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Retail Trade Area Analysis Using the Huff Model

By Ela Dramowicz , Nova Scotia Community College


July 02, 2005

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Introduction
The concept of a retail trade area has been used by analysts and practitioners in
retail site evaluation and other market studies for a very long time. In fact, retail
trade area analysis and site evaluation are complementary procedures. Retail trade
area analysis focuses on locating and describing the target market. This knowledge is
critical for both marketing and merchandising purposes, as well as for choosing new
retail locations. In site evaluation, trade area analysis is combined with many
operational requirements of the retail chain (Jones, Simmons 1993).
It is much easier to analyze trade areas and produce market profiles using GIS. The
majority of GIS software includes functionality for extracting and aggregating data at
various levels of geography. As a result, trade area analysis became one of the most
popular areas of GIS applications in analyzing business problems. The most common
definition of a retail trade area is used for the purpose of this article. According to this
definition, a retail trade area is that area, typically around the store, from which the
store derives most of its patronage (Lea 1998b, p.140).
Retail trade area analysis was a very popular theme during the time Business
Geographics magazine was published (1993-2001). A couple dozen articles were
written on this subject by researchers and GIS consultants specializing in the retail
sector. A variety of techniques on how to delimit and analyze trade areas were
discussed, along with their advantages and disadvantages. These techniques range
from simple ones, such as an application of rings, to more sophisticated, such as
utilizing probabilistic trade area surfaces (Gross 1997, Hooper 1997, Lea 1998a,
Peterson 1997, Simmons 1998).
All techniques represent either the spatial monopoly or market penetration
approaches to analyzing trade areas (Jones, Simmons 1993). The concentric rings
method, drive time/distance polygons or Thiessen (Voronoi) polygons are examples of
this type of approach. These methods are easy to conceptualize and use. However,
they assume that a store has a monopoly over the area that all households in the
trade area relate to the store and no households outside the trade area visit the
store. Once the trade area is delimited geographically as a ring, Thiessen or other
type of polygon, it is easy to prepare a market profile by extracting and aggregating
data using GIS software. Although the methods representing the spatial monopoly
approach are commonly used, they involve a lot of simplification because they do not
account for the existence of competing stores. Therefore, they should be utilized only
if no better alternatives exist (Lea 1998c).
The market penetration approach assumes that there is a spatial variation in the
proportion of households served by a store due to competition. The best example of
this type of approach is the Huff trade area model. The trade area is conceptualized

as a probability surface, which represents the likelihood of customer patronage. This


model provides an answer to a basic question: What is the probability that a
customer will decide to shop at a particular store, given the presence of competing
stores? The creation of probability surface is based on a spatial interaction model
that takes into account such variables as distance, attractiveness and competition.
The probability surface can be contoured to produce regions of patronage probability,
which can then be further used as weights in the preparation of market profile.
The intent of this article is to raise the awareness of the Huff model within the GIS
community.
Introduction to the Huff Model
The Huff model was introduced by David Huff in 1963 (Huff 1963). Its popularity and
longevity can be attributed to its conceptual appeal, relative ease of use, and
applicability to a wide range of problems, of which predicting consumer spatial
behavior is the most commonly known. The probability (Pij) that a consumer located
at i will choose to shop at store j is calculated according to the following formula (Huff
2003).

Where:

Aj is a measure of attractiveness of store j, such as square footage

Dij is the distance from i to j

is an attractiveness parameter estimated from empirical observations

is the distance decay parameter estimated from empirical observations

n is the total number of stores including store j.

The quotient received from dividing


by
is known as the perceived utility of
store j by a consumer located at i. The parameter is an exponent to which a stores
attractiveness value is raised, and enables the user to account for nonlinear behavior
of the attractiveness variable. The
parameter models the rate of decay in the
drawing power of the store as potential customers are located further away from the
store. Increasing the exponent would decrease the relative influence of a store on
more distant customers.
Examples
Four examples included in this article use the Huff model for the following purposes.
1. Trade area analysis for a single site using a single variable for site
attractiveness

2. Trade area analysis for a single site using multiple variables for site
attractiveness
3. Comparison of potential revenue for two sites
4. Modeling a market scenario more complex trade area analysis involving the
use of customer spotting data, information on shopping trips and model
calibration.
Examples 1-3 are simple applications of the model. They do not involve parameter
estimation and do not utilize customer spotting data. They are based on the defaults
implemented in GIS software that include straight line distance calculation and the
most typical values for an attractiveness parameter (the value of 1), and for the
distance decay parameter (the value of 2). Even with the default values used for
parameters, this method is superior to the methods based on the spatial monopoly
concept.
Trade area analysis for a single site using a single variable for site
attractiveness
Two data sets were used in this example: shopping centers with their characteristics,
and small census units with some related data. The purpose of this example was to
create a market profile for a single mall. The Gross Leasable Area (GLA) was used as
an attractiveness variable. The patronage probability surface (a grid) was created for
a selected mall (Figure 1). A potential customer is assumed to be located at every
grid cell. The probability of a customer patronizing a selected mall is positively
related (directly proportional) to the attractiveness of the mall and negatively related
(inversely proportional) to the distance between the mall and the customer, given
the presence of all competing malls.

Figure 1. Customer
patronage probability map
for Micmac Mall, HalifaxDartmouth, Nova Scotia,
using Gross Leasable Area
(GLA) as an attractiveness
variable. (Click for larger
image)

The patronage probability surface was converted to regions of probability. It is


possible to select any number of regions. For this example, ten regions of probability
were chosen. The regions are delineated using contours shown as white lines in
Figure 1. The data was then extracted for each region from underlying census
polygons (Table 1). The numbers in Table 1 include all households in the study area.

Table 1. Market profile


(unweighted data) for
regions of patronage
probability. (Click for
larger image)

Table 1 was then summarized to show the totals for each variable (Table 2).

Table 2. Market profile


(unweighted data) for
regions of patronage
probability - summary.
(Click for larger image)

Now the values of probabilities came into play. They were used as weights for scaling
down the numbers from Table 1, to simply make them more realistic. Each of the first
four columns in Table 1 (Population, Dwellings, Families and Households),
representing absolute values, was multiplied (weighted) by the midpoint value of
every probability region. For example, the midpoint value for the 0 0.1 region
equals to 0.05. Table 3 presents more realistic market area profile that is based on
weighted data. The last two columns in Table 1 were not weighted because they
represent relative values and therefore are not included in Table 3.

Table 3. Market profile


(weighted data) for
regions of patronage
probability. (Click for

larger image)

Table 3 was then summarized to show the totals for each variable (Table 4).

Table 4. Market profile


(weighted data) for
regions of patronage
probability - summary.
(Click for larger image)

The comparison of tables 2 and 4 allows for stating that the actual number of
households patronizing this mall will be less than 10% of all households located in the
study area. This number was determined by calculating the proportion of weighted
number of households (10,203) in the total number of households (110,810).
Trade area analysis for a single site using multiple variables for site
attractiveness
The difference between Examples 1 and 2 is that in Example 2 more than one
variable was used as an attractiveness index. The value of the model depends on
the ability to incorporate a number of different measures of store attractiveness
(Jones, Simmons 1993, p.345). If more variables are included, it is easier to
understand a variation in patronage patterns. In addition to the GLA, in this example
the number of stores in each mall and the number of parking spaces were also
considered as the attractiveness attributes. These three variables were converted to
z-values and added together to make up an attractiveness index. Some of the
attractiveness index values were negative and software could not calculate a surface.
To alleviate this problem, the minimum negative z-value was added to all
attractiveness values in order to create positive numbers, so that software would be
able to handle the task. Figure 2 shows the probability surface created for the same
mall using an attractiveness index composed of three, instead of one, characteristics.
These three variables are correlated to some degree.
Comparison of maps in Figures 1 and 2 indicates that considering more
attractiveness variables increases the drawing power of the analyzed mall. The
extent of isolines has changed (for an example see isoline labeled with the value of
0.3).

Figure 2. Customer
patronage probability map
for Micmac Mall, HalifaxDartmouth, Nova Scotia,
using GLA, number of
stores and number of
parking spaces as an
attractiveness variables.
(Click for larger image)

The new surface was converted to regions of probability and data was then extracted
for each region from underlying census polygons (Table 5). The numbers in Table 5
include all households in the study area.

Table 5. Market profile unweighted data. (Click


for larger image)

Table 5 was then summarized to show the totals for each variable (Table 6).

Table 6. Market profile


(unweighted data) for
regions of patronage

probability - summary.
(Click for larger image)

Tables 6 and 2 show very similar results. In fact, changing the number of
attractiveness variables had no effect on the unweighted market profile data.
Each of the first four columns in Table 5 (Population, Dwellings, Families, Households),
representing absolute values, was weighted by the midpoint value for every
probability region. The result is shown in Table 7. Again, the last two columns in Table
5 were not weighted because they represent relative values and therefore are not
included in Table 7.

Table 7. Market profile


weighted data for regions
of patronage probability.
(Click for larger image)

Table 7 was then summarized to show the totals for each variable (Table 8).

Table 8. Market profile


(weighted data) for
regions of patronage
probability - summary.
(Click for larger image)

The numbers in Table 8 are significantly larger than in Table 4. The number of
households patronizing the studied mall increased by 32.2% and this mall would now
capture 12.3% of households in the study area. The latter number was received by
calculating the proportion of weighted number of households (13,487; Table 8) in the
total number of households (110,030; Table 6).
Comparison of potential revenue for two shopping centers
This example involves the calculation of potential revenue for two shopping centers
using the same data sets and the same study area as in the previous examples. The
first site used in this comparison is Micmac Mall for which the patronage probability
grid was previously created (Figure 2). The Halifax Shopping Centre was selected as
the second site. The patronage probability grid for the Halifax Shopping Centre was
also calculated using z values (Figure 3).

Figure 3. Customer
patronage probability
surface for the Halifax
Shopping Centre, Nova
Scotia, using the Gross
Leasable Area (GLA),
number of stores and
number of parking spaces
as attractiveness
variables. (Click for larger
image)

Additional data included potential spending on food, furniture and clothing (Table 9).
The area of each polygon was then calculated. Knowing the grid cell size, it was easy
to calculate a number of cells in each polygon. The potential spending on each
category was then divided by the number of cells in order to get spending per single
cell. These were the necessary steps in order to prepare data suitable for
rasterization. Table 9 shows a portion of a larger table with data prepared in this
manner.

Table 9. Consumer
spending potential (CSP)
data suitable for
rasterization. (Click for
larger image)

Three grids were produced for three spending categories (Figure 4). The dollar values
shown in the legend of each grid represent the spending potential per single grid cell.

Figure 4. Consumer
spending potential (CSP)
on food, furniture and
clothing represented as
grids (unweighted). (Click
for larger image)

Values of each of these grids shown in Figure 4 were then multiplied by the values of
the patronage probability grid for each shopping centre. This produced the total of six
grids with weighted dollar values: three for each mall (Figures 5 and 6). This is the
most interesting part of this example, allowing for an estimation of potential revenue
each mall may anticipate from selling food, furniture and clothing.

Figure 5. Consumer
spending potential (CSP)
on food, furniture and
clothing represented as
grids for the Halifax
Shopping Centre
(weighted). (Click for
larger image)

Figure 6. Consumer
spending potential (CSP)
on food, furniture and
clothing represented as
grids for Micmac Mall
(weighted). (Click for
larger image)

The last step was to aggregate weighted grid data shown in Figures 5 and 6 and
calculate totals ($) for each shopping centre and each category. The aggregation of
data took place within a region that was created by combining polygons within the
study area (Figure 7).

Figure 7. Creation of a
region from polygons.
(Click for larger image)

The final results of data aggregation are shown in Table 10. They indicate that
Micmac Mall may slightly outperform the Halifax Shopping Centre.

Table 10. Potential


revenue for both shopping
centers. (Click for larger
image)

The characteristics of both shopping centers that served as attractiveness variables


in the Huff model may help in understanding this situation (Table 11).

Table 11. Input data for


the Huff model for two
shopping centers. (Click
for larger image)

These numbers indicate that considering only attractiveness characteristics, both


malls would indeed demonstrate a similar drawing power.
Modeling a market scenario more complex trade area analysis involving
the use of customer spotting data, information on shopping trips and model
calibration
This exercise was completed using different software allowing for more complex trade
area analysis. The software uses a new version of the Huff model that accepts

multiple predictor variables and estimates the parameters using the ordinary least
squares method. The predictor variables include store (destination) attributes, census
polygons (origins) characteristics and distance of origins to destinations. With this
new version, it is possible to model a variety of market scenarios such as an addition
or closure of a store and determine the impact this will have on existing stores. A
different study area was used for this example (Figure 8). There are three stores in
this study area: A, B, and C, representing the same retail chain. The study area was
determined based on customer spotting data and included polygons that make up
the primary (60% of customers) and secondary (next 25% of customers) trade area
for all three stores.

Figure 8. Study area and


store locations for
example 4. (Click for
larger image)

Three data sets are required.

Destinations (stores) and their attributes. Only two attributes (retail square
footage and warehouse square footage) were used as predictor (formerly
attractiveness) variables, but many more would be desired (Table 12).

Table 12. Destination data.


(Click for larger image)

Origins (small census units) and their attributes. Attributes such as a number
of households and average household income could be included, but for

simplicity of this example only product expenditures were considered as origin


characteristic (Table 13).

Table 13. Sample data for


origins. (Click for larger
image)

Scenario data. Scenario data indicate the patronage between a given origin
and destination and the distance between them. Distance can be calculated
as road mileage or travel time. If this information is not available, straight line
distances can easily be calculated from coordinates for the store locations and
origin centroids included in Tables 12 and 13. Table 14 illustrates sample
scenario data. Because the table does not include the column Distance,
straight line distances will be calculated when the model is first run.

Table 14. Sample scenario


data.

The scenario data is the most important of the three data sets because it is required
for calibration of the Huff model. It includes actual patronage information from a
sample of households in each origin within the study area. Such data is usually
compiled based on a customer survey. The values of proportions in Table 14 indicate
the proportion of shopping trips that were made to a particular store from a specific
origin. Each origin is listed three times in Table 14 because there are three stores.
The sum of the proportion values for each origin should be one.
The calibration of the model was completed with the use of scenario data. Several
reports, graphs and maps are produced for evaluation of results. The statistical report
summarizes the regression results and statistics for predictor variables. Table 15
presents one of the calibration reports. The third column shows the actual
proportions entered as input data, the fourth column is populated with the expected
proportions calculated from the model, and the last column shows the differences. A
positive difference indicates that there were actually fewer shopping trips to a
particular store from a given origin than the model predicts. This means that three
origins listed in Table 15 are underperforming in terms of the patronage of store B.
Negative differences indicate that the origins are outperforming comparing to what
the model indicates. Store C represents this situation.

Table 15. Proportion report


for all stores original
calibration (a sample).
(Click for larger image)

Another calibration report shows market share and how the total sales are shared
between stores. The Huff model calculates market shares by applying probabilities to
the expenditure data for all origins. The highest market share belongs to store B,
followed by store C.

Table 16. Market


share/expenditure report
after original calibration.

(Click for larger image)

These and other results, also for individual stores, can be analyzed using maps and
graphs resulting from calibration.
Once the model calibration is complete, it is possible to simulate various market
scenarios. Table 17 demonstrates the changes in proportions when a new store is
added to the market. The retail and warehouse square footage of the new store are
equal to 4,000. All stores lost some portion of patronage in favor of the new store.

Table 17. Proportion report


for all stores after adding
a new store (a sample).
(Click for larger image)

Table 18 illustrates changes in market share and total sales.

Table 18. Market


share/expenditure report
after adding a new store.
(Click for larger image)

Again, there is much more to explore. An impressive number of possible ways to


further analyze the results of this new market scenario using graphs, maps and other
reports is available to the user.
Final remarks
There are a few commercially available GIS software packages that incorporate the
Huff model and less than a few GIS software packages that allow for parameter
estimation and model calibration. Software used for the completion of the examples
presented in this article cannot therefore remain unnamed. Examples 1-3 were
completed with MapInfos Vertical Mapper and for the last exercise, MPSI Systems
Huffs Market Area Planner was used. Unfortunately, MPSI Systems does not have
plans to update or enhance the software.
David Huff explains why most GIS packages do not provide a statistical capability for

calibrating the model (Huff 2004, p.2). The first reason is that in order to calibrate the
model, scenario data is required, and this data can be expensive to collect. However,
this looks like more a users problem rather than a vendors problem. Huff states also
that indeed, the statistical analysis required to calibrate the model may be
perceived as being too difficult and that the additional functionality would have to
be included in GIS software to perform various statistical analyses. Huff also says that
the model has not always been employed correctly and its full potential has not
been realized (Huff 2003). This is a matter of time. The inclusion of the Huff model in
Business Analyst from ESRI is a major step forward. There are many applications for
this model not only in the retail environment but also in other business areas.
Finally, it is interesting to note that the Huff model is the only one discussed in the
Trade Area Analysis chapter in the Geographic Information Systems in Business
book, published in 2005 (Pick 2005), most likely because of its superiority to other
methods.
References
An Update from MPSI, 2005. An interview with Jim Auten, MPSIs president and CEO.
Directions Magazine, March 22
Gross, B., 1997. Dynamic Trade Areas. Business Geographics, September, 30-33 (not
available online)
Hernandez, T., Lea, A.C., and Bermingham, P., 2004. Whats in a Trade Area?
Publications of the Centre for the Study of Commercial Activity , Ryerson University,
Toronto
Hooper, H., 1997. Whos Really Shopping My Store? Business Geographics,
September, 34-36 (not available online)
Huff, D.L., 1963. A Probabilistic Analysis of Shopping Center Trade Areas. Land
Economics 39: 81-90
Huff, D.L., 2003. Parameter Estimation in the Huff Model. ArcUser, OctoberDecember, 34-36
Huff D.L., 2004. A Note on the Misuse of the Huff Model in GIS. Retrieved from
www.mpsisys.com on January 16, 2004
Huff, D.L., 2005. The Use of Geographic Information Systems and Spatial Models in
Market Area Analysis. ESRI GeoInfo Summit, April 18-19, Chicago
Lea, A.C., 1998a. An Arsenal of Trade Areas. Business Geographics, August, 34-35
Lea, A.C., 1998b. Misuses and Abuses of the Trade Area Concept, GIS98/RT98
Conference Proceedings, 140-143, Toronto
Lea, A.C., 1998c. Trade Areas: Concepts, not Polygons. Business Geographics,
February, p.18
Lea, A.C., 2005. Site Evaluation and Sales Estimation Modelling for Retailers and
Banks. ESRI GeoInfo Summit, April 18-19, Chicago
Jones, K., Simmons, J., 1993. Location, Location, Location. Nelson Canada

Peterson, K., 1997. A Trade Area Primer. Business Geographics, September, 18-21
Pick, J. B., 2005. Geographic Information Systems in Business. Idea Group Publishing
Simmons, W., 1998. Defining Trade Areas. Business Geographics, September, 28-30