LOCATION AND CO-LOCATION IN RETAIL

A probabilistic approach using geo-coded data for Swedish metropolitan retail markets

Özge Önera,b,c
&

Johan P. Larssona,b

Abstract

This paper offers a unique empirical approach to detect co-location patterns in the retail sector. We
analyse the co-location of retail service establishments in Sweden by using geo-coded data. We pinpoint
each establishment in Sweden down to a 250 by 250 metre square. Our analysis captures a general pattern
for the co-location of different types of retailing activities, also taking into account several spatial
attributes of location. We study the three major retail markets in Sweden (Stockholm, Malmö, and
Gothenburg). We position the paper within a framework in which the presence of an economic activity in
space is explained by the spatial attributes of the place as well as the nature of the economic activity. Our
empirical design follows a probabilistic approach, whereby the probability of finding a particular type of
retailing activity in a square is explained by the presence of similar and different kinds of retailing activities
in the respective square, as well as by the characteristics of their location. We select three major and
distinct types of retailing stores: clothing, household appliances, and specialized stores. Our findings are
well in line with the propositions of bid rent theory and central place theory for retail markets. We further
document negative location tendencies between shops that sell frequently purchased products and shops
that sell durables. Moreover, our results highlight the importance of demand in the close surroundings,
which is particularly strong for small-scale establishments.

a Jönköping International Business School

b Centre for Entrepreneurship and Spatial Economics

c Corresponding Author

1
Introduction

Retailing is a highly location-sensitive economic activity. Due to the nature of the transactions carried out

in various types and sizes of stores, they are likely to be found in regional centres (urban cores) or in close

proximity to such centres. Where proximity to demand and being located within a retail cluster are

crucially important for an individual shop, the high rental costs in such places produce an aversive impact.

We know that stores with large establishment sizes, which also often sell durables for less frequent

purchase, are more likely to be located further from the core of the retail cluster. Meanwhile, the retail

cluster in the urban core is more likely to be occupied by small-scale stores and/or downtown shopping

centres where several shops are nested together. Nevertheless, it is an acknowledged fact that stores are

not distributed across space randomly. One important spatial regularity in the retail industry is that many

retail services are likely to be located close to each other. This co-location phenomenon in retailing is

driven by consumers’ as well as suppliers’ desire to have a critical mass of shops in a marketplace. Also,

for a store, being located close to different and similar kinds of retailing activities is necessary for survival

due to complementarities between the retailing services.

This paper addresses two questions regarding retail location within one framework. First, is there a general

pattern of co-location of different and similar retailing activities? Second, how is location affected by the

spatial characteristics of the place where the shops are present? In order to answer these questions, we use

disaggregated, and highly unique, geo-coded data from Sweden, which we utilize in a probabilistic

empirical design.

The importance of the retail sector for an economy is layered. The sector creates attractive employment

opportunities as well as diverse consumption possibilities. The presence of retail services contributes

significantly to a region’s attractiveness, which makes consumption an urban amenity to be enjoyed and an

important force behind regional growth and development (Glaeser et al., 2000; Clark et al., 2002; Clark,

2003; Florida et al., 2008).

The retail landscape has changed significantly over the last decades. Large firms have grown faster than

the sector itself, which implies a significant decline in the number of small firms. Consequently, retail

markets have become more concentrated than ever and the sizes of the retail establishments, as well as

2
their locations, have changed accordingly (Dawson, 2006). The diffusion of private transportation,

together with several additional advantages, like the presence of a great variety of shops, security services,

and free parking, has encouraged the particularly fast development of out-of-town retailing. However, we

can still see a substantial increase in downtown rent prices and the retail sector is still dominated by small-

scale downtown shops in Europe as well as in Sweden (Birkin et al., 2002).

Previously, peripheral retailers were not perceived as substitutes for central retail clusters since most of

them were in the form of warehouses, which were designed to serve the need for bigger establishments

that sold durable household goods (Guy, 1998). In most Western European markets, including the

Scandinavian countries, the 1960s and 1970s exhibited rapid development in peripheral retailing, which

was encouraged by governments and performed by private incentives. Planners aimed to provide a large

enough retail space for newly emerging neighbourhoods due to urban sprawl (Dawson , 1983). Today,

however, authorities are increasingly interested in retail planning in city centres. The fact that over time

peripheral retailers have become substitutes for central retail districts has triggered concerns about the

retail attractiveness of the centre. Today, it is rather common to see several regulations and arrangements

on the part of authorities that particularly concern downtown retailers. New concepts like ‘downtown

shopping centres’, particularly in Central Europe, are becoming increasingly popular (Birkin et al., 2002).

Taking note of the general changes in retail trends, one attribute of retail markets has remained the same

over time: they are highly complex and dynamic. It is well known that retail markets all over the world

have always been very responsive to the overall market conditions, financial fluctuations, and changes in

consumption patterns. However, what is particularly important for the purpose of this paper is that

despite the fact that determining and adjusting retail location is a rather costly task, we can observe rapid

changes in retail location. In order for sector actors and decision makers to be flexible and efficient in

response to the changes that concern retail location, capturing a general location pattern is necessary. In

particular, determining how this pattern relates to the spatial characteristics of the places where the shops

in question are present may reveal useful information for sector actors, as well as for policy makers. This is

the motivation that constitutes the research questions addressed in this paper.

3
Only a few empirical studies are available relating to the co-location of economic activities in general, and

to our knowledge no empirical study has been conducted to capture overall retail co-location patterns.

This may certainly be due to the fact that it is not an easy task to find data on the exact location of

establishments. Hence, researchers over many years have relied on case studies and/or very aggregated

spatial information (e.g. municipal level). These kinds of market aggregations may provide an overall

understanding of, for example, change in the volume of retail trade, productivity in a given retail market,

or entrepreneurial trends in retailing. However, they reveal hardly any in-depth information on location or

co-location. The main reason is that every activity is destined to be present within a geographical

boundary. Hence, when looking at a municipal market aggregation, all the different types of retailers will

appear to be co-located with each other. In the end, it becomes an onerous task to find a pattern that

actually makes theoretical as well as practical sense.

This study mainly has its roots in various traditional location theories that have also been used intensively

to deal with retail location. We combine these traditional approaches with the contemporary sector facts in

order to capture an overall pattern for co-location in the retail sector. Following a probabilistic point of

view, we explain the presence of one particular type of retailing activity at a specific location by looking at

the presence of other retailing activities. In order to achieve this, we exploit geo-coded data for the three

major Swedish retail markets: the Stockholm, Gothenburg, and Malmö regions. The data source is a

matched employer–employee database holding publicly audited information on all workplaces (retail

establishments in this case), as well as their employees. It is possible to pinpoint each workplace and

individual (both workers and residents) to a 250 by 250 metre square, meaning that the co-location

analysis is conducted at a high level of disaggregation.

Our findings reveal strong dependence on the proximate demand for the retailing activities that are

purchased more frequently. We also confirm the relevance of traditional location theories (e.g. central

place theory and bid rent theory) to explaining how retailing activities are more clustered, and hence co-

located in central marketplaces, and this type of dependence on the central marketplace changes as we

examine the functions of different types of retailing activities in greater depth.

4
Theoretical Framework

Considering the focus of this study, the most relevant theories are the ‘central place theory’ of Christaller

(1933) and its later extensions, which specifically deal with retail location. In fact, the use of central place

theory for retail can be traced back in history in many countries with strong retail planning traditions, like

Sweden, the Netherlands, and the UK (Dawson, 1980; Borchert, 1988; Sparks & Dawson, 1989).

According to the theory, the demand at any location is expressed roughly as the number of consumers

within a large area. This very basic idea of spatial demand allows one to map a retail centre by taking the

surrounding geography into account. The intuition behind the use of this theory for retail location

investigation is that in each location it is possible to describe a spatial dimension of consumer demand,

which attenuates as we move outwards from the location in question. Thus, the demand is not uniform

but subject to distance decay. This decline in potential demand with increasing distance is due to

consumers’ decreasing willingness to travel greater distances. This phenomenon is referred to as a spatial

demand cone by Lösch (1940), and Huff (1964) explicitly discusses the decreasing shopping probabilities

radiating outward from a centre in his work.

Following the tradition of using ‘central place theory’ as a base for retail location investigation, Berry

(1967) suggests that the theory can be used to explain the configuration and emergence of trading areas. In

his analysis, in which microeconomic theory is combined with spatial analysis (and under the assumption

of a flat plane with uniformly distributed population and equal travel accessibility in all directions), a

market centre is very likely to develop as more suppliers enter the market. Following the emergence of

these central marketplaces, consumers evaluate the price of a good together with the transportation cost

to reach this centre. The idea is that if the price of the good together with the additional transportation

cost is not sufficiently low, consumers will patronize another marketplace that is closer.

Central place theory suggests that cities are connected in systems of cities and that they are hierarchically

ranked, a proposition that is extensively analysed in the rank–size literature. Large cities are likely to be

closely linked to cities of a smaller size, and they are also likely to influence the growth of the smaller

places connected to them. We expect the number of services available in a central city to increase as its

rank increases (Dicken & Lloyd, 1990). This type of hierarchical order that we observe for cities is in fact

5
very similar to the hierarchical order between different retail markets. Berry and Garrison (1958a, 1958b)

propose that a similar stratification exists in retail markets, where small clusters of retail establishments

along a street are followed by neighbourhood shopping centres, community shopping centres, and to a

larger extent regional shopping centres. By dividing the trading areas into separate hierarchical circles of

demand, Applebaum and Kaylin (1974) distinguish between a primary area where the demand is at its

highest level, secondary areas where the demand is lower and a peripheral ring where consumers have a

tendency to shop elsewhere.

The concept of ‘retail agglomeration economies’, which has its roots in the work of Hotelling (1929),

provides clarification for the existing excessive retail clusters. Briefly, the theory indicates that firms selling

similar products tend to cluster in the centre of a given market to benefit from the scale of that market

(Hotelling, 1929), where they still maintain the optimum distance between each other. An empirical study

by Artle (1959) investigates six different retail activities for the Stockholm metropolitan region. His

findings likewise highlight the importance of proximity between the suppliers and the purchasers for the

retail market.

Our work is also inspired by Haig’s bid rent theory (1927). The main argument the theory poses is that the

land is occupied by the activities that can pay the highest rent value and therefore the land should be in its

‘highest and best’ use (Fujita et al., 1988; Jones et al., 1991). According to bid rent theory, the desire of the

retailers to attract more and higher-profile demand motivates them to seek higher rents. Hereby, the rent a

retailer would pay for the land drops rapidly as the distance from the central marketplace increases

(Johnston, 1973).

Scott (1970) also argues that the spatial organization of retail activities within shopping districts can be

explained by bid rent theory. In an urban retail cluster, competition is highest, hence the ability to pay

higher rents can be considered as a good indicator of performance and competitiveness. Provided with

this theoretical argument, we would then expect similar types of retailing activities to cluster in the same

place. If they are not similar in their nature and function, they should still be similar in their scale or

competitiveness given the amount of rent they need to pay in order to exist in the urban core.

6
It is also noteworthy that there are differences in the degrees of these retail clusters with respect to the

nature of retailing activities of different kinds (Kivell et al., 1980). The fact that high-order1 retailing

activities have a tendency to cluster more than low-order retail activities is discussed in the literature

(Brown, 2006). Alonso (1960, 1964) discusses this type of stratification for cities; as they are shared

between retailing and industrial activities, retailing takes place in the centre and industrial activities take

place in the periphery. Ratcliff (1949) further suggests that the ‘type’ of retailing activity is what matters in

explaining its spatial distribution within a district. For example, retail establishments such as food retailers

are likely to be found in or in close proximity to the city centre, whereas high-order activities are located

on the outskirts (Brown, 2006). Relying on the findings of consumer behaviour research, Dicken and

Lloyd (1990) mention: ‘For each good, a map can be drawn connecting the location of each consumer

with that of the centre in which the good is purchased with a straight line known as “desire line”. Patterns

of consumer behaviour for low-order goods would therefore show many very short desire lines focusing

on a large number of small places. Patterns for high-order goods would show much longer desire lines

focused on a smaller number of large centres’ (p. 45).

This extensive discussion on the spatial distribution of different kinds of retailing activities with respect to

their function and scale, in both the central place theory literature and the bid rent theory literature,

constitutes the spine of our empirical design. Our selection of retailing activities for the empirical analysis

is mostly driven by the desire to capture the location patterns derived from the aforementioned theories.

In our empirical setting, clothing stores, for example, have more frequent demand for their products and

services in comparison with stores selling household appliances and electronics. This would imply greater

dependence on the proximity to demand for clothing stores than for household appliance stores. Due to

the nature of the products that these two different types of retailers provide, they would also need

different scales of establishment, which then suggests that the rent costs will differ substantially between

the two. Hence, their location tendencies should also exhibit an opposite pattern, in line with the theory.

In other words, although initially these two different types of retailing activities occupy the same aggregate

1 In the previous literature, low-order retailing refers to goods that are not purchased very frequently, e.g. convenience goods,
whereas high-order retailing refers to stores selling somewhat more durable goods (Dicken, P., & Lloyd, P. E. (1990). Location in
Space, Theoretical Perspectives in Economic Geography (Third ed.). New York: HarperCollinsPublishers, Inc.

7
marketplace once examined empirically (e.g. a municipal market), they should not be co-located when we

consider a finer disaggregation.

We have discussed the importance of the aforementioned line of location theories for understanding the

spatial distribution of different kinds of retailing activities in space with respect to their dependence on

proximity to demand and their function. However, one downside of these theories is that they are not

only based on the assumptions of identical consumers and an even distribution of population, but they

also assume that the consumers envisage the cost of travel to a retail centre for single-purpose shopping.

However, previous research has shown empirically that shoppers do not always patronize the nearest

centre where they can find a particular good or service (Clark & Rushton, 1966; Clark, 1968). It is found

that most shopping trips are performed to procure different categories and orders of goods and services

(O’Kelley, 1981; Thill & Thomas, 1987). For a consumer, a multi-purpose shopping trip is preferable to a

single-purpose shopping trip as it reduces the cost of time and travel. However, besides the benefits from

reducing the travel costs, it also allows customers to patronize a more distant but larger marketplace with

greater variety. In other words, in order to fulfil the motivation behind a multi-purpose trip, the retail

marketplace should offer substantial variety to a consumer (Johnston & Rimmer, 1967; Craig, Ghosh &

McLafferty, 1984 (1984)). ‘Variety’ is the key in this context. For example, the new economic geography

(NEG) literature refers to this kind of agglomerative force as the ‘love-of-variety’ effect, the impact of

which can be observed both on the production side and on the consumption side (Krugman, 1991; Fujita

et al., 1999; Fujita & Thisse, 2002). The theory postulates that larger marketplaces are more competent in

providing greater variety (see e.g. Andersson & Klaesson, 2009). Hence, the diversity in a retail market

should grow as the total demand increases. Having isolated this kind of impact in an empirical setting, the

similarities and differences in the location patterns of different kinds of retailing activities should be more

obvious.

The Swedish Retail Market

Before describing the data and the empirical design in detail, we find it useful to identify the Swedish retail

market and the rank of retailing activities of different kinds with respect to employment and establishment

size. For the empirical analysis, we construct three categories of different retailing activities: clothing,

8
household appliances, and specialized stores. All these retailers are listed under the three-digit industrial

classification, SIC-524, which consists of retail sale of new goods in specialized stores. The reason behind

our selection is that this is a rather diverse category in which distinct retailing activities are nested together

and the function of the stores is easy to comprehend. Hence, the stores in this category provide us with a

more clear-cut depiction of their location patterns.

Although we conduct our analysis only for the three metropolitan retail markets in Sweden (Stockholm,

Malmö, and Gothenburg), as they are similar in function as well as in scale, we still find it plausible to

provide an overall picture for the entire Swedish retail market. Hence, we display the scale of different

kinds of retailing activities in the empirical question on a descriptive level. Below, in table 3-1, we rank the

total number of establishments in the entire Swedish retail market for all the retailing activities that are

listed under SIC-524 by using data from 2008. The highest number of establishments can be observed for

specialized stores. Most of those stores are likely to be small in size and located in the very core of the

urban space. A possible reason for specialized stores ranking highest in the establishment numbers is that

they encompass a wide range of retailing activities. Similarly, clothing stores and non-specialized small-

scale stores (with a mixture of goods) follow specialized stores in terms of the total number of

establishments. The fourth retail branch in the ranking is the retail sale of furniture, lighting equipment,

and household articles. In Sweden, the stores that supply goods for internal design are diverse both in size

and in nature. Nevertheless, most of these stores are located in the city core or close to the city core,

whereas their warehouses are likely to be located in the periphery.

9
 Table 1: Rank of retail branches (four-digit) in terms of the total number of establishments
No SIC Description Total Number of
Code Establishments
1 5248 Specialized stores (optical goods, photography, jewellery, leisure goods, etc.) 6568
2 5242 Clothing 5424
3 5211 Non-specialized stores with food, beverages, or tobacco predominating 5087
4 5244 Furniture, lighting equipment, and household articles 3027
5 5249 Specialized stores (art galleries, office supplies, telecommunication, etc.) 2801
6 5246 Hardware, paints, and glass 1992
7 5245 Electrical household appliances and radio and television goods 1818
8 5243 Footwear and leather goods 1264
9 5224 Bread, cakes, flour confectionery, and sugar confectionery 1254
10 5226 Tobacco products 1141
11 5231 Dispensing chemists 982
12 5227 Food, beverages, and tobacco in specialized stores 943
13 5250 Second-hand goods in stores 884
14 5247 Books, newspapers, and stationery 837
15 5241 Textiles 757
16 5233 Cosmetic and toilet articles 680
17 5212 Non-specialized stores 547
18 5225 Alcoholic and other beverages 399
19 5223 Fish, crustaceans, and molluscs 242
20 5221 Food, beverages, and tobacco in specialized stores 178
21 5222 Meat and meat products 93
22 5232 Medical and orthopaedic goods 32

The next table shows the rank of retail services in terms of the total employment in each branch. This

simple practice helps us to see the relation between establishment size and employment. Now, the non-

specialized stores take over from the specialized stores in terms of employment. This is, to some extent,

due to non-specialized stores being open for longer hours, given that they provide food-related supplies.

Working in shifts is a highly common situation in food retailing. Hence, these stores represent a large

amount of the total employment. Non-specialized stores are followed by clothing, specialized stores, and

stores for furniture, lighting equipment, and household articles.

Both in terms of employment and in terms of the total number of establishments, we can see that the

lowest-ranked retail branches are those that supply niche products. Although these stores are likely to be

present in the core of the city, they are not very numerous; hence, we are not likely to capture a clustering

of similar kinds of retailing activities when it comes to these types of retail branches (e.g. alcoholic

beverages, books, second-hand stores, fish, meat, etc.).

10
 Table 2: Rank of retail branches (four-digit) in terms of employment
Rank SIC Code Description Total Employment
1 5211 Non-specialized stores with food, beverages, or tobacco predominating 73246
2 5242 Clothing 31166
3 5248 Specialized stores (optical goods, photography, jewellery, leisure goods, etc.) 28311
4 5244 Furniture, lighting equipment, and household articles 18798
5 5246 Hardware, paints, and glass 15073
6 5231 Dispensing chemists 11175
7 5245 Electrical household appliances and radio and television goods 11088
8 5249 Specialized stores (art galleries, office supplies, telecommunication, etc.) 10699
9 5212 Non-specialized stores 8435
10 5243 Footwear and leather goods 5968
11 5224 Bread, cakes, flour confectionery, and sugar confectionery 3846
12 5247 Books, newspapers, and stationery 3771
13 5225 Alcoholic and other beverages 3726
14 5226 Tobacco products 2705
15 5233 Cosmetic and toilet articles 2311
16 5227 Food, beverages, and tobacco in specialized stores 2256
17 5250 Second-hand goods in stores 1771
18 5241 Textiles 1518
19 5223 Fish, crustaceans, and molluscs 812
20 5221 Food, beverages, and tobacco in specialized stores 524
21 5222 Meat and meat products 300
22 5232 Medical and orthopaedic goods 75

The state of the retailing activities in the Swedish retail market is roughly as discussed above. The kinds of

retailing activities nested under the three categories that are subject to our empirical investigation (clothing,

household appliances, and specialized stores) will be clarified further in the following section, in which we

introduce our variables.

When we look at the distribution of retailing across the total of 290 Swedish municipalities, we see a very

skewed picture. Stockholm (30 municipalities), Malmö (15 municipalities), and Gothenburg (16

municipalities) constitute the 3 large metropolitan retail markets in Sweden, accounting for approximately

45% of the entire retail employment. These 3 retail markets by any standard represent the type of urban–

periphery structure that has been addressed previously. Moreover, the scale of the retail sector in these

markets allows us to seek a pattern, since they exhibit only a small extent of ‘idle land’ compared with

smaller regions.

In order to obtain an initial idea of how the three categories of retailing activities we analyse are

distributed across space, we map the stores in central Stockholm. Below, three maps for the three retailing

activities are found in the respective order clothing, household appliances, and specialized stores.

11
Although they seem similar at first, a closer examination reveals that different shops are clustered quite

differently.

The squares on the map correspond to our investigation units, each of which is 250 by 250 metres. All the

squares with any retailing activity are present on all three maps. Then, the squares are shaded with respect

to the total number of available establishments (stores) in one of the three types of retailing activity. So,

the squares range from zero to the highest number of stores available in the respective category. For

example, the highest number of clothing stores available in a square on the map is 75, whereas this

number is 19 for household appliances stores and 27 for specialized stores. In line with what was

discussed in the theoretical framework, we see the concentration of all these 3 types of retailing activities

in the urban core, radiating outwards. However, this concentration is less visible for household appliances

than it is for clothing and specialized stores. Also, it is apparent that the specialized stores are more

scattered across space given their varying functions. We can also see a greater degree of concentration

outside the urban core when we compare the third map with the first two.

12
Figure 1. Spatial distribution of the squares in Stockholm with the three types of retail stores (clothing, household appliances, and specialized stores in order)

5
A Probabilistic Approach to Retail Co-location

As mentioned earlier, there is no previous study to which we can refer for an empirical implementation of

a co-location analysis for the retail sector. We need an empirical design that relates the analysis to the

existing theory and also enables us to exploit the data in the best possible way. We propose that the co-

location of establishments in space can be explained in a probabilistic setting; the presence of

establishments in a square is explained by the presence of other establishments. In addition, we suggest

that certain characteristics with respect to the squares that host the establishments and the surrounding

economic milieu should be taken into account, as discussed extensively in the previous literature.

Data

The data set employed in the study is extracted from a publicly audited, matched employer–employee

database maintained by Statistics Sweden. The original database contains information on each workplace,

firm, and individual in Sweden. Each workplace is associated with a pair of coordinates within a grid

covering all the city areas in Sweden. The size of the grids used in the study is 250 by 250 metres (or about

0.16 by 0.16 miles). Each workplace is pinned down to a location within the grid, and information on it

and its employees is then matched to each particular location. Since all the squares used are of the same

size, there is no need to normalize the variables. Any difference in, for example, employees between any

two squares is the exact difference in employment density between those squares. Apart from simplifying

the interpretation, the construction of the data eliminates problems with administratively defined

geographical areas, which are often a hazard in spatial econometrics (Openshaw & Taylor, 1979). In this

study, we rely on economically defined marketplaces than rather politically defined ones (i.e. since ‘idle

lands’ are not included in the data to begin with).

The workplaces located in the periphery (formally defined by Statistics Sweden as non-city areas) are not

classified as exactly within the grid as those establishments that are located within city areas. For the sake

of consistency, the workplaces located in the periphery are excluded. Since those workplaces are relatively

few and since large-scale co-location is uncommon in such locations, we expect this operation to be a

minor issue. The analysis is conducted for the retail branches listed under ‘retail trade’ on the SIC list for

6
the Swedish industry classifications.2 There is a total of 3 aggregation levels for the classification of

retailing activities with respect to their function. For establishment-based retailing, a total of 5 categories

exists on the 3-digit level, 22 on the 4-digit level, and 54 on the 5-digit level. Depending on its purpose, an

establishment can be investigated as nested under any of these aggregation levels.

The data used in this paper are in count form, suggesting that a Poisson model can be used. Following a

probabilistic approach, we aim to determine how the presence of each of these three selected retail

branches can be explained by the presence of other retail branches in a square. In addition, we utilize

certain spatial attributes of the squares, as well as the surrounding milieu, to assess the variation across

space.

Variables

Similar retailing activities listed under the same three-digit SIC code 524 (Retail sale of new goods in specialized stores)

The following categories constitute the dependent variables. We can also see the relation between these

three categories as they are each introduced as an explanatory variable for the other two.

Clothing: Retail sale of clothing and retail sale of footwear and leather goods are listed in the respective

category.

Household appliances: This category consists of the retail sale of furniture, lighting equipment, and

other kinds of household articles, together with electrical household appliances, hardware, paints, and

glass.

Specialized stores: This category consists of a wide range of shops that are often small in size and

centrally located. Some of them sell frequently purchased goods whereas others correspond to rare

consumption. The types of stores listed in this category are:

- spectacles and optical goods

- photographic equipment and related services

- sale of books, newspapers

2 We use the four-digit aggregation level for retailing activities in our regression analysis.

7
 - sale of watches and clocks

- sale of jewellery, gold, and silverware

- sale of sport and leisure goods

- games and toys

- flowers and other plants

- pet animals

Other retailing activities

This is the three-digit-level aggregation for other types of retailing activities:

Non-specialized stores: Stores mostly specializing in food retailing together with many other items on

large establishment scales. Department stores are a typical example of the stores that are listed in this

category.

Food, beverages, and tobacco in specialized stores: Specialized stores in small-scale food retailing.

Typical examples are shops selling vegetables and fruit, stores that specialize in meat products only,

confectioneries, and bakeries.

Pharmaceutical and medical goods, cosmetics, and toilet articles: A self-explanatory category, these

shops sell chemical products, as well as medical equipment and cosmetics and toilet articles.

Second-hand goods: Second-hand stores and stores that sell antiques.

Spatial variables

Average establishment size: This variable controls for the average establishment size of the retail

establishments located in a given square. It is calculated in terms of employment per establishment. The

idea is that if the average establishment size is relatively large in a square, that square will be populated by

fewer stores. Hence, the probability of finding stores of a different or similar kind co-located in that

square should be effected by the scale of the store(s).

Demand within walking distance: This variable is calculated by taking the total wage sum of the

individuals who reside within the same square kilometre area as the store. The variable is employed to

8
determine the impact of the demand from the immediate surroundings. We expect the impact to vary

depending on the type of retailing activity in question. Our expectation is that the demand from the close

surroundings will have a positive and significant impact on the presence of clothing and specialized stores,

whereas a negative impact should be captured for household appliances given their location pattern. Those

stores are likely to be large in scale and located outside the retail core in an urban space. Hence, their

proximity to residential areas should be much less than that of clothing or specialized stores.

Demand within driving distance: We employ an accessibility to wage sums approach at the municipal

level using a second-level aggregation into functional economic regions (FERs). The idea is to proxy the

demand of people in the functional economic region where the square is located. The calculations are

performed based on the earlier work of Johansson et al. (2003). They estimate distance-decay parameters

using observed commuting behaviour: accessibility is hence interpreted as accessible demand. The total

accessible demand for each municipality is divided into three parts as shown below:

= + + ,

In this equation, refers to intra-municipal, to intra-regional, and to extra-regional potential

demand for municipality i at point of time t. Intra-regional accessibility in this context is the accessibility

from one to the other municipalities within the same FER. In Sweden, there is a total of 290

municipalities, which are aggregated into 81 FERs, each of which is highly integrated in terms of

commuting flows. The summation in the equation is not considered to be the relevant measure of an

individual municipal market. It gives us the total potential demand. The reason is that different

municipalities are in competition for the same geographical pattern of consumers (cf. Andersson &

Klaesson, 2009). Therefore, for the analysis, each component is treated as a different explanatory variable.

It is argued that the influence of the three components in the given equation differs for different

municipalities. The relative size of these components is used to provide different types of municipalities.

Assuming W= {1,…,n} to be the set containing all municipalities, n, in an economy and R to denote a

functional economic region (FER) employing several municipalities (W) within, we can say that R W.

9
Then, = R \ {m} denotes the municipalities in region R, while excluding the given municipality m.

Finally, = W\R denotes all the municipalities in that economy excluding the ones in R.

( )
Intra-municipal: = ,

( )
Intra-regional: =∑ ,

( )
Extra-regional: =∑ ,

P in the formula stands for the wage sum of the population of a given municipality. The travelling time by

car between two given municipalities is represented by t, and λ is used as a time–distance sensitivity

parameter. For each component of the equation, the value of λ differs.3 The values are estimated by

Johansson et al. (2003).

We expect a positive and significant impact from municipal potential demand on the probability of finding the

retail stores in question, whereas extra-regional potential demand is a weak indicator in the context of our

study. Therefore, we combine the extra-regional and intra-regional potential demand and introduce them

as one explanatory variable, external potential demand, into the model. Since the calculations are performed

based on the driving distances, in this way we obtain two distinct measures for demand within driving

distance for each square.

Distance to central business district (CBD) variables: In most urban markets, central business

districts and retail clusters overlap. Looking at the concentration of economic activity, a central business

district can be identified. However, in several cases, more than one retail cluster exists, probably with

different functions. The way these retail clusters function has great relevance to their distance from the

central business district in the greater marketplace. For example, the squares where household appliances

are present should be further from the CBD, whereas the opposite relationship should be found for

clothing stores. With the same logic, most of the specialized retail stores should be located in the closer

surroundings of residential areas, which are very likely to be further from the CBD as well. Hence, the

variables are constructed by taking the distance from a respective square to the CBD, which is defined as

3 , for intra-municipality 0.02, (intra-regional) 0.1, and for (extra-regional) 0.05. The values correspond to
an ‘S’-shaped curve, in which the willingness to commute is high within the local municipality, lower in the associated
FER, and again quite high for the small subset of actors who commute to the surrounding FERs.

10
the square in the region with the highest number of industries in the five-digit SIC. For each square, two

potential CBDs are identified: one for the municipality in which the square is located (local CBD) and one

for the central municipality in the FER in which the square is located (regional CBD).

Retail diversity: Retail clusters can show up in two main forms. They may either host retailing activities

of the same kind (e.g. clothing outlets, electronic stores) or they may consist of retailing activities of

different kinds. Those that consist of different types of retailing are often populated by smaller-scale

shops and they are likely to emerge within or in close proximity to the urban core, whereas this

relationship is the opposite for the retail clusters consisting of the same or similar types of retailing

activities, where stores are larger, and where they are located in close proximity to transportation hubs in

order to benefit from the demand within the driving distance. Hence, a square that is located in a diverse

retail market should over-perform in terms of the presence of smaller stores. By examining the co-location

of stores, we aimed to control for the retail diversity in the square and its surroundings. The retail diversity

variable counts the number of different retailing activities on the 5-digit level (industry classification)

within an area of 10 square kilometres. Thanks to the scale of the area that we take into consideration for

the diversity measure, we avoid the biased figures that may arise due to a square being populated by one or

a few very large-scale retail establishments.

Retail density in a square: This variable is introduced into the analysis in order to control for the size of

the square in terms of retailing intensity. It is simply measured as the number of employees working for

any type of retail establishment in a square.

11
Table 3 – Location and co-location in retail markets. Dependent variable: number of establishments per 250 by
250 metre square. All the squares with retail activity in the larger Stockholm, Gothenburg, and Malmö regions are
included as observational units. The parameters are identified using a Poisson estimator.
Household Specialized
Clothing
Variables Appliances Stores

Similar retailing activities listed under SIC-524

Clothing -.0298*** .0158***
[.00524] [.00346]
Household Appliances -.0142* .0702***
[.00771] [.00821]
Specialized Stores .141*** .117***
[.00473] [.00809]

Other retailing activities 521, 522, 523, 525

Non-specialized stores (521) .114*** .0454* .163***
[.0155] [.0237] [.0166]
Food, beverages, and tobacco in specialized stores (522) .0855*** .0248 .0987***
[.00990] [.0166] [.0112]
Pharmaceutical and medical goods, cosmetics, and toilet articles (523) .0218 .00698 .124***
[.0198] [.0357] [.0260]
Second-hand goods (525) .311*** .407*** .112***
[.0254] [.0308] [.0253]

Spatial variables
Demand walking distance (1 km2, log) .0873*** -.0720*** .0472***
[.0176] [.0119] [.0139]
Demand driving distance – local (municipal) market (log) .0787*** .0524** .151***
[.0235] [.0242] [.0192]
Demand driving distance – external market (log) -.193*** -.0937** -.0256
[.0348] [.0374] [.0300]
Distance to regional CBD .0928*** -.0280 .0612***
[.0131] [.0198] [.0150]
Distance to local CBD -.125*** -.108*** -.192***
[.00940] [.0125] [.00865]
Retail employment density .000810*** .00132*** .000383***
[9.85e-05] [.000200] [.000145]
Retail diversity (10 km2) .00819*** .00998*** .00595***
[.00278] [.00268] [.00220]
Average retail establishment size -.00238 .000852 -.00730***
[.00172] [.000836] [.00194]
McFadden R squared 0.51 0.20 0.31
Observations 4890 4890 4890
Standard errors in brackets; *** p<0.01, ** p<0.05, * p<0.1;
3-digit SIC codes are in parentheses.

According to the results presented above, the probability of finding clothing stores in a square is positively

associated with the presence of specialized stores, but as expected the relationship is negative and significant

concerning household appliances. In line with the theory, household appliances are purchased less frequently;

hence, the stores providing such kinds of high-order retail goods tend to be located outside the urban

core. Clothing stores, on the other hand, are often found in the very heart of the urban retail market.

12
When we examine the probability of finding household appliance stores, we observe a consistent relationship

with clothing, with a slightly higher magnitude of impact, which may imply that the location of clothing is a

rather more important determinant of the location of household appliances than the other way round.

Looking at the impact from specialized stores on the probability of finding household appliances in a square, we

notice a positive co-location tendency.

Specialized stores are likely to be scattered across space. It is possible to find them in the very core of a retail

market, as well as in rather remote residential areas. By the same token, we would expect them to co-

locate with both clothing and household appliance stores, which is confirmed by the results.

Moving on to the next set of variables, which are introduced into the model to determine the co-location

pattern between the retailing activities that are classified as different kinds, our first variable, non-specialized

stores, is positively co-located with all three types in question. The significance of this relationship,

however, is rather weak for the household appliance stores. We see that the impact from finding a food

related retail store in a square has no significant impact on the probability of finding stores selling

household appliances. The relation between second-hand stores and all three types positive, significant and

rather strong.

So far, our results do not contradict what we expected initially. Now, we can evaluate what we capture via

our spatial variables. Demand within walking distance gives the expected results for all three types of

retailers. It has a positive and significant impact on the probability of finding clothing and specialized stores,

whereas this impact is negative and significant for household appliances. Mostly located in the periphery,

stores selling household appliances derive the benefits of internal scale due to their big establishment

sizes. Hence, a higher demand within walking distance implies higher rental costs; for an economic activity

like HA retailing, the fixed costs are relatively higher. Therefore, the implication is a negative impact from

demand within walking distance on the presence at a given location.

Demand within driving distance, delimited by municipal market borders, has a positive impact on all three

types, as expected. This impact is highest for specialized stores. When we look at the impact from demand

within driving distance from outside the municipal market boundaries, we see a negative impact on the

first two types, clothing and household appliances, and an insignificant impact on specialized stores. In line with

13
the earlier theoretical discussion, a negative sign implies a competition effect arising from retail markets in

other regions. Having greater access to a marketplace that is beyond the municipal market implies that

consumers can commute easily from a small retail market to a larger one given the advantages derived

from scale and diversity. This is particularly important for the small municipalities that are located very

close to a large retail market where the direction of the consumer inflow is large. The impact from external

market access is insignificant for finding specialized stores in a given square. This result thus implies that the

relevant market (demand) for these retailing activities does not extend beyond their original municipal

border. The discussion of demand as multi-layered and appropriately analysed at a disaggregated level for

certain activities underlines the problems involved with analyses using higher-order levels of aggregation.

As discussed previously, a retail cluster is not the same as a central business district, and the two do not

always overlap in space. A major strand of the literature on location theories deals with issues relating to

the formation of CBDs. The main assumption is that the rents would be the highest in a CBD. What we

refer to as CBDs in today’s modern cities are historically the marketplaces where trade used to take place.

The variation in different economic activities was not as obvious as it is today; hence, we were likely to

find all the economic activities to be clustered within the same core. However, when we observe different

marketplaces today, although it is possible to see many examples in which the CBD is also the main retail

cluster, we still see a considerable distinction between the clusters that are mostly occupied by business

services and those that are mostly occupied by stores.

When we look at the results from distance to regional CBD we see a positive and significant impact on the

probability of finding clothing and specialized stores in a square, with a higher impact for clothing. The

distance to the regional CBD appears to have an insignificant impact on household appliance stores, which is

intuitive, given that these stores are most likely to be found outside the urban core. However, as a general

conclusion, we can say that the further we are from the regional CBD, the more likely we are to find

clothing and specialized stores in a square. This implies that the square in question is more likely to be in a

marketplace that is self-sufficient, given its distance from the bigger marketplace, as captured by the

distance to the regional CBD.

14
When we examine the impact from distance to local CBD we see that the story is rather different. In all three

cases, we find a negative and significant impact from the distance to the local central business district on

the probability of finding these retailing activities in a square. This means that the further we are from the

local marketplace, the less likely we are to find the retailing activities in question.

The retail employment density in a square is introduced to control for the degree of overall retailing

activities, and as expected, in all cases it has a positive and significant impact. When we look at the

following variable, retail diversity in the surrounding marketplace, we also see a positive and significant

impact on finding any of the three retailing activities in question in a square.

The average retail establishment size in a square, calculated as employees per establishment, is also

introduced to control for a possible impact that may arise due to a very large establishment occupying one

square, or a square being occupied by many small-scale establishments. It is apparent that the only

significant case is specialized stores, for which the average establishment size has a negative impact on the

probability of finding these stores in a square. These stores are more consistent in their size, being smaller

than many other stores serving various retailing purposes. Hence, having this kind of negative relationship

makes sense. Conversely, clothing stores, as well household appliance stores, vary in size.

Concluding Remarks

In this paper, we revisit the traditional location theories (i.e. central place theory and bid rent theory) and

assess their relevance to the location and co-location of retail establishments empirically by using a geo-

coded square grid of fine spatial resolution. Theoretically, retailing is (i) an activity in which the

establishments are likely to cluster in space, (ii) likely to be located in or in close proximity to the urban

core, and (iii) spatially distributed with respect to the function and the size of the establishment to

optimize the distance to demand in relation to the cost of rent.

We also provide a discussion on the importance of variety both to consumers and to producers, as it

requires a certain scale of agglomeration and is crucial for attracting consumers. The theory implicitly talks

about the indispensable need for stores to be located close to each other, be they similar or different in

15
nature. However, few previous studies connect these theoretical discussions to reality. Combining the

spatial indicators that are of importance for retail location as predicted using location theories, we design

an empirical setting to investigate how different and similar types of retailing activities are co-located in

space and how this type of location pattern is affected by spatial attributes that are addressed in the

theoretical framework. Our findings confirm strong dependency on proximity to demand; this type of

impact is particularly strong for the type of retailing activities that are carried out in somewhat smaller

establishments and that hence occupy the urban core. This finding is in line with the propositions of both

bid rent theory and central place theory. We also document a negative co-location tendency between

stores selling goods for more frequent purchase and stores that specialize in high-order goods (of the

durable kind), which is also in line with the theoretical framework.

We suggest a novel way to examine retail location and co-location empirically, in which the impact of

economic indicators like demand is layered spatially where different degrees of proximity are utilized.

Several attributes of the paper contribute to the existing literature on retail location in a notable way. One

of them is the depiction of a location pattern for different kinds of retailing activities on a very

disaggregated level. This type of empirical analysis may provide both sector actors and policy makers with

the details behind retail location, who then can avoid inaccurate investments or inappropriate retail

planning policies that are based on information retrieved from high geographical aggregations, with which

it is not possible to capture the specific impacts from underlying factors on different types of retailing

activities. Our analyses also underline the need to view demand as a multi-layered concept in which the

appropriate geographical aggregation differs between industries.

16
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Appendix 1

Table A1: Description and sectoral codes of the retail branches, four-digit
SNI Code Description
5211 Retail sale in non-specialized stores with food, beverages, or tobacco predominating
5212 Other retail sale in non-specialized stores
5221 Retail sale of food, beverages, and tobacco in specialized stores
5222 Retail sale of meat and meat products
5223 Retail sale of fish, crustaceans, and molluscs
5224 Retail sale of bread, cakes, flour confectionery, and sugar confectionery
5225 Retail sale of alcoholic and other beverages
5226 Retail sale of tobacco products
5227 Other retail sale of food, beverages, and tobacco in specialized stores
5231 Dispensing chemists
5232 Retail sale of medical and orthopaedic goods
5233 Retail sale of cosmetics and toilet articles
5241 Retail sale of textiles
5242 Retail sale of clothing
5243 Retail sale of footwear and leather goods
5244 Retail sale of furniture, lighting equipment, and household articles
5245 Retail sale of electrical household appliances and radio and television goods
5246 Retail sale of hardware, paints, and glass
5247 Retail sale of books, newspapers, and stationery
5248 Other retail sale in specialized stores (part 1)
5249 Other retail sale in specialized stores (part 2)
5250 Retail sale of second-hand goods in stores
Source: Statistics Sweden

20