Chapter 6

Market Selection and Retail

Location Analysis
 Learning Objectives

 Explain the criteria used in selecting a target

market.
 Identify the different options, both store-based
and nonstore-based, for effectively reaching a
target market and identify the advantages and
disadvantages of business districts, shopping
centers, and freestanding units as sites for a retail
location.

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 Learning Objectives

 Describe the various factors to consider when

identifying the most attractive geographic market
for a new store.
 Discuss the various attributes to consider when
evaluating retail sites within a retail market.
 Explain how to select the best geographic site for
a store.

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Selecting a Target Market**

 Market segmentation
Target market - Group of customers that the retailer
is seeking to serve.
It is not easy to reach every target market, because
each target market is different from the other.

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. LO 1
 Selecting a Target Market**

 Criteria to successfully reach a target market:

Seek a measurable market segment.
Accessibility or the degree to which the retailer can
target its promotional or distribution efforts to a
particular market segment.
Segment should be substantial or large enough to be
profitable for the retailer.

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. LO 1
 Retail Formats for Accessing Your Target
Market**

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. LO 2
 Location of Store-Based Retailers**
1A. Central business Advantages Disadvantages
district (CBD)
An unplanned shopping  Easy access to public  Inadequate and
area around the transportation. usually expensive
geographic point where all  Wide product parking.
assortment.  Older stores.
public transportation
 Variety in images,  High rents and taxes.
systems converge; it is
prices, and services.  Traffic and delivery
usually in the center of the
 Proximity to congestion.
city and often where the commercial activities.  Potentially high crime
city originated rate.
historically.
 Decaying conditions of
inner cities.

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. LO 2
 Location of Store-Based Retailers**
1B. Secondary business Shopping area that is smaller than the CBD and
district (SBD) that revolves around at least one department or
variety store at a major street intersection.

1C. Neighborhood business Shopping area that evolves to satisfy the

district (NBD) convenience-oriented shopping needs of a
neighborhood; generally contains several small
stores (with the major retailer being a
supermarket or a variety store), and is located on
a major artery of a residential area.

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. LO 2
 Location of Store-Based Retailers**
2. Shopping center Centrally owned or managed shopping district that is
or planned, has balanced tenancy (the stores complement
mall each other in merchandise offerings), and is surrounded by
parking facilities.

Anchor stores Stores in a shopping center that are the most dominant and
are expected to draw customers to the shopping center.

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. LO 2
 Location of Store-Based Retailers**

Advantages of shopping centres Disadvantages of shopping centres

 Heavy traffic resulting from the  Inflexible store hours

wide range of product offerings  High rents
 Cooperative planning and sharing  Restrictions as to what merchandise or
of common costs services the retailer may sell
 Access to highways and available  Inflexible operations and required
parking membership in the center’s merchant
 Lower crime rate organization
 Clean and neat environment  Potentially too much competition and
much of the traffic is not interested in a
particular product offering
 An anchor tenant’s dominance of the
smaller stores

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. LO 2
 Location of Store-Based Retailers**
3. Freestanding Advantages Disadvantages
retailer
Locates along  Lack of direct  Lack of drawing power from
major traffic competition complementary stores
arteries and does  Lower rents  Difficulties in attracting
not have any  Freedom in operations customers for the initial visit
adjacent retailers to and hours  Higher advertising and
share traffic. promotional costs
 Facilities that can be
adapted to individual  Operating costs cannot be shared
needs with others
 Inexpensive parking  Stores may have to be built rather
than rented
 Zoning laws may restrict some
activities
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. LO 2
 Location of Store-Based Retailers**
3. Nontraditional Advantages Disadvantages
locations
Locations such as  Greater convenience  Lack of drawing power from
airports, college complementary stores
campuses, truck
and travel stops
(along highways),
franchises space in
gas stations,
hospitals, hotels
etc, and service
retailers (plumbers,
house painters,
lawn-care
providers)
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. LO 2
 Selecting a Retail Location**

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. LO 4
 Market Identification**

1. Retail location theories

2. Market demand potential
3. Market supply factors

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. LO 4
 Retail Location Theories**

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. LO 4
 Retail Location Theories**
1. Retail gravity theory
1. Retail gravity Suggests that there are underlying consistencies
theory in shopping behavior that yield to mathematical
analysis and prediction based on the notion or
concept of gravity.
Reilly’s law of retail Based on Newtonian gravitational principles,
gravitation explains how large urbanized areas attract
customers from smaller rural communities.
Point of indifference Is the breaking point between two cities where
customers are indifferent to shopping in either
city.

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. LO 4
 Retail Location Theories**
1. Retail gravity theory
 Assumptions of the retail gravity theory
The two competing cities are equally accessible from
the major road.
Population is a good indicator of the differences in the
goods and services available in different cities.

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. LO 4
 Retail Location Theories**
1. Retail gravity theory
 Limitations of the retail gravity theory
City population does not always reflect the available
shopping facilities.
Distance is measured in miles, not the time involved
for the consumer to travel that distance or the
consumer’s perception of that distance or time
involved.

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. LO 4
 Retail Location Theories**
1. Retail gravity theory
 Factors that the retail gravity theory fails to
consider:
Perceived differences between local and other trading
centers
Variety-seeking behavior
Medical services or entertainment facilities

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. LO 4
 Retail Location Theories**
2. Saturation theory
 Saturation theory
Examines how the demand for goods and services of a
potential trading area is being served by current retail
establishments in comparison with other potential
markets.
This analysis produces three outcomes:
Retail store saturation
Understored
Overstored

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. LO 4
 Retail Location Theories**
2. Saturation theory
Retail store There are just enough store facilities for a given type of store to
saturation efficiently and satisfactorily serve the population and yield a
fair profit to the owners.
Understored The number of stores in relation to households is relatively low
so that engaging in retailing is an attractive economic endeavor.
Overstored Where the number of stores in relation to households is so large
that to engage in retailing is usually unprofitable or marginally
profitable.

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. LO 4
 Retail Location Theories**
3. Buying power index
 Buying power index (BPI) - An indicator of a
market’s overall retail potential and is composed
of weighted measures of effective buying income,
retail sales, and population size.

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. LO 4
 Market demand potentials**

 Major components of market demand potential

are:
 Population characteristics
 Buyer behavior characteristics
 Household income
 Household age profile
 Household composition
 Community life cycle
 Population density
 Mobility
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. LO 4
 Market Supply Factors

 Square feet per store

 Square feet per employee
 Growth in stores
 Quality of competition

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. LO 4
 Site Analysis

 An evaluation of the density of demand and

supply within each market with the goal of
identifying the best retail site(s).
 Description of trading area
Retailers can access, at a relatively low cost,
information concerning the trading area for various
retail locations and the buyer behavior of the trading
area.

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. LO 5
 Site Analysis

 Size of trading areas

William Applebaum designed a technique specifically
for determining and evaluating trading areas for an
individual store, which was based on customer
spottings.
It is relatively easy to define the trading area of an
existing store, as compared to a new store.

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. LO 5
 Site Analysis
 Demand density - The extent to which the potential
demand for the retailer’s goods and services is
concentrated in certain census tracts, ZIP code areas, or
parts of the community.
 To determine the extent of demand density, retailers need
to identify the major variables influencing their potential
demand, which can be examined by the types of
customers who already shop in the retailer’s present
stores.
 Supply density - The extent to which retailers are
concentrated in different areas of the market under
question.

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. LO 5
 Demand Density Map

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. LO 5
 Store Density and Site Availability Map
(Supply Density Map)

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. LO 5
 Site Analysis

 Site availability
Eminent domain law - The inherent power of the
government to seize private property without the
owner’s consent in order to benefit the community.
A map should be constructed of available sites in each
community being analyzed.

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. LO 5
 Checklist for Site Evaluations

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. LO 5
 Checklist for Site Evaluations

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. LO 5
 Checklist for Site Evaluations

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. LO 5
 Checklist for Site Evaluations

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. LO 5
 Checklist for Site Evaluations

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. LO 5
 Site Selection

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. LO 6
 Site Selection

 100 percent location - When there is no better

use for a site than the retail store that is being
planned for that site.
 The traffic that passes a site, whether it is
vehicular or pedestrian, can be an important
determinant of the potential sales at that site.

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. LO 6
 1. Nature of Site
A. Traffic characteristics
 Two traffic-related aspects of the site should be
evaluated.
Availability of sufficient parking, either at the site or
nearby.
Whether direction of traffic is relative to the shopping
area.

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. LO 6
 1. Nature of Site
B. Type of neighbors
 Type of neighbors
A good neighboring business will be one that is
compatible with the retailer’s line of trade.
Research has found that retailers experience a benefit
from store compatibility.
Store compatibility - Exists when two similar retail
businesses locate next to or nearby each other and they
realize a sales volume greater than what they would
have achieved if they were located apart from each
other.
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. LO 6
 1. Nature of Site
B. Type of neighbors
 Type of neighbors
Retail clusters - Groups of stores closely located that
share similar characteristics.
The major benefit of clustering is twofold for
customers.
Once potential customers identify a need for a line of
merchandise or service, they don’t need to decide on the
specific store to visit; they just need to decide to travel to the
retail cluster.
It allows customers to walk from store to store, comparing
prices, products, and service.

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. LO 6
 2. Terms of Purchase or Lease

 The retailer should review:

Length of lease
Exclusivity clause
Guaranteed traffic rate
Anchor clause

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. LO 6
 3. Expected Profitability

 The final step in site-selection analysis is

construction of a pro forma (expected) return-on-
asset model for each possible site.
The return-on-asset model comprises of net profit
margin, asset turnover, and return on assets.

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. LO 6