Dunne, Lusch, & Carver

Chapter 7

Market Selection

and Retail Location Analysis

Selecting a Target Market

• With the increased presence of alternative ways to reach customers, both geographic space and cyberspace must be considered.

• The counterpart to location on the Internet is the "ease of access" a consumer has to the site

• The Internet is becoming a major force in retailing

• Sales expected to reach a little more than 5% over next decade.

Market Segmentation

• The method retailers use to break down heterogeneous consumer populations into smaller homogeneous groups.

• Because any single retailer cannot serve all potential customers profitably*, it is important that it segment the market and select a target market(s)

• Recall the 3rd pillar of a market orientation*

• Target market• A group(s) of consumers that the retailer is seeking to serve.

Market Segmentation

• Although a retailer may identify several segments within any given market, not all targets should be considered for targeting.

• For a segment(s) to be considered attractive enough for becoming one’s target market, it must meet all three criteria.

1. It must be measurable

2. It must be accessible

3. It must be substantial

Reaching One’s Target Market

• Two Basic Retail Formats:

1. Store-Based Retailers

• Retailers that operate from a fixed store location and require customers to travel to the store to make a purchase

2. Nonstore-Based Retailers

• Retailers that reach the customer at home, work, or any place other than at a traditional store

Potential Retail Formats

Business Districts

1. Central Business District (CBD)

• Characteristics:

1. Usually located around a geographic point at which all public transportation systems converge.

2. Make-up usually depends on history, past retail trends, and luck.

3. Usually their attractiveness is in decline, but they can become enhanced by increased planning, community support, and adaptation to enhance non-shopping attractions.

Business Districts (cont.)

1. Central Business District (CBD)

• Strengths:1. Easy public access

2. Wide assortment of products sold

3. Proximity to commercial activities

• Weaknesses:1. Inadequate parking (not only for customers, but also

delivery)

2. Older stores (often in decaying conditions)

3. Higher rent/taxes

4. Potentially higher crime rates

Business Districts (cont.)

2. Secondary Business District (SBD)

• Characteristics:

1. Smaller than a CBD

2. Revolves around at least one department/variety store

3. Located at a major street intersection

Business Districts (cont.)

3. Neighborhood District (ND)

• Characteristics:

1. Typically smaller than a SBD

2. Evolves to satisfy convenience

3. Generally many small stores centered around one supermarket/variety store

4. Located on a major artery of a residential area

Shopping Centers / Malls

• Characteristics:

1. Centrally owned

2. Planned

3. Balanced tenancy

4. Large amounts parking

Shopping Centers / Malls (cont.)

• Strengths:

1. Heavy traffic

2. Cooperative planning and sharing of costs

3. Access to highways

4. Typically have clean and neat environments

5. Decreased crime rates

Shopping Centers / Malls (cont.)

• Weaknesses:

1. Inflexible hours

2. Higher rents

3. Restrictions on merchandise which can be sold

4. Potentially too much competition

Free-Standing Locations

• Characteristics:

1. Locate along major traffic routes

2. Lack of adjacent retailers selling competitive products

3. Typically large, well-known retailers because of the difficulty in attracting & holding customers in an isolated location

Free-Standing Locations (cont.)

• Strengths:

1. Lack of direct competition

2. Generally lower rents

3. Freedom in operations and hours

4. Facilities that can be adapted to the retailer’s own needs

5. Inexpensive parking

Free-Standing Locations (cont.)

• Weaknesses:

1. Lack of drawing power by complimentary stores

2. Difficulties in attracting customers for the initial visit

3. Higher advertising and promotional costs

4. Operating costs that cannot be shared

5. Stores that may have to be built rather than rented

6. Zoning laws

Geographic Information Systems (GIS)

• Computerized system that combines physical geography with cultural geography.

• Creates thematic maps

• Maps that use visual techniques such as color, shading, and lines, to display cultural characteristics of the physical space

Components of a GIS

Three Steps of All Retail Location Decisions

Market Identification

• Three Retail Location Theories

1. Retail Gravity Theory

2. Saturation Theory

3. The Buying Power Index

Retail Gravity Theory

• Seeks to understand how large urban areas attract customers from smaller rural communities & determine the breaking points at which customers would be indifferent between shopping in either city.

• Formula:

• Where:• Dab is the breaking point from A, measured in miles along the road to B.• d is the distance between A and B along the major highway• Pa is the population of A• Pb is the population of B

Saturation Theory

• Seeks to understand how the demand for goods & services of a potential trading area is being served in comparison with other potential markets.

• Index of retail saturation (IRS) - Ratio of demand for a product divided by available supply.

• IRS = (H × RE) /RF

• IRS - Index of retail saturation for an area.• H - Number of households in the area.• RE - Annual retail expenditures for a particular line of trade per

household in the area.• RF - Square footage of retail facilities of a particular line of trade in

the area.

Buying Power Index

• An indicator of a market’s overall retail potential & uses a weighted average of buying income (i.e., personal income, including all non-tax payments [e.g. social security], minus all taxes), retail sales, & 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 sales) + 0.2(the area’s percentage of U.S. population)

• Reflects only the demand levels of the two proposed trading areas and not the supply levels; thus, it doesn’t reflect saturation levels.

• Doesn’t account for competing products or stores in nearby cities.

Other Demand & Supply Factors to Consider

• Market demand potential:• Population characteristics; Buyer behavior

characteristics; Household income; Household age profile; Household composition; Community life cycle; Population density; and Mobility

• Market supply potential:• Square feet per store; Square feet per employee;

Growth of stores; and Quality of competition

Site Analysis

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

• Estimating the Size of Trading Area

• Important factors to consider:• By selling specifically tailored merchandise, the trade area shrinks• As mobility increases, the size of the trade area increases.• As size and assortment increases, the size of the trade area increases.• As distance between competitors increases, the size of the trade area

increases.• Natural and manmade obstacles (e.g. rivers and highways) can

abruptly limit the size of an otherwise large trade area

Description of the Trade Area

• Information about areas is easy and relatively cheap to gain from information retailers (e.g. MapInfo.com)• Demand Density – the extent to which potential

demand for a retailer’s goods is concentrated in one area (e.g., census tracts, ZIP code areas, or parts of the community)

• Supply Density – the extent to which potential competitors of a retailer’s goods are concentrated in one area

• Site Availability – even though demand may be greater than supply in a region, sites might not be available (zoning laws, no roads available, no space, etc.)

Example of a Demand Density Map

Example of a Store Density & Site Availability Map

Site Selection

• Nature of Site• Involves its price, history, etc.• The retailer needs to investigate why it’s available

before potentially choosing it.• Traffic characteristics• Parking availability• Ease of reaching the store (traffic patterns, roads, congestion

at peak times, etc.)• Types of neighbors• Store compatibility – “Cluster” theory

• Cluster theory doesn’t work for retailers requiring a membership (gyms, etc.)

What You Should Have Learned…Chapter’s Learning Objectives

1. The criteria used in selecting a target market.

2. The different options for effectively reaching a target market and the (dis)advantages of business districts, shopping centers, & freestanding units.

3. What a GIS is & its potential uses in a retail enterprise.

4. The various factors to consider when identifying the most attractive geographic market for a new store.

5. The various attributes to consider when evaluating retail sites within a retail market.

6. How to select the best geographic site for a store.