Retail

Chapter 7

Marketing Selection and Retail Location Analysis

Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved.

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Learning Objectives l l

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Explain the criteria used in selecting a target market. Identify the different options, both store-based and nonstore-based, for effectively reaching a target market and identify the advantages and disadvantages of business districts, shopping centers, and freestanding units as sites for retail location. Define geographic information systems (GIS) and discuss their potential uses in a retail enterprise.

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Learning Objectives l

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Describe the various factors to consider in identifying the most attractive geographic market for a new store. Discuss the various attributes to consider in evaluating retail sites within a retail market. Explain how to select the best geographic site for a store.

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Selecting a Target Market LO 1 l

Home Page Is the introductory or first material viewers see when they access a retailer’s Internet site. It is the equivalent to a retailer’s store-front in the physical world.

• Virtual Store Is the collection of all the pages of information on the retailer’s Internet site.

• Ease of Access Refers to the consumer’s ability to easily and 4

Selecting a Target Market LO 1 l

Market Segmentation

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Identifying a Target Market

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Selecting a Target Market LO 1 l

Market Segmentation Is dividing of a heterogeneous consumer population into smaller, more homogenous groups on demographic, economic, psychographic, and behavioral characteristics.

• Market segment should be measurable. • Market should be accessible. • Market should be substantial enough to be profitable. • Target market Is the group of customers that the retailer is seeking to serve

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Ease of Access LO 1: Exhibit 7.1

Difficulty Finding Desired Site Through Search Engine

Number of Web Sites 7

Target Market LO 1 l

The Limited has a welldefined target market: the moderate-income, career-oriented woman who is fashion conscious.

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Location of Store-Based Retailers LO 2

• Store-Based Retailers operate from a fixed store

location that requires customers to travel to the store to view and select merchandise or service.

• Nonstore-Based Retailers intercept customers at

home, at work, or at a place other than a store where they might be susceptible to purchasing.

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Retail Formats for Accessing a Target Market LO 2: Exhibit 7.2 Retail NonstoreBased

Store-Based Business District Freestandi ng

Shopping Centers/M alls

Nontraditio nal

Street Peddling Direct Selling

Mail-Order

Interactiv e TV

Automated Merchandis ing

Internet 10

Location of Store-Based Retailers LO 2 l

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Central Business Districts (CBD) usually consists 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 originated historically. Secondary Business District (SBD) is a shopping area that is smaller than the CBD and that revolves around at least one department or variety store at a major street intersection.

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Location of Store-Based Retailers LO 2 l

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Neighborhood Business District (NBD) is a chopping 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 its located on a major artery of a residential area. Shopping Center (or mall) is a centrally owned or managed shopping district that is planned, has balanced tenancy (the stores complement each other in merchandise offerings), and is surrounded by parking facilities.

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Location of Store-Based Retailers LO 2 l

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Anchor Stores are the stores in a shopping center that are the most the most dominant and are expected to draw customers to the shopping center. Free-Standing Retailer generally locates along major traffic arteries and does not have any adjacent retailers to share traffic with.

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Shopping Center Advantages over a CBD LO 2 l

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Heavy traffic resulting from the wide range of product offerings. Cooperative planning and sharing of common resources.

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Access to highways and availability of parking.

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Lower crime rate.

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Clean, neat environment.

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Shopping Center Disadvantages LO 2 Inflexible store hours (open during mall hours only). lHigh rents. lRestrictions as to what merchandise the retailer may sell. lInflexible operations and required membership in the center’s merchant organization. lPossibility of too much competition and the fact that much of the traffic is not interested in a perticular product offering. lDominance of the smaller stores by the anchor tenants. l

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Advantages of Freestanding Retailing LO 2

• Lack of direct competition. • Generally lower rents. • Freedom in operations and hours. • Facilities that can be adapted to individual needs. • Inexpensive parking.

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Limitations of Freestanding Retailing LO 2

• Lack of drawing power from complementary stores. • Difficulties in attracting customers for the initial visit. • Higher advertising and promotional costs. • Operating costs that cannot be shared with others. • Stores that may have to be built rather than rented. • Zoning laws that may restrict some activities.

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Nonstore-based Retail Formats LO 2

• Direct Selling • Street Peddling • Interactive TV • Mail-Order • Internet • Automated Merchandising Systems

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ISCS Shopping Center Definitions LO 2

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ISCS Shopping Center Definitions LO 2

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Typical Size & Trading Area of Shopping Centers LO 2 Type of Shopping Center Neighborhood Gross Leasable Square Feet 30,000 to 150,000 Primary Trade Area 3 Miles

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Typical Size & Trading Area of Shopping Centers LO 2 Type of Shopping Center Community Gross Leasable Square Feet 100,000 to 350,000 Primary Trade Area 3-6 Miles

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Typical Size & Trading Area of Shopping Centers LO 2 Type of Shopping Center Regional Gross Leasable Square Feet 400,000 to 800,000 Primary Trade Area 5-15 Miles

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Typical Size & Trading Area of Shopping Centers LO 2 Type of Shopping Center SuperRegional Gross Leasable Square Feet 800,000 Primary Trade Area 525 Miles

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Question to Ponder l

Given the wide variety of locations available to target specific consumer groups, what new locations will provide the greatest opportunities for the retailers of tomorrow?

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Geographic Information Systems LO 3

• Thematic Maps • Uses of GIS

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Geographic Information Systems LO 3

• Geographic Information System (GIS) is a

computerized system that combines physical geography with cultural geography.

• Cultureis the buffer that people have created between

themselves and the raw physical environment and includes the characteristics of the population, humanly created objects, and mobile physical structures.

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Geographic Information Systems LO 3

• Thematic Mapsuse visual techniques such as colors,

shading, and lines to display cultural characteristics of the physical space.

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GIS Components LO 3: Exhibit 7.4 Cultural Geography

Physical Geography Latitude/Longitude Land/Water Terrain Rainfall/Snow Temperature

Data Inputs

Demographics Manmade Structures Consumption Patterns Work Patterns Leisure Behavior Deviant Behavior

GIS (Data Aggregation and Analysis via Computer) Output Maps and Other Displays of Information 29

Uses of GIS LO 3

• Market selection. • Site analysis. • Trade area definition. • New store cannibalization. • Advertising management. • Merchandise management. • Evaluation of store managers.

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Market Identification LO 4

• Retail Location Theories • Market Demand Potential • Market Supply Factors

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Selecting a Retail Location LO 4: Exhibit 7.5 Identify the most attractive markets in which to operate

Identify the most attractive sites that are available within each market

Select the best site(s) available 32

Market Identification LO 4 l

Trading Area Is the geographic area from which a retailer, or group of retailers, or community draws its customers.

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Retail Location Theories LO 4

• Retail Gravity Theory • Saturation Theory • Buying Power Index

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Retail Location Theories LO 4

• Retail Gravity Theory Suggests that there are underlying consistencies in shopping behavior that yield to mathematical analysis and prediction based on the notion or concept of gravity.

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Retail Location Theories LO 4

• Reilly’s Law of Retail Gravitation based on Newtonian gravitational principles, explains how large urbanized areas attract customers from smaller rural communities. d Da

= 1+

Pb P

a where Dab is the breaking point from city A, measured in miles along the road to city B; d is the distance between city A and city B along the major highway; Pa is the population of city A; and 36

Retail Location Theories LO 4

• Point of Indifference Is the extremity of a city’s trading area where households would be indifferent between shopping in that city or an alternative city in a different geographical direction.

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Trading Area for City A LO 4: Exhibit 7.6 3.5 miles

City B (Population 14,000)

14.5 miles

X

3.2 miles Z City C (Population 21,000)

m 10.8

iles

City A (Population 240,000)

3.7 miles

Y

1.3 miles

City D (Population 30,000) 38

Retail Location Theories LO 4

• Saturation Theory Examines how the demand for goods and services of a potential trading area is being served by current retail establishments in comparison with other potential markets.

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Retail Location Theories LO 4

• Retail Store Saturation is a condition where there is

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

• Understored is a condition in a community where the

number of stores in relation to households is relatively low so that engaging in retailing is an attractive economic endeavor.

• Overstored is a condition in a community where the

number of stores in relation to households is so large that engaging in retailing is usually unprofitable or marginally profitable. 40

Retail Location Theories LO 4

• Index of Retail Saturation (IRS) is the ratio of demand

for a product (households in the geographic area multiplied by annual retail expenditures for a particular line of trade per household) divided by available supply (the square footage of retail facilities of a particular line of trade in a geographic area). IRS = (H X Where IRS is the index of retail saturation for and area; H is the number of households in the area; RE is the annual retail expenditures for a particular line of trade per household in the area; RF is the square footage of retail facilities 41

Retail Location Theories LO 4

• Buying Power Index (BPI) is an indicator of a market’s

overall retail potential and is composed of the weighted measures of effective buying income (personal 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

+ 0.3(the area’s percentage of U.S. + 0.2(the area’s percentage of U.S.

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Market Demand Potential LO 4

• Population Characteristics • Buyer Behavior Characteristics • Household Income • Household Age Profile • Household Composition • Community Life Cycle • Population Density • Mobility 43

Identifying Communities with High Demand Potential for Fast-Food Drive-In Restaurant

LO 4: Exhibit 7.7

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Market Supply Factors LO 4

• Square Feet Per Store • Square Feet Per Employee • Growth in Stores • Quality of Competition

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Site Analysis LO 5

• Site Analysis Is the evaluation of the density of demand and supply within each market with the goal of identifying the best retail site(s).

• Size of Trading Areas • Description of Trading Area • Demand Density • Supply Density • Site Availability 46

Site Analysis LO 5

• Size of Trading Areas • Description of Trading Area • Demand Density • Supply Density • Site Availability

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Customer Spotting Map for a Supermarket LO 5: Exhibit 7.8 City Limits

Store

2 miles from store 4 miles from store 3 miles from store

1 mile from store 48

Description of Trading Area LO 5 l

Exhibit 7.9 identifies the 65 neighborhood types or clusters that MapInfo has distinguished for describing neighborhoods. This information is used in describing a trading area.

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PSYTE USA Cluster Demographic LO 5: Exhibit 7.9

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PSYTE USA Cluster Demographic LO 5: Exhibit 7.9

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Demand Density LO 5 l

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.

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Demand Density Map LO 5: Exhibit 7.10 Three-Variable Demand-Density Map Variable 1 = Median income over $22,000 Variable 2 = Households per square mile greater than 1,200 Variable 3 = Average growth in population over last 3 years in excess of 3 percent per year Number of Variables Met 0 1 2

3

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Supply Density LO 5 l

Supply Density The extent to which retailers are concentrated in different areas of the market under question.

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Store Density and Site Availability Map LO 5: Exhibit 7.11

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Checklist for Site Evaluations LO 5: Exhibit 7.12

•Local Demographics •Population and/or household base •Population growth potential •Lifestyles of consumers •Income potential •Age makeup •Population of nearby special markets, that

is, daytime workers, students, and tourists, if applicable •Occupation mix 56

Checklist for Site Evaluations LO 5: Exhibit 7.12

•Traffic Flow and Accessibility •Number and type of vehicles passing location •Access of vehicles to location •Number and type of pedestrians passing location •Availability of mass transit, if applicable •Accessibility of major highway artery •Quality of access streets •Level of street congestion •Presence of physical barriers that affect trade 57

Checklist for Site Evaluations LO 5: Exhibit 7.12

•Retail Competition •Number and types of stores in area •Analysis of “key” players in general area •Competitiveness of other merchants •Number and location of direct competitors in area •Possibility of joint promotions with local

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Checklist for Site Evaluations LO 5: Exhibit 7.12

•Site Characteristic

•Number of parking spaces available •Distance of parking areas •Ease of access for delivery •Visibility of site from street •History of the site •Compatibility of neighboring stores •Size and shape of lot •Condition of existing building •Ease of entrance and exit for traffic •Ease of access for handicapped customers •Restrictions on sign usage •Building safety code restrictions •Type of zoning

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Checklist for Site Evaluations LO 5: Exhibit 7.12

•Cost Factors •Terms of lease/rent agreement •Basic rent payments •Length of lease •Local taxes •Operations and maintenance cost •Restrictive clauses in lease •Membership in local merchants association required •Voluntary regulations by local merchants 60

Site Selection LO 6 l

100 Percent Location Is when there is no better use for a site than the retail store that is being planned for that site.

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Site Selection LO 6

• Nature of Site • Terms of Purchase or Lease • Expected Profitability

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Nature of Site LO 6

• Traffic Characteristics • Types of Neighbors

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Nature of Site LO 6

• Store Compatibility Exists when two similar retail businesses locate next to or nearby each other and they realize a sales volume greater than what they would have achieved if they were located apart from each other.

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Terms of Purchase or Lease LO 6

• Length of lease • Exclusivity clause • Guaranteed traffic rate • Anchor clause

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Expected Profitability LO 6

• Net profit margin • Asset turnover • Return on assets

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If Retailers Could Select Their Neighbors LO 6

Retailer Next to Fast-food restaurant Gas service station Health food store Fitness center, medical center Recycled merchandise Supercenter Home improvement store Supercenter Hardware store Wholesale club, supermarket Zale’s Jewelry Sears, JCPenney, Mervyn’s Record Giant Wal-Mart; Kmart Payless Shoes Supercenters, KinderCare Long’s Drug Stores TJMaxx, Kmart Cato Fashion Kmart; Wal-Mart Bennetton Nordstron; Bloomingdale’s Nursery and Crafts Toys “R” Us; Circuit City 67