Location Strategy: Trading Area Analysis McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

8-2 Questions ■Why are location decisions so important to retailers? ■What process is used to select a retail store location? ■What is a trading area and its major zones? ■What methods are used to determine the trading areas of existing stores? ■What methods are used to project trading areas of potential stores? ■What criteria are used to evaluate the attractiveness of a potential trading area? ■Where can retailers get information to evaluate potential trading areas?

7-3 What Are the Three Most Important Things in Retailing? Eddie Tan/Life File/Getty Images Location! Location! Location!

7-4 Why is Store Location Important for a Retailer? ■Location is typically a prime consideration in the customer’s store choice. ■Location affects other retail mix elements ■Location decisions require a lengthy commitment and a substantial investment. F. Schussler/PhotoLink/Getty Images

7-5 Steps in the Location Planning Process Evaluate Alternative Trading Areas Determine the Type of Location Desired Select the Specific Site within the Desired Location

7-6 What is a Trading Area? A geographic area from which a store (or group of stores such as a shopping center) draws its customers. Examples: What would be the trading area of a Kroger’s? What would be the trading area of a shopping center like Dogwood Festival?

8-7 What are trading area zones? A trading area is comprised of three parts: Primary zone Derives 50 to 70 percent of its customers Secondary zone Derives 20 to 30 percent of its customers Tertiary zone Includes the remaining customers who occasionally shop at the store or shopping center

8-8 Zones in a Trade Area

8-9 Factors Affecting the Size and Shape of a Trading Area ■Type of Store ■Type of Shopping Area ■Competition ■Accessibility ■Natural and Physical Barriers

8-10 Methods for Estimating the Trading Area of an Existing Store (size and shape) Objective: Locate the residences of existing customers for a store or shopping center. How? Ask customers for addresses or zip codes at check out Record information from a check Maintain a customer data base - loyalty program, internet orders, promotional event Observe license plates Use data to plot customer addresses on a map and display relative to the store location

8-11 Methods for Estimating the Trading Area of a Proposed Store (size and shape) Must look at opportunities for customer traffic rather than actual customer traffic patterns Analog System Gravity Models Huff Gravity Model – pg. 235

8-12 Talbots uses the addresses of its catalog customers to determine promising locations for its future stores

8-13 Evaluating the Attractiveness of a Potential Trading Area ■Characteristics of the Population – Is there a Strategic Fit? ■Competitive Situation ■Economic Conditions ■Operating Costs

8-14 Population Characteristics: Strategic Fit Ann Taylor – High income, dual career families Hot Topic – teen, pop culture, grunge Royalty-Free/CORBIS REI – outdoor enthusiasts The McGraw-Hill Companies, Inc./John Flournoy, photographer McDonald’s – families with kids ■Do demographics, lifestyle profiles, and composition of households in the trading area match your target market?

8-15 Information Sources for Population Characteristics ■Census Data ■Geographic Information System Suppliers ■Other Sources: State and Metropolitan Area Data Book County and City Data Book Editor and Publisher Market Guide Chamber of Commerce

8-16 Ryan McVay/Getty Images Census Data of the U.S. Only once in 10 years. Each household in the country is counted to determine the number of persons per household, household relationships, sex, race, age and marital status. A sample of households gets a more extensive survey Available in many formats: census block, block groups, census tracks, zip code, county, state, region of country

8-17 Geographic Information System (GIS) ■Several firms today collect, store, and analyze demographic, psychographic, and consumer spending data and then correlate the data to geographic locations on a map. ■Services are offered for a fee ■Examples: ESRI ( ESRI Claritas (www. Claritas.com) Claritaswww. Claritas.com MapInfo ( MapInfowww.Mapinfo.com

8-18 Example: ESRI data For the potential site’s addresses, the system provides the data for 2009 and projected for 2014 on the people living within a three-, five-, and 10- mile radius from the sites ■Gender ■Income ■Disposable income ■Net worth ■Education ■Age ■Race/ethnicity ■Employment status ■Occupation ■Travel time to work ■Transportation mode to work ■Household composition ■Household expenditures by NAICS categories ■Geodemographic market segment ■Market potential index ■Spending potential index

8-19 Data from GIS on Retail Expenditures in a Trade Area

8-20 Index for Assessing Sales Potential ■Spending Potential Index (SPI) Average Amount Spent on a Product or Service by a Household in a Trade Area

8-21 ■Need to Know the Number and Type of Existing Retail Stores in the Area ■Sources for Measuring Competition GIS Firms provide competitive data The Internet - lists current locations and future sites. Yellow Pages Other Sources: Directories published by trade associations Chambers of commerce Municipal and county governments Competition in the Trade Area

8-22 Economic Conditions in Trading Area ■Important to Examine a Trading Area’s: Level and growth of employment (Why?) Level of economic base diversity (Why?)

8-23 Operating Costs in Trading Area Vary across areas Affected by local and state legal and regulatory environment