Athol Furniture Inc.

Case Analysis
by Huff’s Location Model

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 Q. 1.

Utilizing a spreadsheet version of the Huff location model (with = 1.0), recommend a store
size and location for AFI that will maximize expected net operating profit before taxes.
Assuming that AFI does not wish to consider a store smaller than 10,000 square feet, assess
the store sizes (based on increments of 5,000 square feet) up to the maximum allowable sales
area for each potential site.

Ans. 1

Using the Excel spreadsheet HUFF Model for Retail Location, the results shown below
indicate that a 15,000 sq. ft. “annual profit” of $23,393 m. store at Y location maximizes the
expected net operating profit before taxes.

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 HUFF MODEL FOR RETAIL LOCATION

PROFIT MARGINS
---------------
SIZE MARGI
N
10000 0.039
15000 0.036
20000 0.029

PROFIT CALCULATIONS ; LAMBDA = 1

MARGIN
BEFORE ANNUAL MARKET
PROPOSED | SIZE TAXES PROFIT SHARE
SITE | ------- | ------- ------- ------- -------
A | 10000 | 0.039 21127 0.327
B | 15000 | 0.036 40144 0.673

X | 10000 | 0.039 18521 0.2866

X | 15000 | 0.036 21867 0.3666
Y | 10000 | 0.039 19683 0.3046
Y | 15000 | 0.036 23393 0.3922
Y | 20000 | 0.029 22055 0.459
Z | 10000 | 0.039 16748 0.2592

Head to head comparisons

A | 10000 | 0.039 16275 25.19%
B | 15000 | 0.036 27527 46.15%
X | 10000 | 0.039 18521 28.66%

A | 10000 | 0.039 14752 22.83%

B | 15000 | 0.036 24162 40.51%
X | 15000 | 0.036 21867 36.66%

A | 10000 | 0.039 15587 24.12%

B | 15000 | 0.036 27088 45.42%
Y | 10000 | 0.039 19683 30.46%

A | 10000 | 0.039 13859 21.45%

B | 15000 | 0.036 23459 39.33%
Y | 15000 | 0.036 23393 39.22%

A | 10000 | 0.039 12497 19.34%

B | 15000 | 0.036 20732 34.76%
Y | 20000 | 0.029 22055 45.90%

A | 10000 | 0.039 14801 22.91%

B | 15000 | 0.036 30523 51.17%
Z | 10000 | 0.039 16748 25.92%

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 Q. 2.

What is the expected annual net operating profit before taxes and market share for the outlet
you have recommended? Defend your recommendation.

Ans.2

Although a 15,000 sq. ft. store at site Y yields an expected annual net operating profit of
$23,393, a 20,000 sq. ft. store at the site would maximize the market share at 45.9 percent.
With the larger store the market share of the competition is severely eroded (refer above head
to head comparison). Store A with a 10% loss in market share (33% to 23%) will probably
not survive. Furthermore, with store B and Athol located in close proximity the effect of
clustering will draw even more customers to shop from both stores simultaneously.

Q. 3

Try two other values of (e.g., 0.5 and 5.0) to measure the sensitivity of customer travel
propensity on your recommended location.

Ans. 3

Store Size Max Store Size Max Market

Profit Share
0.5 Y 15,000 $23,122 Y 20,000 46%
5.0 Y 15,000 $22,450 Y 20,000 41%

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 Q. 4

Briefly state any shortcomings you may perceive in this model.

Ans. 4

(a) Size may not be an adequate approximation of the attractiveness of a furniture store.
Other qualitative aspects such as perceived quality of the furniture, friendliness of the sales
staff, and the customer's loyalty to an existing store may confound the size variable.

(b) At first glance, a long travel time to the store may be seen as a disincentive to visit a
furniture store. To counteract such a disincentive, furniture stores can emulate automobile
dealers. This strategy of locating all or most dealers in one area is effective in drawing many
customers from great distances away.

(c) Other factors, most of that are not quantifiable, may also alter a customer's perception of
the utility of the shopping center. For example, consider the effect of an established firm's
reputation or the lure of a new store. The visibility of a store and the nature of adjoining
stores or neighborhoods may also influence the store's ability to attract customers, but these
factors are not easily measured.

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