has no other choice than to When the retailer decides to locate in a shopping center, it usually has no other choice than to lease. However, in the case of freestanding location, an outright purchase is often possible. lease. However, in the case of freestanding location, an outright purchase is often possible. Purchase and lease cost should be factor into the site’s expected profitability.Purchase and lease cost should be factor into the site’s expected profitability.

Expected profitabilityExpected profitabilityThe final step in site selection analysis is contraction of a pro forma (expected) return The final step in site selection analysis is contraction of a pro forma (expected) return on asset model for each possible site. The return on asset model comprises three on asset model for each possible site. The return on asset model comprises three crucial variable: net profit margin, asset turnover, and return on assets.crucial variable: net profit margin, asset turnover, and return on assets.