Retail Site Location

Location decisions have great strategic importance because

they have significant effects on store choice and are difficult
advantages for competitors to duplicate. Picking good sites
for locating stores is part science and part art.

Some factors retailers consider when evaluating an area to

locate stores are (1) the economic conditions, (2)
competition, (3) the strategic fit of the area’s population
with the retailer’s target market, and (4) the costs of
operating stores. Having selected an area to locate stores,
the next decision is how many stores to operate in that area.

When making the decision about how many stores to open

in an area, retailers have to consider the trade-offs between
lower operating costs and potential cannibalization from
multiple stores in an area. Most retail chains open multiple
stores in an area because promotion and distribution
economies of scale can be achieved. However, locating too
many additional stores in an area can result in diminishing
returns due to cannibalization.

The next step for a retailer is to evaluate and select a

specific site. In making this decision, retailers consider three
factors: (1) the characteristics of the site, (2) the
characteristics of the trading area for a store at the site, and
(3) the estimated potential sales that can be generated by a
store at the site.

Trade areas are typically divided into primary, secondary,

and tertiary zones. The boundaries of a trade area are
determined by how accessible it is to customers, the natural
and physical barriers that exist in the area, the type of
shopping area in which the store is located, the type of
store, and the level of competition.

Once retailers have the data that describe their trade areas,
they use several analytical techniques to estimate demand.
The Huff gravity model predicts the probability that a
customer will choose a particular store in a trade area; the
model is based on the premise that customers are more
likely to shop at a given store or shopping center if it is
conveniently located and offers a large selection. Regression
analysis is a statistically based model that estimates the
effects of a variety of factors on existing store sales and
uses that information to predict sales for a new site. The
analog approach—one of the easiest to use—can be
particularly useful for smaller retailers. Using the same logic
as regression analysis, the retailer can make predictions
about sales by a new store on the basis of sales in stores in
similar areas.

Finally, retailers need to negotiate the terms of a lease.

These lease terms affect the cost of the location and may
restrict retailing activities.