Trade Areas and Retail Site SelectionChapters 8 & 9

Location, Location, Location!!!Importance of location decision:Requires complex decision makingCosts lots of $$Little flexibility once a location has been chosenAttributes of location have a strong impact on the retailers strategy

Criteria to be considered:Size & characteristics of populationLevel of competitionAccess to transportationAvailability of parkingAttributes of nearby storesProperty costsLength of agreement (if lease)Population trendsLegal restrictions

Site EvaluationAccessibilityLocational advantagesTerms of occupancyLegal considerations (e.g. environmental considerations, zoning restrictions, building codes, signs, licensing requirements)

Checklist for Site EvaluationsLocal 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

Checklist for Site EvaluationsTraffic 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 area shape

Checklist for Site EvaluationsRetail 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 merchants

Checklist for Site EvaluationsSite 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

Checklist for Site EvaluationsCost 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

Site SelectionTrade area -- contiguous geographic area that accounts for the majority of a stores sales and customersPrimary trade zone -- Usually 3-5 mile radius; generates 60-65% of customersSecondary trade zone -- Usually 3-7 mile radius; generates 20% of customersTertiary trade zone -- Usually 15 - 50 mile radius

Steps in selecting a site:Evaluate alternative geographic areas in terms of the characteristics of residents and existing retailers (trading-area analysis)Determine whether to locate as stand-alone, unplanned business district or planned shopping centerMake a decision about location typeAnalyze alternate sites

Retailer Formats for Accessing Your Target MarketRetail FormatsStore-BasedNonstore-BasedFreestandingBusinessDistrictNontraditionalShoppingCenters/MallsInteractiveTVMail-OrderInternetAutomatedMerchandisingSystemsDirectSellingStreetPeddling

Types of LeasesPercentageFixed - Rate Percentage leases - rent is based on a percentage of sales. Retailers also typically pay a maintenance fee based on a percentage of their square footage of leased space. Most malls use some form of percentage lease.

Variations of Percentage LeasesPercentage lease with specified maximum - percentage of sales up to a maximum amount.Rewards retailer performance by allowing retailer to hold rent constant above a certain level of salesPercentage lease with specified minimum - retailer must pay a minimum rent no matter how low sales are.

Sliding scale - percentage of sales as rent decreases as sales go up.

Fixed Rate LeasesFixed rate leases - used by community and neighborhood centers.Retailer pays a fixed amount per month over the life of the lease.Not as popular as percentage leasesGraduated lease - a variation of the fixed rate leaseRent increases by a fixed amount over a specified period of time.

Percentage or Fixed Rate LeasesMaintenance-increase-recoupment lease - used with either a percentage or fixed rate lease.Rent increases if insurance, property taxes, or utility bills increase beyond a certain point.Net lease - retailer is responsible for all maintenance and utilities.

Prohibited Use Clause Limits the landlord from leasing to certain tenants

Some tenants take up parking spaces and dont bring in shoppers: bowling alley, skating rink, meeting hall, dentist, or real estate office.

Some tenants could harm the shopping centers wholesome image: bars, pool halls, game parlors, off-track betting establishments, massage parlors and pornography retailers.

Exclusive Use Clause Prohibits the landlord from leasing to retailers selling competing merchandiseSpecify no outparcelsSpecify if certain retailer leaves center, they can terminate lease.Escape clause Allows the retailer to terminate its lease if sales dont reach a certain level after a specified number of years, or if a specific co-tenant in the center terminates its lease.

Environmental IssuesAbove-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 Protection Stipulate in the lease that the lessor is responsible for removal and disposal of this material if its found.Retailer can buy insurance that specifically protects it from these risks.

Other Legal IssuesZoning and Building Codes Zoning 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 usedSignsRestrictions on the use of signs can also impact a particular sites desirabilityLicensing RequirementsSome areas may restrict or require a license for alcoholic beverages

Retail Trading Area IdentificationSpotting Techniques: spot customer origins license plate surveyscustomer surveyscustomer recordscustomer activities (contests, sweepstakes)Demographic data & GIS VendorsCensusBuying Power Index (BPI)Measuring Competition

Demographic Data and GIS VendorsDemographic data vendors specialize in repackaging and updating census-type data.

Geographic Information System (GIS) is a computer system that enables analysts to visualize information about their customers demographics, buying behavior, and other data in a map format.GIS is a spatial database that stores the location and shape of information.Analysts can identify the boundaries of a trade area and isolate target customer groups

GIS ComponentsData InputsPhysical Geography

Latitude/LongitudeLand/WaterTerrainRainfall/SnowTemperatureCultural Geography

DemographicsMan-Made StructuresConsumption PatternsWork PatternsLeisure BehaviorDeviant BehaviorGIS (Data Aggregation and Analysis via Computer)Output Maps and Other Displays of Information

Retail Location Theories1. Retail Gravity Theory2. Saturation Theory3. Buying Power Index

Retail Location TheoriesRetail gravity theorysuggests that there are underlying consistencies in shopping behavior that yield to mathematical analysis and prediction based on the notion or concept of gravity.

Huffs Gravity ModelBased on the premise that the probability that a given customer will shop in a particular store or shopping center becomes larger as the size of store or center grows and distance or travel time from customer shrinks

Huffs LawAssumptions:The proportion of consumers patronizing a given shopping area varies with the distance from the shopping areaThe proportion of consumers patronizing various shopping areas varies with the breadth and depth of merchandise offered by each shopping areaThe distance that consumers travel to various shopping areas varies for different types of products purchasedThe pull of any given shopping area is influenced by the proximity of competing shopping areas

Huffs Model Formula

University and Shopping Centers: Gravity Model Illustration

Huffs Model: The SolutionPij = 1000 32 (1000 32) + (500 52) + (100 12)

Probability = .43

.43 x 12,000 students = 5,160 customers

5,160 customers x $150 = $774,000

Repeat steps 1 to 3 for the remaining areas and then sum them.

Retail Location TheoriesSaturation theoryexamines 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.

Retail Location TheoriesIndex 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).

Retail Location TheoriesIndex of Retail Saturation (IRS)

where IRS is the index of retail saturationH is the number of households in the areaRE is the annual retail expenditures for a particular line of trade per household in the areaRF is the square footage of retail facilities of a particular line of trade in the area (including square footage of the proposed store) IRS = (H X RE)/RF

Retail Location TheoriesBuying power index (BPI)is an indicator of a markets 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.

Buying Power Index (BPI)Published annually in Demographics USAMeasures a given markets ability to buyIs expressed as a percentage of the total U.S. potentialSource: The Census and You, U.S. Department of Commerce, Bureau of the Census.

Retail Location TheoriesBuying Power Index

BPI = 0.5(the areas percentage of U.S. effective buying income)

+ 0.3(the areas percentage of U.S. retail sales)

+ 0.2(the areas percentage of U.S. population)

Buying PowerWeb sites for additional informationhttp://www.selig.uga.edu/forecast/totalbuy/total/tbp1.htmlhttp://www.repgroup.com/bpi.htmhttp://www.census.gov/epcd/www/97EC44.HTMhttp://demographicsusa.com/p_demographics.html

Otherhttp://www.mlb.ilstu.edu/ressubj/subject/business/home.htm

Identifying Communities with High Demand Potential for Fast-Food Drive-In Restaurant Population per over 400 375 423 Square Mile Median Family Income over $31,000 $28,024 $32,418 % Population 14-54 over 60% 48% 63% % White Collar over 50% 38% 54% % People Living in 1-3 over 70% 61% 72% Person Units % Workforce Traveling over 75% 49% 74% 0-14 Minutes to Work Average Annual over $600 $521 $619 Household Expenditure on Eating Out Demographic Desired Target Characteristic Market Community A Community B