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Competitive impact model for

site selection: the impact of
competition, sales generators
and own store cannibalization
J. Patrick Kelly , D. Carl Freeman & John M Emlen
Published online: 28 Jul 2006.

To cite this article: J. Patrick Kelly , D. Carl Freeman & John M Emlen (1993)
Competitive impact model for site selection: the impact of competition, sales
generators and own store cannibalization, The International Review of Retail,
Distribution and Consumer Research, 3:3, 237-259, DOI: 10.1080/09593969300000017

To link to this article: http://dx.doi.org/10.1080/09593969300000017

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 Competitive impact model
for site selection: the
impact of competition,
sales generators and own
store cannibalization
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I J. Patrick Kelly, D. Carl Freeman and

I John M. Emlen

1 Abstract
This article adapts a methodology developed, and successfully applied by
ecologists, to measure the interaction among plant and animal species in
nature. This adaptation for retailing involves the determination of distances
over which other retailers may positively or negatively impact on the sales of
a specific type of retail store at a given location. The impacts of cannibaliza-
tion from own store growth and sociodemographic variables are also incorpo-
rated into the methodology.

Keywords

Impact, site selection, ecology, interaction.

Introduction

Retail site selection decisions are important prerequisites for the suc-
cessful operation of a retail store. The proper blending of merchandis-
ing, pricing and promotional strategies is important in the success of a
store but their strength is often insufficient to triumph over a poor loca-
tion. A retailer's market share, sales volume and profits are directly
impacted upon by outlet location. The permanence of the location
makes the initial site selection decision an important one (Ghosh and
McLafferty 1987; Brown 1989).
When a retailer makes a correct decision about a location and growth
in sales exceeds expectations, the retailer is likely either to expand exist-
 238 3. Patrick Kelly, D. Carl Freeman and John M. Emlen

ing facilities or to expand to new store locations within the same trade I
area geography. With successful levels of sales in existing locations, new
locations are likely to be developed. Care must be taken in selecting new I

store locations so as not to cannibalize the level of sales in existing out- ,

lets.
Although the proximity of one's own store may be desirable on a
macroscale to imply a high market share, it may be harmful on a 1
~
microlevel because of cannibalization (Finne and Laulajainen 1992).
Additionally, store expansion strategies should take current and possible
future competitive actions into consideration. When future strategies are
considered, a retailer's site selection strategies can result in competitive
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blocking positioning as new sites are selected (Ghosh 1983). Conversely,

as store sales dwindle or underachieve expectations, store closings may
be necessary to maintain overall profitability. This optimal allocation of
resources matches the view of perfect competition supported by eco-
nomic theorists (Dickinson 1981). We seldom view store closings as
location strategies; yet, as competitive manoeuvrings occur or as cus-
tomer sociodemographic changes take place, store closures become
important in achieving profitability maximization objectives.
The measurement of the impact of competition on a specific retail
site has been an unobtainable goal of most site selection models.
Research into the spatial structuring of a retailer and competitors as well
as the spatial interaction among these competitors is a topic frequently
~
I

encouraged in the summary section of academic articles. Often, addi-

tional research is suggested to 'focus both on processes leading to
agglomeration of firms and the implications of spatial competition
among firms' (Craig et al. 1984).
The purposes of this article are two-fold: ,1
I

(1) T o discuss the development, adaptation and refinement of a new I

methodology for assessing the impact of competitive interaction
on sales volume and profits; and
(2) T o test this method using data from a specific retail chain with
multiple locations.
This methodology allows a retailer to determine which stores are
competitors, sales generators or neutral with respect to their impact on
sales at a specific location. The cannibalization of a firm's own store
expansions can also be assessed. The magnitude of competitive interac-
tions and the distance at which each competitor has the greatest impact
on sales is determined. Thus, competitive spatial interactions and
configurations can be assessed, utilizing competitive strength and dis-
tance, in a manner not possible with prior models.
The basic methodology described in this study has been used by ecol-
ogists to measure the impact of a species' own density and the interac-
tions of other plant and animal species on the ability of the target
 Competitive impact model for site selection 239

species to perpetuate itself, i.e. its fitness (Emlen 1985; Emlen et al.
1989). The term fitness is synonymous with survivorship and the ability
to reproduce. When additional numbers of plant or animal species
occupy a given space, the relative abundance of the species has a nega-
tive relationship with its fitness (Harper 1977; Workman and Allard
1964). As the number of both identical and different species increase in
a given space, the fitness of those species declines. This interaction
between density and fitness helps to regulate population size (Anderson
1971; Charlesworth 1971; Roughgarden 1971; Clark 1972; Smouse 1976;
Emlen 1985).
Several ecological studies have taken into account aspects of both the
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physical and competitive environments as well as physical and reproduc-

tive attributes of organisms (Allard and Adams 1969; Beardmore 1963;
Franco and Nobel 1988; Fretwell 1972; Fretwell and Lucas 1969;
Nassar 1979). These methods, when adapted for retailing, provide use-
ful insights into competitive spatial interactions and impact of these
configurations.

I Background

I Competition: direct and indirecz

Economists view competition as existing along a continuum from perfect

I competition to monopoly; these end points are theoretical descriptions
of conditions which do not actually exist. These extremes are used
because they can be precisely defined while the real-world conditions of
imperfect competition which exist between the two ends of the contin-
uum lack precision in their definitions. Market conditions used to
describe competition deal with homogeneity of products, numbers of
buyers and sellers, perfect knowledge and lack of preferential treatment
in pricing, tariffs or other means (Hanson 1974). Other economists sug-
gest 'competition tends to be directly related to the degree of diffusion
of market power' (Spencer 1986). Competition is a state of rivalry exist-
ing among several business firms seeking to sell the same or similar
goods, rewards or satisfactions. This is a more general view of competi-
tion (Berenyi 1982).
Marketers view competitors as those with similar marketing mix vari-
ables. A retailer with similar products, prices, promotions and policies
located within a trade area geography is a more direct competitor than a
retailer either located outside the trade area or one with dissimilar prod-
ucts within the same trade area.
Because disposable income is relatively fixed for a defined trade area
geography any retail outlet is a potential competitor for any other outlet.
Retail customers may spend their fixed disposable income for a movie,
 240 3. Patrick Kelly, D. Carl Freeman and John M. Emlen

haircut, fast food, gasoline, furniture, groceries, photo processing or a

wide range of other products or services. The movie theatre and haircut
are different products and indirect competitors for the customers'
expenditures. The fast food and grocery store with food products are
more direct competitors; two gasoline stations on opposite corners with
identical products are obviously very direct competitors. In this paper
we consider a competitor to be any retail firm whose proximity creates a
negative impact on another outlet's sales. If competitors were to disap-
pear the remaining outlet would experience an increase in sales.
It seems obvious that spatial avoidance of competition would enhance
sales. Unfortunately, identification of competitors is not straightforward,
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much less an assessment of a particular competitor's impact on sales or

profits. T o what degree does the barber shop cut into the movie the-
atre's sales? How is this influenced by proximity? Is this competitive
effect compensated or overcompensated by providing customers with
easy access to two services in a small area? How much greater is the
damaging effect of one food store on another food store? Would the
benefits accruing to one as a consequence of moving elsewhere to avoid
competition more than pay for the move? Rachman (1975) suggests a
retailer must decide for himself who his competitors are, but the out-
look is not so bleak. The methodology described in this study allows for
identification of those retailers who are competitors and the measure-
ment of the intensity of their impact on a specific store in a given retail
location.

Retail sales generators

Some retailers tend to be more successful when outlets are agglomer-

ated. Clustering of stores produces increased customer traffic (Hasty
1983). The sales of one retailer are increased when they are located
close to others (Berman and Evans 1986). The location of sales genera-
tive affinities is important in site selection strategy, a fact well docu-
mented in the retailing literature (Barket and Anderson 1935; Davidson
et al. 1984; Berman and Evans 1989). These sales-generating affinities
exist because shopping goods, such as automobiles, furniture, clothing
and shoes, are often purchased after comparison shopping. Multiple
outlets in close proximity allow for such comparisons among similar
stores as consumers attempt to maximize satisfaction in choosing
between price, style, selection and services offered for alternative prod-
ucts by similar retailers (Berman and Evans 1986). These affinities also
exist because they minimize travel and shopping time for customers
seeking several items. Customers select clusterings of stores with diverse
product offerings which facilitate one-stop shopping (Berman and Evans
1986). The effect of one-stop shopping is more difficult to quantify
 Competitive impact model for site selection 241

because of the multitude of combinations of products comprising cus-

tomer shopping lists for a specific shopping trip.
Sales-generating affinities are retailers which positively impact on the
sales of a given outlet through their spatial interaction. A retailer should
identify those stores which are sales generative and weigh the compati-
bility of adjacencies (Berman and Evans 1986). The competitive or
enhancement impact of the spatial configuration can be used in site
selection decisions to maximize sales potential. The methodology
described in this paper allows for measurement of affinities and their
strength as a positive impact on sales for a retailer at a specific location.
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Cannibalization

When a specific retail chain experiences sales which exceed expectations,

I or when sociodemographic variables justify expansion, new branch
stores will be added to a trade area geography. Those shoppers who vis-
ited the original location may now have a second locational choice for
the identical marketing mix. Cannibalization occurs when this second
location acts as a competitor and draws customers from the original
store to the new location. The objective for the retailer is to select a
new site location in such a way as to minimize the negative impact of
the interaction between the two stores given the existing and potential
competitive spatial configuration of the trade area. While attempting to
minimize own store negative spatial interaction, the objective is to draw
new customers while inflicting as strong as possible negative impact on
competitors. Growth in sales with market expansion is a measure of
competitive strength when new stores sales are considered. The degree
of cannibalization of own store competition has again been an evasive
characteristic of most site selection models. The methodology described
in this study measures the impact of cannibalization upon one's own
store within the same trade area.

Neutral spatial interaction

We have described retail outlets which act to decrease sales as competi-

tors, those who increase sales as generators and same store expansion
which may act negatively as cannibalization. The remaining logical cate-
gory is retailers exhibiting a neutral spatial interaction. That is, their
proximity neither adds to or detracts from a retailer's sales. From a
market mix perspective we would expect these retailers to exhibit a very
different marketing mix, but this generality may not be accurate.
Additional research is needed on how multiproduct purchase trips and
expectations impact on multi-store customer visitation decisions.
Nevertheless, identification of neutral stores is as important as the other
 242 3. Patrick Kelly, D. Carl Freeman and John M. Emlen

store types described above. The methodology described in this study

allows for classification of retail stores into these four categories: com-
petitor, sales generator, cannibalizated or neutral, as well as providing a
measure of their competitive impact.

Models of retail location analysis

Much of the direction for development and adaptation of our methodol-

ogy has taken its thrust from the Craig et al. (1984) review of store
location models. Their article provides an overview of the basic models
with descriptions of each model's strengths and weaknesses. Additional
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overviews of retail site evaluation models are also available (Lea 1989;
Lea and Menger 1990; Lea and Menger 1991). Gonsistently a weakness
of each approach at modelling site selection strategies is the inability to
assess the level and impact of competition. We present a brief descrip-
tion of four basic models and describe the weakness of each approach as
it relates to the impact of competition.

Check-list method

A check-list is the identification of the variables which impact on the

success or failure of a potential store as it interacts with the environ-
ment at a particular location. The systematic consideration of a number
of factors attempts to remove the subjectivity of selecting between sites.
Although a number of standardized factors exist (Davidson et al. 1984),
most retailers need to develop their own lists, which often involves a
degree of subjectivity based on the experience of the check-list user
(Jenkins 1980). Although the level of competition is one of the variables
to evaluate when using the check-list approach, it often omits the inter-
active effects of some variables and is particularly insensitive to the
addition of a branch outlet within the same trade area (Craig et al.
1984).

Analogue approach

The analogue approach is a procedure used to estimate sales potential

surrounding a particular site. The parameters of the trade area are
identified by customer surveys or spotting techniques. A market poten-
tial is determined by estimating customer purchasing of similar products
or at similar stores. Market share estimates are obtained through use of
analogues, i.e. similar retail outlets. The market share and market
potential are used to calculate sales projections for different sites. The
site with the greatest potential for sales is selected as the most desirable
location.
 Competitive impact model fvr site selection 243

Typically two problems exist with this approach. First is the selection
of analogue stores that closely match the combination of marketing mix
variables of the proposed store. Significant variations are likely to exist
in market share potential for very similar stores with identical product
offerings. Second is the lack of direct consideration of competition
(Craig et al. 1984; Mason and Meyer 1987). Competitors become a fac-
tor only as they impact upon the analogue stores. Their direct impact
on an outlet at a specific site cannot be ascertained in the analogue
approach. The reliability of the analogue approach is wholly contingent
upon similarities between the analogue and the proposed store including
the similarities in the physical, sociodemographic and competitive
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aspects of the two trade areas.

Regression computations

Rather than the use of a check-list of factors which may or may not
have a real impact on either sales or profitability, the regression models
allow for the measurement of the impact of various factors on perfor-
mance. This approach has been used by a wide range of retail firms to
determine the impact of various factors on performance (see Craig et al.
1984 for a review of these retail firms and factors used).
Regression models recognize that the impact of competition can vary
depending upon the competitors' distance from the proposed site and
that some forms of competition (affinities) are helpful in increasing
sales, while other forms of competition have a negative impact on sales
potential. Competition is often measured using distance to the nearest
competitor or the actual number of competitors within a trade area.
Both of these measures fail to identify the impact of competition as it
may change based upon distance, variations in size, price, image or
assortment (Craig et al. 1984).

Location allocation method

Allocation methods assign demand to specific sites as a way of assessing

the sites' strengths. Demand for multiple outlets can be computed,
allowing for measures of cannibalization and market coverage, to maxi-
mize sales potential. Each of the variables which influence demand, such
as population changes, competitive locations, economic factors, dispos-
able income, etc., can be altered to measure their impact. Because any
scenario can be identified and placed in the location allocation model,
this approach has the most promise for site selection research. The
greatest benefit of this approach is the ability to model multi-purpose
shopping trips. The methodology we propose allows the measure of
competitive impact and agglomeration of retail stores.
 244 3. Patrick Kelly, D. Carl Freeman and John M. Emlen

Spatial conjiguration and distance interaction

The effect of distance has been recognized as an important factor in the

description of spatial interaction (Laulajainen 1987; Griffith and Jones
1980). Distance relates to space and the interval between objects. Space
can be computed using a measure of distance between objects or as the
time in minutes or hours necessary to move between objects. The
objects in models of retail location research are retail stores and dis-
tances between the consumer's home or work and those retail stores
selected for purchases. As consumers' willingness to travel to certain
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retail stores is determined, the size of trade areas can be computed. As

retailers offer variations in the mix of merchandise, price ranges, brands
and promotions, consumers can be influenced to select one store over
another. Consumer response to retail offerings becomes the theoretical
formation of central place theory (Christaller 1935).
In addition to the distance consumers are willing to travel and the
size of trade areas and geographies, distance has also been used to mea-
sure placement of competitive locations (Hotelling 1929; Lerner and
Singer 1937; Eaton and Lipsey 1975; Wendell and McKelvey 1981).
Drezner (1982) describes a two-location model appropriate for a chain
store wanting to expand within a market area. Locations are selected
based on demand points rather than distance measured in either miles
or time. Ghosh (1983) describes a two-trader and three-trader system
where mobility is possible between competitors. When multiple compet-
itive locations are considered, they are usually described relative to mar-
ket area concentrations rather than in Euclidean distance (Eaton and
Lipsey 1979; Hotelling 1929).
The impact of competition can be described in a number of ways.
The impact can be neutralized by assuming equilibrium, with no firm
able to increase its profits by relocating (Eaton and Lipsey 1979) or
profit maximization can be achieved by movement to a new location
(Braid 1989; Ghosh 1983). These new locations typically are described
as the longer side of the market (Chamberlin 1933; Brown 1989) rather
than Euclidean distance.
Distances as described in most models of site selection strategies are
not specific about distances in miles or distances in travel time. Existing
site selection models that incorporate distance measures have yielded
important conceptual insights but are not readily applicable to assessing
the four types of interactions among stores (competitive, sales generative
affinity-based, cannibal and neutral) using real world data.
 Competitive impact model fir site selection 245

A new competitive impact model

The development of the competitive impact model (CIM) methodology

in this article is not intended to replace existing models such as the spa-
tial interactive models, but to complement them. CIM provides a proce-
dure to estimate the success of a particular outlet at a specific location
based upon both the sociodemographic and competitive retail environ-
ment. Existing site selection models (Lea 1989; Lea and Menger 1990)
typically determine the optimal location to site one or more stores based
upon the performance of some objectively measured dependent vari-
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ables. Such models do not normally quantitatively consider the impacts

of other retailers on the success of a new outlet, nor how that success
might vary as a function of a competitor's potential action of adding or
decreasing the number of outlets within the trade area. Our CIM allows
the assessment of competition and of own store cannibalization.
However, the fundamental assumption underlying our model is that the
firm has located its outlets optimally. This assumption of optimality is
an often used and necessary assumption for building most models (Lea
and Menger 1991; Finne and Laulajainen 1992). In brief, we are exam-
I
ining the damage of competition after the best efforts have been made
to minimize that damage, i.e. we offer a way of estimating a worst case
scenario.
The typical measures of success used by retailers are sales and profits.
The very foundation of site selection research is to provide a forecast of
sales volume of the proposed site (Lea 1989). Of course, as sales volume
increases, the impact on profits, return on net worth, sales per square
foot and other measures of productivity can be computed as they each
relate to sales volume. The generation of dollars of sales volume
I
becomes the basis of our measure of productivity of a specific location.
If a retailer experiences success in a trade area with a single outlet,
the retailer is likely to expand within the same trade area. Not only has
the marketing mix presented to customers proven acceptable, but
economies of scale can be generated with trade area expansion which
add to overall profitability. Supervision, transportation, promotional
efforts and other support functions can be divided across multiple out-
lets rather than allocation to a single store. Two stores become more
profitable per store with similar sales than a single outlet. Sales dollars
from one successful store lead to new store expansions. Sales volume is
a short-term measure of the local success and competitive strength of
each store. In the short run, a competitive position can be strategized
from the sales volume or market share position, but, in the long run, the
I
strategy must shift to a projit maximization position. Long-term implica-
tions suggest strong linkage between sales volume/market share and
I profitability (Buzzell and Gale 1987).
 246 3. Patrick Kelly, D. Carl Freeman andJohn M . Emlen

The CIM methodology uses both sales volume and profitability to

access the impact of competition. A regression approach is used to
examine factors which influence sales volume of an outlet. Next we view
success as the ability of each dollar to create an additional dollar of
sales. A least squares approach is used to weight the variables (socio-
demographic variables, the number and distance of different types of
interacting stores) around each store in proportion to the sales volume
of each store. These values are then used to estimate the effect of each
variable on the expected contribution each dollar of sales makes to
profits.
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Sales volume

The functional relationship between sales volume and the existence of

competition can be approximated with the use of multiple regression.
Parameters are entered or removed from the equation based upon the
percentage of variance in sales accounted for by a particular variable.
The regression coefficients determine the sign, positive or negative, as
well as magnitude of the interaction. The interaction of competition
over the trade area geography must be determined. The problem,
though, is to determine the appropriate trade area geography over which
the interactions occur. The trade area will be much smaller for a conve-
nience food store than for a regional mall. One additional problem is
that the trade area varies depending upon the marketing mix offered by
each retailer. There are between group interactions for firms with differ-
ent marketing mix strategies as well as within group differences for
firms with similar marketing strategies. For example, a large grocery
store featuring a 'warehouse' or 'off-price' format may have a very dif-
ferent trade area geography than a smaller grocery operation but be
within the boundary of the larger store's trade area. The competitive
structure of the trade area may influence distance and strength of the
interaction. The entire agglomeration of stores with varying marketing
mix elements, types of stores, number of similar marketing mix com-
petitors and affinities will impact on a specific store's drawing ability
and trade area geography. The problem becomes, how can retailers
efficiently and economically ascertain which variables are important and
at what different distances do interactions occur?
Rather than using labour intensive and costly customer spotting tech-
niques we have chosen to use a simpler and less costly procedure
(Emlen et al. 1989). The first step is the identification of the retail store
or each individual store of the chain in question. Each store is located at
the centre of a series of concentric circles of different diameters. These
diameters are selected judgementally based upon prior experience and
existing information. For example Ghosh and McLafferty (1987) state
 Competitive impact model for site selection 247

that the typical trade area for a grocery store in suburban USA is
approximately a circle with a one-mile radius. T o access the impact of
other grocery stores we might sample stores with radii of one half mile,
one mile and three miles. In practice, the number and size of concentric
circles should include some sizes which are obviously too small and oth-
ers which are too large. By extending in both directions, the optimum
circle size can be determined.
Within each circle, we identify all retail stores. These include other
branch stores, potential competitors, generators or neutral stores. All
stores are considered even though their individual trade area geogra-
phies differ in size. Using this inclusive approach, the final equation
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incorporates the effects of all stores within the nested series of concen-
tric circles. Because stores vary in their interaction with each outlet
based on their distance, the interaction can be estimated. A convenience
food store may not have an impact on a discount store even though it is
one mile away, but another discount store may have a greater impact
when it is four miles away. By allowing the radius to vary with each
type of store, we can determine the radius at which each type of store
has the maximum impact. While it is possible to plot the distance and
direction one must traverse to go from an outlet of the target store to
the outlet of a competitor, we have not done so here. The information
with respect to direction is virtually useless when considering stores
from many locations. Going north from a location is no different than
going south. We have simply established circles of different radii and
thus are treating distance as a linear scaler and not a vector. The con-
cept of measuring direction from a given location is similar to the
approach used by Finne and Laulajainen (1992). They use 'Trackbound'
to indicate expansion along a track or string of populations.
T o determine the appropriate sized circle for each type of competitive
interaction, the method regresses sales from stores in question against
the number and type of competitive store within each circle. The size of
the circle with the highest regression coefficient for a particular type of
store is the circle size yielding the maximum impact for that store type.
This is the distance which will maximize the percentage of the variance
in sales of an outlet that can be explained by each particular type of
store. While we have elected to use this distance in our calculations, one
could also use the distance at which the impact of the interactions falls
below a certain level such as a half or a quarter, etc., of the maximum
impact. The use of concentric circles has several inherent advantages.
The researcher need not a priori classify the relationship between the
different types of stores and the target outlet. The statistics determine
both the sign and the magnitude of the interaction. This allows for
measurement of multiple-purpose shopping trips as well as the negative,
sales generative or neutral relationships of other retailers.
 248 3. Patrick Kelly, D. Carl Freeman and John M . Emlen

Profit equilibrium approach

The method assumes retail corporations will behave in a manner to

optimize their profits with respect to new site openings. That is, corpo-
rations will continue opening new outlets within a trade area until open-
ing the next new outlet will cause a greater depression in the
profitability of all existing outlets than can be justified with addition of
the new location. Doubtless, some corporations will hedge their bets on
future profits with new outlets because of predicted changes in trade
area demographics or to execute competitive blocking strategies.
Conversely, as retail environments deteriorate, outlets may be closed to
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achieve profit maximization.

If corporate behaviour approximates this assumption of optimality
then the contribution that each dollar of sales makes to corporate
growth can be expected to be equal regardless of the outlet where the
sale was made. Outlets in good environments will tend to make more
sales than outlets in bad environments. By examining the environment
experienced by each dollar of sales, one dollar at a time, we can assess
how various aspects of the competitive environment impact upon suc-
cess.
T o do this we are going to use a least squares approach, which, while
similar to a multiple regression, differs in one key aspect - the nature of
the cases. In a typical multiple regression analysis with dependent vari-
able z and independent variables x and y, one would use the values of
x,y,z to construct the best least squares fit. If we have four values of
x,y, and z we enter four triplets and conduct the multiple regression
analysis. Let the values of the three variables be x,y,z:

What is different in our analysis is first there is no dependent variable.

Rather we are assuming optimality and are fitting a constant. Second,
we use the z values to weight the cases. If we apply the CIM model to
this hypothetical illustration xl yl is entered three times, x2 y2 six times,
x3 y3 nine times, and x4 y4 twelve times. By so doing we look at the
environment from the context of a dollar one at a time. Those
configurations of stores which result in high sales are entered more fre-
quently than configurations of competing outlets which result in fewer
sales from the target store.
 Competitive impact model for site selection 249

The methodology

We will use a variant of the basic gravitational consumer choice model

to derive this equilibrium approach. That is, the appeal of an outlet will
diminish the greater the distance the customer is from the store loca-
tion. Let the success of a particular outlet be S, which equals

where the appeal of an outlet (A) is a function of distance (D), and

sociodemographic variable {X), store characteristics such as products,
assortments, pricing, etc {Y). Distance can be measured in Euclidean
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terms or time increments. The 2 n D term weights the function by the

areal extent of the market at distance D, and p is a parameter reflecting
drop-off in purchase probability as distance from the outlet increases.
Because the outlet draws from a defined trade area geography, the suc-
cess reflects the summation of purchases at all distances. As a store's
sales volume increases, beyond the break-even point where fixed costs
are covered, an opportunity for reduced operating expenses and lower
costs may be reflected in lower selling prices, therefore increasing the
appeal of the retailer.
Craig et al. (1984) note that a 'search for alternative measures of spa-
tial configuration should be high on our agenda for future research', and
that p must, itself, be a function of {x). Indeed, P depends on the exis-
tence of alternate sources of merchandising, competitors, ease of access
for consumers, demand (itself a function of {x)), etc. The rate at which
a store's success (p) declines with distance depends to some extent on
the store characteristics of competition, as well as the location of same
store competitive outlets. This cannibalization of same store competition
is the strongest form of direct competition. Continual increase in outlets
for a given trade area will ultimately have a negative impact on the rate
of sales growth.
Success can be measured in terms of dollars of profit generated (S);
we therefore can express dollars of profit as:
S = A ( D , V ~,{X),{Y) )D - P ' D 3 V ~ { X ' 2 ~ ~ d ~ { y ' . (2)
For computational purposes, the integrand may be approximated with
a summation.
If sales were available for each store and its competitors, a best fit
(least squares, maximum likelihoods, etc.) model could be used to define
the coefficients of A,D,V,{X)). Here we are not examining differences
in store characteristics and are therefore dropping the store characteris-
tics {Y) from this analysis. Unfortunately, sales data from competitors
normally are not available, market conditions change with additions and
deletions of competitive retailers and the mix of merchandise will vary.
With this limitation, equation (2) can be solved if we make use of the
 250 3. Patrick Kelly, D. Carl Freeman and John M . Emlen

equality assumption. This assumption is that the expected profits on

each dollar of sales, on average, will be equal in all trade areas thus

A
where S is an unknown constant and E' reflects error due to management
judgement and local market variations. Because we do not know the
true form of equation (2), we approximate it with the Taylor expansion
using only the linear form g(V,{X}) as an illustration in this paper. The
CIM method is not limited to the use of linear terms. Distance (D) . .

drops out of the equation because it has been incorporated by integra-

tion into each term in the function g. This does not mean that distance
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is unimportant, in fact, the coefficients of g directly depend upon dis-

tance. The relation between customer and sales, and how it varies over
space directly contributes to the coefficient values.
Because no model is a perfect descriptor of reality, an error term E is
introduced, and we have
A
s = s + El = [g(V,{X}) + €1 + E' (4)
A
Because S is a constant, the portion of interest to us is
A

s = g(V,Cx>) + E (5)
T o solve for the coefficients describing g, we have only to find the
values of those coefficients that minimize the mean square error in E for
any value of S.
It is important to note, at this point, that in calculating the best fit
solution for equation (5), the statistical 'cases' involved are not the indi-
vidual outlets, but dollars of sales. That is because success is, in effect,
one dollar's way of making more dollars. So approximate the expecta-
tion - of S, with S where the tilde (-) indicates the average weighted
according to the sales volume of each outlet (V). Thus the mean square
error is to be minimized not over outlets, but over dollars. The parame-
ters describing the environment around each outlet enter the analysis in
frequency relative to the outlq's sges volume.
If E is small, then because S + S for large sample sizes, we can use a
Taylor expansion and write
-E - -
= g - s = g-s = g - g -
A
[Av a g / a v + ZjAXj + ag/ax] =
Zbj AXj + bj AV
where AX = X - % andthe tilde (-) denotes the mean over sales dol-
lars. Hence the solution is the combination of (V,{x}) which minimizes
- = [AV ag/aV + CjAx j d g j / a ~ 1 2= ZpjAXj + pjAV
E (6)
T o avoid the trivial solution(s) when s + 0, or S + we impose the
m,

following constraint:
 Competitive impact model for site selection 25 1

Because markets limit customer base, profits will eventually decline as

total sales volume rises; it is convenient to have the constraint reflect
this diminishing of profits. With this constraint, the solution becomes,

q = (0,0, . . I), with 1 in the position corres~ondingto V, and Q is

Ax.AxT, where AX is the data matrix of X - Xvalues, with rows rep-
resenting different X variables, and a column corresponding to each dol-
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lar in sales. Substituting equation (8) back into equation (5), we have
finally

Confidence intervals on the model coefficients can be estimated using

a bootstrap technique. T o do this we scramble the values of the vari-
ables with respect to the outlets, one variable at a time and, with
replacement, recalculate the coefficient values. This procedure generates
a random distribution of P values for each variable. T o determine if the
original P value differs from that generated by a random expectation,
we compute the mean and standard deviation of the random. distribu-
tion. If the original value differs by more than two standard deviations
from the mean of the random distribution, then the probability of this
occurrence is less than 5 per cent and the variable is retained in the
equation. This procedure must be employed, because one cannot deter-
mine t h ~influence
; of a variable by examin%g the per cent of the vari-
ance in S accounted for by that variable, as S is a constant and therefore
has no variance.

An example of the CIM methodology

Annual sales and store profits were obtained for the most recent two-
year time periods for thirty-seven XYZ stores (the authors cannot reveal
the name of the company or describe it in a way which would jeopar-
dize its anonymity upon request of the participating retailer). The num-
ber of stores by geographic locations is identified in Table 1.
Geographic locations were selected to provide a wide national prospec-
tive. Individual stores within each market were selected based upon
their proximity to an identified list of common competitors, as well as at
least three full years of operation. Once the stores were selected, demo-
graphic data for the trade areas were identified using census tract
descriptions provided by Dun and Bradstreet.
All competitors were identified by name and by type of retail store.
 252 3. Patrick K e l l y , D. C a r l Freeman a n d J o h n M. Emlen

Table 1 Store locations and the number of

stores per location
XYZ stores
Location per location

Atlanta
Chicago
Dallas
Detroit
Los Angeles
Memphis
Minneapolis
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Philadelphia
Phoenix
San Carlos
St. Louis
Seattle

Because the names of competitors were not identical across all markets,
each store was classified into a category by type of store. T h e categories
for all stores are identified in Table 2. Each of the competitor's dis-
tances from the XYZ store was identified as well as distances to other
XYZ stores in the trade area. T h e greatest number of competitive stores
in any trade area was sixty. T h e number of each type of competitor was
counted within circles of one, three, five and ten mile radii. The radius
used for each type of store was selected using a regression equation and
selecting the distance with the highest regression coefficient (R). This
means all stores within that distance were entered as an independent
variable in the equation. T h e circle radii with the highest regression
coefficients are shown in Table 2.

Table 2 Store categories and circle size

Store categories Circle radius

Catalogue 10 miles
Combo - other 10 miles
Department 1 mile
Discount 1 mile
Grocery 5 miles
Large home centre 1 mile
Small hardware 10 miles
Speciality 10 miles
Variety 10 miles
Other XYZ 5 miles
 Competitive impact model for site selection 253

In using this procedure we are not examining the distance over which
a particular type of store has an effect on sales. Rather, here we are
examining the distance over which stores have their maximum impacts.
So strong competitors will have short distances - causing more damage
when close. Weak competitors will have diffuse effects, and thus greater
distances. One can use other decision rules to establish the size of cir-
cles to be used. We wanted to illustrate how one can establish the
impacts of competitors and so deliberately chose a decision rule which
would maximize these effects. One could have chosen the distance at
which the store had 50 per cent of its maximal impact as an alternative
strategy.
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It is possible to transform the data using this methodology. As an

illustration we have used the natural log of stores commonly found in
malls. Because adding the natural log of two variables is equivalent to
multiplying their linear values the synergistic effect of two or more
stores locating close together can thereby be reflected in the sum of the
logarithms. Such a procedure allows us to evaluate the potential syner-
gistic effect when variables co-occur. The groupings of two or more
department stores into one mall location may profoundly alter the com-
petitive environment of a trade area. The significance of this is clearly
evident by the common procedure of using department stores as mall
anchors.
For the sake of illustration we first analysed our data using sales vol-
ume as the dependent variable in a traditional regression approach. Next
the analysis was conducted using sales volume and the CIM methodol-
ogy described in this article. The results of these two approaches are
presented below.

Sales volume and regression

The results of the multiple regression analysis shown in Table 3 suggest

that sales volume is positively correlated with age and average household
size and negatively correlated with income, education and percentage
white-collar employment. Only the number of small hardware stores
had a significant effect at the p < 0.05 level. The store categories with
negative correlations were catalogue, combination/other, discount and
speciality stores. The use of sales volume and traditional regression
analysis provide little useful input to managerial decision making in this
case, although the fact is that the sales of an XYZ store increase as the
number of hardware stores within five mile radii increases. This may
not be a causal relationship. Judgements cannot be made either about
the competitive effects, retail sales generating affinities, cannibalization
or negative relationships of other retailers within the trade area or about
multiple-shopping-trip relationships.
 254 3. Patrick Kelly, D. Carl Freeman and John M. Emlen

Table 3 Simple correlations with sales volume

Correlation Signficance
coefficient level
Variable R P <

Demographic
Median age
Median household income
Median years of schooling completed
Percent white collar
Store categories
Log, (catalogue stores)
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Log, (combo-other)
Discount at 1 mile
Discount at 3 miles
Log, (departmental)
Log, (grocery-food)
Large home centre
Small hardware
Log, (speciality)
Variety
Note Log, is used because the relationship is not linear and the log, transforma-
tion yielded more significant results

Store sales and the competitive interaction model ( C I M ) methodology

The results of our competitive interaction methodology are shown in

Table 4. In this table we provide the sign and magnitude of each beta,
the magnitude of two standard deviations from the random distribution
of betas for each variable, as well as the mean number of stores of each
category within each concentric circle. Also included is the mean num-
ber of stores experienced by the average dollar of sales. We also report
the standardized beta, which is useful for assessing the relative impact
of the various demographic and store variables.
The only variable not retained by CIM is the natural log of depart-
ment stores. This variable was dropped because its beta did not differ
by more than two standard deviations from the mean beta of the ran-
domized distribution of betas. The most important demographic vari-
able is the average household size (34.49). Increases in household size
have the greatest impact on the sales of an XYZ store. The other demo-
graphic variables are negative and have much smaller effects, but are
none the less significant. The analysis indicates a drop in sales as the
customer base increases in age (-0.41), as household income increases
(-0.07) as the number of years of school completed increases (-1.18) and
percentage white-collar increases (-0.02). Although these demographic
parameters are significant, their effects are less important than the inter-
 Table 4 CIM results
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VariablesX Sign corrected 2 Standard Mean stores Mean stores Standardized

beta deviations per dollar per circle beta

Demographic
Average household size + 1.024 0.086 2.91 2.73 +34.49
Median age -0.114 0.012 30.29 31.50 -0.41
Median household income -0.047 0.004 35.31 35.30 -0.07
Median years of schooling completed -0.093 0.036 12.47 12.58 -1.18
Percent white collar -0.015 0.004 51.50 55.02 -0.02
Store categories g.
XYZ -3.441 2.24 1.27 -21.88 3.
XY Z squared +0.545 6.11 2.78 d
Log, (catalogue stores) -0.307 0.040 0.62 0.52 -6.72 9'
k5
Log, (combo - other) -0.068 0.028 0.37 0.67 -0.1 1
Log, (discount) -0.438 0.084 0.79 0.48 -11.43 3
Log, (grocery - food) -0.425 0.070 0.43 0.57 -13.54 8
Large home centre -0.955 0.076 0.43 0.49 -16.62 2
Small hardware +0.287 0.020 2.45 1.95 +1.66 h
Log, (speciality) +O. 167 0.054 0.60 0.57 +4.15 Y

Variety +0.284 0.014 1.50 1.14 +1.35 2.

2
r z
Note *All variables significant at P < 0.05 Fa
2.
3
 256 3. Patrick Kelly, D. Carl Freeman and John M . Emlen

actions with other retailers as judged by the magnitude of the standard-

ized betas reported in Table 4. In this example, competitive locations
are more important than demographic and psychographic variables in
selecting ne; XYZ store locations.
The negative impact of competition was observed for catalogue, dis-
count, grocery and large home centre stores. Each of these had negative
impact on sales when located within the radius on Table 2. This is
explained from the negative sign on the standardized beta from Table 4.
Large home centres had the greatest negative impact (-16.62) followed
by grocery-food stores (-13.54), discount stores (-11.43) and catalogue
(-6.72).
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Those retailers who act as retail sales generators (affinities) are small
hardware stores, speciality stores and variety stores. These three types
of stores, when located within their circle distance on Table 2, are asso-
ciated with enhanced sales of an XYZ outlet. The beta values for the
sales-generating affinities are smaller than for negative competitors, sug-
gesting that avoidance of competitors may be more important for XYZ
management than attempting to locate close to sales-generating affinities.
Table 4 also indicates the cannibalistic impact of another XYZ store is
the most important to avoid. The greatest negative impact to an XYZ
store is another XYZ store located within 5 miles of an existing XYZ
location (-21 38).
Using CIM, we see that average household size has roughly half the
effect of placing another XYZ store in the same neighbourhood. A clus-
ter of grocery stores, a large home centre, other discount stores or a cat-
alogue store within five miles would be as harmful to an existing XYZ
store as the cannibalistic impact of an additional XYZ.

Conclusion

The use of CIM provides a more sensitive procedure than prior models
used in measuring the impact of competitors for site selection decisions.
Data used in the equation are relatively easy to obtain and can be tai-
lored to a specific retailer's unique set of variables. A diversity of vari-
ables such as gross national product, levels of employment, lay-offs or
any other site-specific parameters can be built into the analysis.
CIM also can be used to identify competitors who are negatively
related to sales as well as those retailers that were associated with a pos-
itive impact on sales. Retailers can determine the impact of existing
competitive stores for a newly proposed site as well as assess the impact
of future competitors for existing locations.
Each retailer who uses CIM would need to identify those variables
most important in determining the success or failure of their individual
store operations. Each different retail store would have a unique set of
 Competitive impact model for site selection 257

variables. CIM allows for this customization in selecting variables. This

article illustrates the successful adaptation of concepts useful to ecolo-
gists by retailers, who can now more precisely measure competitive
impact on a store's success.
This methodology carries with it all of the benefits and problems of
optimality. If firms have not optimally located their outlets, then the
assumptions and thus the conclusions of their study are compromised.
Competitors would appear to have more serious impacts than they really
do. This problem is not unique to our model, but is common among all
optimality models. As applied here, the CIM methodology will yield a
worst case scenario for the effects of competition. By altering the dis-
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tances over which one measures store densities (the size of the concen-
tric circle) one can generate a family of such scenarios. Since the
minimum data required to estimate the competitive effects are the iden-
tities of retail outlets and the distance to target store outlets and the
1 sales volume of the target store outlet, the CIM would appear to pro-
vide a powerful new tool in assessing site locations using data from
existing outlets.
3. Patrick Kelly
Kmart Professor of Marketing
Wayne State University
D. Carl Freeman
Department of Biology
Wayne State University
Detroit
I M I 48202
USA
John M . Emlen
National Fisheries and Research Center
U S Fish and Wildlife Service
Building 204 Naval Support
Seattle
WA 98115
USA

Acknowledgements

The authors express appreciation to the reviewers who provided insight-

ful evaluation during the review process.
 258 3. Patrick Kelly, D. Carl Freeman and John M. Emlen
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