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FACTORS AFFECTING SELECTION OF RETAIL STORE LOCATION

1. TYPES OF GOODSa. Convenienceb. Shoppingc. Specialty

2. POPULATION AND CUSTOMER

3. ACCESSIBILITY, VISIBILITY AND TRAFFIC

4. SIGNAGE, ZONING AND PLANNING

5. COMPETITION AND NEIGHBORS

6. LOCATION COSTS

7. BUILDING INFRASTRUCTURE

McGraw-Hill/IrwinRetailing Management, 7/e © 2008 by The McGraw-Hill Companies, All rights reserved.

What Size Retail Building Do Retailers Need?

•When planning retail store, the amount of selling space will be one of the most important factors in selecting a

location.•To get an estimate on how much selling space your store must have, divide the planned sales volume by

your industry's sales per square foot.•Sales Volume ÷ Sales per Square Foot = Selling Space

•Deciding How Much Space•Make Sure You Don't Overspend

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Questions

■ What types of locations are available to retailers?

■ What are the relative advantages of each location type?

■ Why are some locations particularly well suited to specific retail strategies?

■ Which types of locations are growing in popularity with retailers?

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Elements in Retail Mix

Customer Service

Merchandise

Assortment

PricingCommunication Mix

Store Display

And Design

Location Strategy

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Why is Store Location Important for a Retailer?

■ Location is typically prime consideration in customer’s store choice.

■ Location decisions have strategic importance because they can help to develop sustainable competitive advantage.

■ Location decisions are risky: invest or lease?

F. Schussler/PhotoLink/Getty Images

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Types of Retail Locations

■ Free Standing Sites■ City or Town Locations

n Inner Cityn Main Street

■ Shopping Centersn Strip Shopping Centersn Shopping Malls

■ Other Location Opportunities

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Selecting a particular location type

Involves evaluating a series of trade-offs between■ The size of the trade area (geographic area

encompassing most of the customers who would patronize a specific retail site)

■ the occupancy cost of the location■ The pedestrian and vehicle customer traffic■ The restrictions placed on store operations by the

property manager■ The convenience of the location for customers

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Types of Locations

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Unplanned Retail Locations

■ Freestanding Sites – location for individual store unconnected to other retailer

■ Advantages: n Conveniencen High traffic and visibilityn Modest occupancy costn Separation from competitionn Few restrictions

■ Disadvantages:n No foot trafficn No drawing power The McGraw-Hill Companies, Inc./Andrew Resek, photographer

JCPenney, Sears, Walgreens are shifting to stand alone locations

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Unplanned Retail Locations

Merchandise Kiosks – small temporary selling stations located in walkways of enclosed malls, airports, train stations or office building lobbies.

Kent Knudson/PhotoLink/Getty Images

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City or Town Locations

Gentrification is bringing population back to the cities.

The McGraw-Hill Companies, Inc./Andrew Resek, photographer

Advantage to Retailers:

•Affluence returned•Young professionals•Returned empty-nesters•Incentives to move provided by cities•Jobs!•Low occupancy costs•High pedestrian traffic

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Central Business District (CBD)

■ Draws people into areas during business hours■ Hub for public transportation■ Pedestrian traffic■ Residents

■ High security required■ Shoplifting■ Parking is poor■ Evenings and weekends are slow

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Spike Mafford/Getty Images

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Main Streets vs. CBDs

■ Occupancy costs lower than CBDs

■ They don’t attract as many people

■ There are not as many stores

■ Smaller selections offered■ Not as much

entertainment■ Some planners restrict

store operations

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Inner City

Inner city retailers achieve high sales volume, higher margins and higher profits

Unmet demand tops 25% in many inner city

markets

Inner city customer wants branded merchandise

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Shopping Centers

Shopping Center Management Controls:

•Parking•Security•Parking lot lighting•Outdoor signage•Advertising•Special events for customers

The McGraw-Hill Companies, Inc./Andrew Resek, photographer

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Types of Shopping Centers

■ Neighborhood and Community Centers (Strip Centers)

■ Power Centers■ Enclosed Malls■ Lifestyle Centers■ Fashion Specialty Centers■ Outlet Centers

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Neighborhood and Community Centers

Attached row of stores

Managed as a unit

Onsite parking

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AdvantagesConvenient locationsEasy parkingLow occupancy costs

Disadvantages

Limited trade areaLack of entertainmentNo protection from weather

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Power Centers

Shopping centers that consist primarily of collections of big-box retail stores such as discount stores (Target), off-price stores (Marshall’s), warehouse clubs (Costco), and category specialists (Lowe’s, Best Buy, Dick’s)

■ Open air set up■ Free-standing anchors■ Limited small specialty stores■ Many located near enclosed malls■ Low occupancy costs■ Convenient■ Modest vehicular and pedestrian traffic■ Convenient■ Modest vehicular and pedestrian traffic■ Large trade areas

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Shopping Malls

■ Regional shopping malls (less than 1 million square feet)

■ Super regional malls (more than 1 million square feet)

The South China Mall in Dongguan, China

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The Largest Shopping Malls

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Advantages and Disadvantages of Shopping Malls

Advantages:Many different types of storesMany different assortments availableAttracts many shoppersMain Street for today’s shoppersNever worry about the weatherComfortable surrounding to shopUniform hours of operation

Disadvantages:Occupancy costs are highTenants may not like mall management control of operationsCompetition can be intense

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Challenge to Malls

■ Time pressured society makes it impractical to wander malls■ Fashion apparel sold in malls experiencing limited growth■ Malls are getting old and rundown – unappealing to shop■ Anchor tenants are decreasing due to retail consolidation■ Strategies?

n Make shopping more enjoyable (e.g., sofas, children’s playing areas)n Great food destination (fast food and full-service restaurants)n Tailor make its offering to cater to changing demographics (e.g.,

repositioning older shopping centers for Hispanic markets)n Mall renovation and redevelopment

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Lifestyle Centers

Photo provided by ICSC and used with permission of Aspen Grove Lifestyle Center

Attractive to specialty retailers

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Lifestyle Centers

■ Usually located in affluent residential neighborhoods

■ Includes 50K sq. ft. of upscale chain specialty stores

■ Open-air configuration

■ Design ambience and amenities

■ Upscale stores

■ Restaurants and often a cinema or other entertainment

■ Small department store format may be there

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Fashion Specialty Centers

■ Upscale apparel shops■ Tourist areas/central business

districts■ Need not to be anchored■ Décor is elegant■ High occupancy costs■ Large trade area■ Ex. Phipps Plaza in Atlanta

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Outlet Centers

These shopping centers contain mostly manufacturers and retail outlet stores

Courtesy of Beall’s, Inc.

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Theme/Festival Centers

■ Located in places of historic interests or for tourists

■ Anchored by restaurants and entertainment facilities

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Larger, Multi-format Developments: Omnicenters

■ Combines enclosed malls, lifestyle center, and power centers

■ Larger developments are targeted n to generate more pedestrian traffic and longer

shopping tripsn To capture cross-shopping consumers

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Mixed Use Developments (MXDs)

■ Combine several different uses into one complex, including shopping centers, office tours, hotels, residential complexes, civic centers, and convention centers.

■ Offer an all-inclusive environment so that consumers can work, live, and play in a proximal area

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Other Location Opportunities

■ Airports■ Resorts■ Store within a Store■ Temporary or pop-up stores

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Alternative LocationsAirports

Airports: Why wait with nothing to do?

Rents are 20% higher than mallsSales/square ft are 3-4 times higher than mallsBest airports are ones with many connecting flights

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Alternative LocationsResorts

Captive audienceWell-to-do customer

Customers have time to shop

Royalty-Free/CORBIS

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■ Located within other, larger stores■ Examples:

n Grocery store with service providers (coffee bars, banks, clinics, video outlets)

n Sephora in JCPenney

Alternative LocationsStore within a Store

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Alternative LocationsHospitals

Patients cannot leaveGifts are available

Royalty-Free/CORBIS

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Matching Location to Retail Strategy

The selection of a location type must reinforce the retailer’s strategybe consistent with n the shopping behaviorn size of the target marketn The retailer’s position in its target market

■ Department Stores è Regional Mall■ Specialty Apparel è Central Business District, Regional

malls ■ Category Specialists è Power Centers, Free Standing■ Grocery Stores è Strip Shopping Centers■ Drug Stores è Stand Alone

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Shopping Behavior of Consumers in Retailer’s Target Market

■ Factors affecting the location choice n Consumer Shopping Situations

• Convenience shopping• Comparison shopping • Specialty shopping

n Density of Target Market• Ex. Convenience stores in CBD; comparison

shopping stores next to Wal-Martn Uniqueness of Retailing Offering

• Convenience of locations is less important• Ex. Bass Pro Shop

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Convenience Shopping

Minimize the customer’s effort to get the product or service by locating store close to where customers are located

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Comparison Shopping

Customers have a good idea of what type of product they want, but don’t have a strong preference for brand, model or retailer.

Ryan McVay/Getty Images

Typical for furniture, appliances, apparel, consumer electronics, hand tools and cameras.

Competing retailers locateNear one another

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Category Specialists

Offer the benefits of comparison shoppingConsumers can see almost all brands and models in one storeDestination stores

The McGraw-Hill Companies, Inc./Andrew Resek, photographer

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Environmental Issues

“Above-ground” risks - such as asbestos-containingmaterials or lead pipes used in construction.

Hazardous materials - e.g. dry cleaning chemicals,motor oil, that have been stored in the ground.

Retailers’ ProtectionStipulate in the lease that the lessor is responsible

for removal and disposal of this material if it’s found.

Retailer can buy insurance that specifically protects it from these risks.

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Other Legal Issues

Zoning and Building CodesZoning determines how a particular site can be used.Building codes determine the type of building, signs, size, type of parking lot, etc. that can be used

SignsRestrictions on the use of signs can also impact a particular site’s desirability

Licensing RequirementsSome areas may restrict or require a license for alcoholic beverages

EvaluateAlternateGeographic(Trading)Areas

SelectGeneralLocation

AnalyzeAlternateSites

DetermineTypeofLocation

Site Selection Steps

Site Selection Steps

Site Selection Steps

The farthest distance consumers are willing to travel to purchase retail goods and services.

The size of a retail trade area depends on the variety of goods and services offered in the community and its proximity to competing

retail markets.

Trading Area

Trade area analysis and mapping tell you:

•Where a store's customers are coming from•How many customers you have in a trade area•Where to look for more customers

Why Trading Area Analysis is important?

• Identify gaps or overlaps in the market coverage of your

existing store network, and make corrections by opening,

closing or moving stores

• Define a geographic area to analyze for market potential,

market penetration, and competitive threats

• Become more efficient and effective at target marketing by

reaching out only to those customers and prospects in a store's

trade area

• Use as a key input into customer profiling

• Promotional Activity Focus can be determined

• Proper Number of Stores can be calculated

Benefits of Trade 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

Benefits of Trade Area Analysis

• A trade area should account for more than 50% or higher sales

• Trade area can be a nation/ single neighbor block

• Size of area depends on retailer’s objectives, like, how many customers are needed to achieve profitability? What sales is required to achieve breakeven?

• Ray Kroc of McDonald’s insisted that franchisees live in trading area so they would understand the local market

Characteristics of Trade Area

Various Zones of Trading Area

Various Zones of Trading Area

Primary Secondary Tertiary

- 55-70% of customers originate

- 15-20% of Customers

- 5-15% of Customers

MainTradeArea(MTA)

BeyondTradeArea(BTA)

SizeandShapeofTradingArea

• NotConcentric• TwoStoresinSameAreaCanHaveDifferentTradingAreas(TA)

TradingAreaAnalysisBenefits

• ConsumerCharacteristicsDetailed• PromotionalActivityFocusDetermined• ProperNumberofStoresCalculated• GeographicWeaknessesHighlighted

TradingAreaInfluencers

• StoreSize• Competitors’Locations• NewStores• ResidentialHousingPatterns• TravelorDrivingTime• Promotion-impactistemporary

FactorsAffectingDemandforaTradingarea

• Competition• Businessclimate• Demographicandlifestylecharacteristics• Economiesofscaleversuscannibalization

DECISIONMAKINGMODELFORTRADINGAREASELECTION

How to delineate Trading Areas

A.Concentric Circles or Ring StudiesB.Drive TimeC.Zip Code TabulationD.Point of Sale DataE.Traffic FlowF.Commuting time to work

1. Analogue Models

A. Concentric Circles or Ring StudiesWithin8kms

8-10kms

11-15kms

16-20kms

>20kms

• Defines the trade area based on the amount of time it takes to drive to a community or retail location.

• Drive time trade area will always be irregularly shaped because of the layout of road systems, difference in speed limits on roads/freeways and geographic barriers.

This methodology is often used in urban setting with high

population density.

A rule-of-thumb used in retail industry is that consumers will typically drive 20 minutes to shop.

B. Drive Time

• Tabulate the number of customers by their zip codes.

• Zip code collection can be built into point-of-sale machines.

• Customer’s zip code can be input to a cash register and

then downloaded into a ready-to-use spreadsheet format.

• Once zip codes are in spreadsheet format, this information

can be summarized by the number and percentage of people

originating in each zip code.

• When the zip code percentages are known, they can be

categorized into a trade area.

• Trade area is defined as those zip codes that comprise

about 75% of the customers.

C. Zip Code Tabulation

Customer point-of-sale (POS) data is collected by:

-In-store surveys

-Courtesy card programs

-License plate surveys

-Credit card transactions

-Through raffles

-Business card collection

From this information a trade area map can be developed to

provide a very accurate and precise picture of the spatial

distribution and characteristics of store trade areas

D. Point of Sale Data

is the random canvassing of parking lots at major locations

in town at different times on different days and over several

weeks.

The locations might include the various identified areas,

major shopping destinations such as shopping malls and

centers, Big Bazars, Reliance Marts, Home Depot, and

other popular establishments in town.

E. Traffic Flow

Commuting time to work by local residents is another way of

delineating a community’s retail trade area.

Converting commuting time to work into spatial distances or

miles and plotting these data on a map, provide a visual

picture of the geographic size of its trade area.

F. Commuting Time to Work

• Select store performance measure & variables used to predict performance.

• Solve the regression equation and use it to project performance for future sites

2. Regression Analysis

aka Spatial (flows between locations) Interaction Model

A spatial interaction is a realized movement of people, freight or information between an origin and a destination.

The gravity model is based on the assumption that interaction between two locations is proportional to their size and inversely proportional to their distance (or impedance).

3. Gravity Models

Reilly’s law of retail gravitation, a traditional means of trading-area delineation, establishes a point of indifference between two cities or communities, so the trading area of each can be determined

City A City B30Kms10Kms

Pointofindifference

Population10,000

Population90,000

1. Reilly’s Law

• AccordingtoReilly's"law,"customersarewillingtotravellongerdistancestolargerretailcentersgiventhehigherattractiontheypresenttocustomers.

• Thelawallowsustodrawtradeareaboundariesaroundcitiesusingthedistancebetweenthecitiesandthepopulationofeachcity.

• Reillyrealizedthatthelargeracitythelargeratradeareaitwouldhaveandthusitwoulddrawfromalargerhinterlandaroundthecity.

• Twocitiesofequalsizehaveatradeareaboundarymidwaybetweenthetwocities.

• Whencitiesareofunequalsize,theboundaryliesclosertothesmallercity,givingthelargercityalargertradearea.

• Reillycalledtheboundarybetweentwotradeareasthebreakingpoint(BP).Onthatline,exactlyhalfthepopulationshopsateitherofthetwocities

Limitations of Reilly’s LawReilly’s law rests on 2 assumptions: Competing areas will be accessible from the major road

– Distance is only measured by major thoroughfares; some people will travel shorter distances along cross streets

Retailers in the two areas will be equally effective.Other factors such as dispersion of population are ignored.

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

“The principal retail districts within a metropolitan trading area attract trade from the residential sections of the area approximately in direct proportion to the size of the retail districts and in inverse proportion to the square of the driving time distance from each residential section to the retail districts” (Ellwood, 1954 in Carn, et al. 1988, p.190).

Where,B=percentageofconsumerwanttovisitshoppingcenterS=retailareaT=traveltimea,b=twoshoppingcenters(aandb)

AlthoughEllwoodhasmodifiedtheReilly’slaw,theequationcananalyzeonlytwoshoppingcenters.

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2. Elwood’s Modification

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.

Where,P (Cij) = the probability that a consumer living at site i will shop at retail center jSj = the size of the retail center j Tij = the travel time from site i to retail center jn = the numver of retail center in the immediate areal = a parameter that reflects the effect of travel time on different kinds of shopping trips (Huff discovered values of 3.19 for furniture and 2.72 for clothing)

3. Huff’s Law

Huff model have advantage, which could measure the shoppers’ image to competitiveness among shopping center and their response.

However, the weakness of this model is assumed that demography characteristic of shoppers are equal and they have similar shopping behavior.

GISSoftware

vGeographicInformationSystems– digitizedmappingwithkeylocationaldatatographicallydepicttrading-areacharacteristicssuchas• populationdemographics• dataoncustomerpurchases• listingsofcurrent,proposed,andcompetitorlocations

GISSoftwareinAction- A

GISSoftwareinAction- B

PrivateFirmsOfferingMappingSoftware

Claritas

ESRI

GDT

GeoVue

Mapinfo

SRC

DelineatingTrading-AreaSegments

TradingAreasandStoreType

Largest

TRADINGAREAS

Smallest

Specialty Stores

Department stores

Apparel stores

Supermarkets

Gift stores

Convenience stores

DelineatingTheTradingAreaOfAnExistingStore

Store records or special study can be used to measure the trading area.Primary, secondary and fringe areas can be described in terms of:•Frequency with which people from various geographic areas shop at a particular store.•The average rupee purchase at a store by people from given geographic areas.•The concentration of a store’s credit card holders from given geographic areas.

DelineatingTradingAreaofNewStore

Differenttoolsmustbeusedwhenanareamustbeevaluatedintermsofopportunitiesratherthancurrentpatronageandtrafficpatterns– Trendanalysis– Consumersurveys– Computerizedtradingareaanalysismodels

Analogmodel

• Definecurrenttradearea• Matchcharacteristicsofcurrentstorewithpotentialnewstoreslocationtodeterminethebestsite

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