1. Trading-Area Analysis
Chapter 9
Trading-Area Analysis
Dr Pointer’s Notes

2. Chapter Objectives
To demonstrate the importance of store location for a retailer and outline the process for choosing a store location
To discuss the concept of a trading area and its related components
To show how trading areas may be delineated for existing and new stores

3. Chapter Objectives_2
To examine three major factors in trading-area analysis
Population characteristics
Economic base characteristics
Competition and level of saturation

4. Importance of Selecting Right location
Location decisions are complex, costly and little flexibility once selected
Location attributes have a large affect retailer’s success
The right location may help compensate for a less than stellar retail mix.

5. Location, Location, Location
Criteria to consider include
population size and traits
competition
transportation access
parking availability
nature of nearby stores
property costs
length of agreement
legal restrictions

6. Choosing a Store Location
Step 1: Evaluate alternate geographic (trading)
areas in terms of residents and existing retailers
Step 2: Determine whether to locate as an
isolated store or in a planned shopping center
Step 3: Select the location type
Step 4: Analyze alternate sites contained in the
specific retail location type

7. Trading-Area Analysis
A trading area is a geographic area containing the customers of a particular firm or group of firms for specific goods or services.
Proposed trading areas should be evaluated thoroughly
Any trading area overlaps?

8. Location-Trading Area
Trading area overlap – where the same customers are served by both stores
Need to calculate the net increase in sales to determine if it is worth while to open new store

9. Benefits of Trading Area Analysis
Discovery of consumer demographics and socioeconomic characteristics
Opportunity to determine focus of promotional activities
Opportunity to view media coverage patterns
Assessment of effects of trading area overlap
Ascertain whether chain’s competitors will open nearby
Discovery of ideal number of outlets, geographic weaknesses
Review of other issues, such as transportation

10. Figure 9.2 The Trading Areas of Current and Proposed OutletsB
A. Trading area of existing store
B. Trading area of new store

11. GIS Software Geographic Information Systems software, which combines
digitized mapping with key locational data to graphically depict trading-area characteristics such as
population demographics
data on customer purchases
listings of current, proposed, and competitor locations

12. Private Firms Offering Mapping Software
Claritas
ESRI
GDT
GeoVue
Mapinfo
SRC

13. The Size and Shape of Trading Areas
Primary trading area % of a store’s customers
Secondary trading area % of a store’s customers
Fringe trading area - all remaining customers

14. Figure 9.5 The Segments of a Trading Area
Store
Fringe
Secondary
Primary

15. Destinations versus Parasites
Destination stores have a better assortment, better promotion, and/or better image
It generates a trading area much larger than that of its competitors
Dunkin’ Donuts: “It’s worth the trip!”
Parasite stores do not create their own traffic and have no real trading area of their own
These stores depend on people who are drawn to area for other reasons

16. Trading Areas and Store Type
Largest
TRADING
AREAS
Smallest
Department stores
Supermarkets
Apparel stores
Gift stores
Convenience stores

17. The Trading Area of a New Store
Different tools must be used when an area must be evaluated in terms of opportunities rather than current patronage and traffic patterns
Trend analysis-projecting future based on past
Consumer surveys- gather information from residents in the area
Computerized trading area analysis models- using computers to evaluate potential areas.

18. Advantages of Computer Models for Trading Area Analysis
They are objective and systematic
They offer insights as to how each locational attribute should be weighted
Useful in screening a large number of locations
Can be helpful in assessing performance by comparing forecasts with results.

19. Computerized Trading-Area Analysis Models
Analog Model
Regression Model
Gravity Model

20. Traditional Means of Delineating Trading Areas
Reilly’s law of retail gravitation – establishes a point of indifference between 2 cities so the trading areas of each can be determined
Point of difference – geographic breaking point between 2 cities where consumers are indifferent to shopping at either trading area
Huff’s law of shopper attraction – delineates trading areas on the basis of the product assortment (of the items desired most by consumers) carried at various shopping locations, travel times from the shoppers’ home and etc.

21. Limitations of Reilly’s Law
Distance is only measured by major thoroughfares; some people will travel shorter distances along cross streets
Travel time does not reflect distance traveled. Many people are more concerned with time traveled than with distance
Actual distance may not correspond with perceptions of distance

22. Huff’s Law
Huff’s law of shopper attraction delineates trading areas on the basis of product assortment (of the items desired by the consumer) carried at various shopping locations, travel times from the shopper’s home to alternative locations, and the sensitivity of the kind of shopping to travel time.

23. Table 9.1 Chief Factors to Consider in Evaluating Retail Trading Areas
Population Size and Characteristics
Total size and density
Age distribution
Average educational level
Percentage of residents owning homes
Total disposable income
Per capita disposable income
Occupation distribution
Trends

24. Table 9.1 Chief Factors to Consider in Evaluating Retail Trading Areas
Availability of Labor
Management
Management trainee
Clerical

25. Table 9.1 Chief Factors to Consider in Evaluating Retail Trading Areas
Closeness to Sources of Supply
Delivery costs
Timeliness
Number of manufacturers
Number of wholesalers
Availability of product lines
Reliability of product lines

26. Table 9.1 Chief Factors to Consider in Evaluating Retail Trading Areas
Economic Base
Dominant industry
Extent of diversification
Growth projections
Freedom from economic and seasonal fluctuations
Availability of credit and financial facilities

27. Table 9.1 Chief Factors to Consider in Evaluating Retail Trading Areas
Competitive Situation
Number and size of existing competition
Evaluation of competitor strengths and weaknesses
Short-run and long-run outlook
Level of saturation

28. Table 9.1 Chief Factors to Consider in Evaluating Retail Trading Areas
Availability of Store Locations
Number and type of store locations
Access to transportation
Owning versus leasing opportunities
Zoning restrictions
Costs

29. Table 9.1 Chief Factors to Consider in Evaluating Retail Trading Areas
Regulations
Taxes
Licensing
Operations
Minimum wages
Zoning

30. Elements in Trading-Area Selection
Economic Base
Characteristics
Population
Characteristics
Nature and Saturation
of Competition

31. Characteristics of the Population
Need to have detailed analysis of population
There are many secondary sources of information
Census data –census of population
Survey of Buying Power – annual retail sales by area, annual retail sales by specific product categories, annual effective buying income and 5 yr population and retail sales projection. Buying Power Index (BPI) weight measure which combines different economic variables that determines the attractiveness of a geographic area

32. Table 9.3 Selected Population Statistics for Trading Areas A and B

33. Economic Basis
This evaluates a city’s commercial and industrial infrastructure and resident’s sources of income
Good to seek a city with a diversified economic base
These factors should be evaluated
percentage of labor force in each industry, transportation, banking facilities, impact of economic fluctuations, future of different industries operating in the city

34. Nature and Intensity of competition
Markets with intensive competitive competition are unattractive
These factors should be evaluating when assessing competition in an area
1. number of existing stores
2. size distribution of existing stores
3. rate of new store openings, strength and weaknesses of all stores
4. short-run and long run trends and level of saturation

35. Nature and Intensity of competition
Understored trading area – too few stores selling a specific good or service satisfy the needs of population
Overstored trading area – area has many stores selling a specific goods and many retailers cannot make enough profits to survive
Saturated trading area – proper amount of stores to satisfy needs of it population

36. Measuring Trading Area Saturation
Trading areas can support only a given number of stores or square feet of selling space per good/service category.
Ratios that must be calculated/evaluated
average sales per store
average sales per store category
average store sales per capita or household
average sales per square foot of selling area
Average sales per employee
Saturation levels per cities can be compared

37. Questions