MKT3351

CHAPTER 9
Retailing and Distribution Management

Retail Site
Location
McGraw-Hill/Irwin

CHAPTER 09
Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
 Learning Objectives
Learning Objective 9-1 Summarize the factors considered in
locating multiple stores.
Learning Objective 9-2 Review the characteristics of a
particular site.
Learning Objective 9-3 Understand how retailers analyze the
trade area for a site.
Learning Objective 9-4 Determine the forecasted sales for a
new store location.
Learning Objective 9-5 Illustrate the site selection process.
Learning Objective 9-6 Explain the different types and terms of
leases.

©McGraw-Hill Education.
 Questions CHAPTER 9
2
1

• What factors do retailers consider when determining where

to locate their stores?
• What is a trade area for a store, and how do retailers
determine the trade area?
• What factors do retailers consider when deciding on a
particular site?
• How do retailers forecast sales for new store locations?
• Where can retailers get information to evaluate potential
store locations?
• What issues are involved in negotiating leases?
9-3
 Retail Site Location
This chapter takes a close look at how retailers choose
specific sites.

 Evaluating Areas for Locations and Determining

the number of stores in an area

 Evaluating Specific Sites

 Defining Trading Areas

 Estimating Potential Sales for a Store Site

 An Example of Site Selection

 Negotiating a Lease
©McGraw-Hill Education.
 Evaluating Areas for Locations and Determining
the Number of Stores in an Area 1 of 3

Areas to be analyzed and considered:

Metropolitan Statistical Area (MSA)

• A core urban area with 50,000 or more inhabitants
• Consumers tend to shop within MSA

Micropolitan Statistical Area (μSA) – somewhat

removed from larger cities, often by up to 100 miles
 Lack big cities’ pull and economic significance
 with a population of at least 10,000 but fewer than
50,000 people

©McGraw-Hill Education.
 https://www.census2011.gov.hk/en/constituency-area.html

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 CHAPTER 8
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 Evaluating Areas for Locations and Determining
the Number of Stores in an Area 2 of 3
Considerations in Evaluating Store Locations
1. Economic
 Population and employment growth levels (plus labor,
wages, etc.)
2. Competition
3. Strategic fit
 Right demographic and lifestyle fit
4. Operating costs
 Proximity of area
 Local and state regulations

©McGraw-Hill Education.
 EXHIBIT 9-1 Factors Affecting the Attractiveness of an
Area for Locating Stores

©McGraw-Hill Education.
1. Economic Conditions CHAPTER 9
2
1

• The growth of population and employment

• How long the growth will continue, and how it will affect
demand for merchandise sold in its stores
• Which areas growing quickly and why

9-10
2. Competition CHAPTER 9
2
1

• Some retailers are

going urban:
 Lack of competition
 High level of
disposable income ThreeSixty in Landmark

 Large, untapped
labor force

Godiva in ifc
9-11
3. Strategic Fit CHAPTER 9
2
1

• Demographic, lifestyle profile, size and composition

of households in an area
IKEA – young married couples
McDonald’s –
working adults/ families with kids

Flagship Store in Sha Tin, 84,000 sq. ft.

Yee Woo Street in Causeway
9-12
 CHAPTER 8
2
1

City’super located at ifc mall targeting at professionals and executives

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Bauhaus and 5cm in Tuen Mun Town
Plaza targeting at Teenagers
CHAPTER 9
2
1

9-14
4. Operating Costs CHAPTER 9
2
1

• Vary across different areas

• Affected by proximity of
area considered vs. other
areas where retailer
operates

• Local/state legal and

regulatory environment
has effect on operating
costs
9-15
 Evaluating Areas for Locations and Determining
the Number of Stores in an Area 3 of 3
Number of Stores in an Area
Once an area is selected, then decide how many stores
to operate in that area. Need to consider:
• Economies of Scale from Multiple Stores
• Cannibalization
• Diminishing returns when too many stores in an area
• Marginal revenues must be greater than marginal costs
(for opening a new store)
• May have an exclusive territory agreement for
franchising in order to diminish cannibalization

©McGraw-Hill Education.
 EXHIBIT 9-2 Location of Customers Patronizing a
Retailer’s Store

© McGraw Hill LLC Source: Environmental Systems Research Institute (ESRI)

 Evaluating a Site for Locating a Retail Store

When evaluating and selecting a specific

site, retailers consider three factors:
1. The characteristic of the site
2. The characteristic of the trading area
3. The estimated potential sales that can be
generated

©McGraw-Hill Education.
 Evaluating a Site for Locating a Retail Store

Site Characteristics
• Traffic flow and accessibility
• Natural barriers
• Artificial barriers
• Parking
• Congestion
• Visibility
• Adjacent tenants
• Cumulative attraction
• Restrictions and costs

©McGraw-Hill Education.
Site Characteristics CHAPTER 9
2
1

9-20
Traffic Flow and Accessibility CHAPTER 9
2
1

• (1) The degree to which customers can

easily get into and out of a retail site;
• (2) Ability of the retailer to deliver the
appropriate retail mix to customers in
the segment.
• When traffic is greater, more customers
shop
• Good for convenience retailers
• Not necessary for destination retailers
• Too much can impede access to store
• Accessibility to store is as important as
traffic flow
9-21
 Traffic Flow

Airports are an
appealing
location for
some retailers
because there
are lots of
potential
customers with
time to shop.

©McGraw-Hill Education.
Convenience of
Going to Site Accessibility
CHAPTER 9
2
1

• Road pattern and condition

• Natural and artificial
barriers
• Visibility
• Traffic flow
• Parking
• Congestion
• Ingress (in, entrance)
/egress (out, exit)
9-23
What Should Retailers Consider
Regarding Parking?
CHAPTER 9
2
1

• Observe shopping center at

various times
• Employee parking
availability
• Shoppers that use cars
• Parking by non-shoppers
• Typical length of
a shopping trip

ParknShop in Baquio Villa

9-24
Visibility CHAPTER 9
2
1

• Refers to customers’ ability to see the store from

the street.

• Good visibility may be less important for stores

with a well-established and loyal customer base.

9-25
Adjacent Tenants CHAPTER 9
2
1

• Complementary (also competing) adjacent retailers

build traffic

• In Hong Kong, what other retailers would Kai Bo Food

Supermarket want to be located near?
• Japan Home Centre, Pricerite, or Direct Sales Center
• All target price-sensitive consumers

9-26
Adjacent Tenants CHAPTER 9
2
1

• In an enclosed mall, what retailers would Abercrombie

& Fitch want to be located near?
American Eagle Outfitter, Marks & Spenser, Body
Shop, Electronic Boutique?
• Principle of Cumulative Attractiveness
• G2000, Bossini and Giordano (selling similar products)
tend to locate close to each other!

9-27
Restrictions and Costs CHAPTER 9
2
1

• Restrictions
 Signage
 Tenant Mix
 Operating hours
• Costs
 Rent
 Common Area Maintenance Fee/Insurance
 Advertising Fee

9-28
 Evaluating a Site for Locating a Retail Store

Locations within a Shopping Center

• Affects both sales and occupancy costs.
• Strip shopping center – closest to the supermarket
more expensive as more foot traffic
• Enclosed shopping mall – retailers who sell
comparison shopping goods locate close to the
department store anchors
• Locate stores that appeal to similar target markets
• Principle of cumulative attraction

©McGraw-Hill Education.
 Principle of Cumulative Attraction

Based on the principle

of cumulative attraction,
stores selling similar
merchandise to similar
target markets, such as
Rolex and Piaget,
should locate in close
proximity to one
another to increase the
appeal of the location
to its customers.

©McGraw-Hill Education.
 Defining Trade Areas 1 of 6
Characteristics of the Trading Area for a Store Site
1). Trade Area Definition
- a contiguous or connected area that accounts for the
majority of a store’s sales and customers

3 trade area zones:

a. Primary trading area
 50-70% of customers
b. Secondary trading area
 20-30% percent of a store’s sales
c. Tertiary trading area or fringe trading area
 Customers who come from widely dispersed areas, might
travel long distances
©McGraw-Hill Education.
 EXHIBIT 9-3 Zones In a Trade Area

© McGraw Hill LLC Source: ESRI

 Defining Trade Areas 2 of 6

2). Factors Affecting the Size of the Trade Area

• Accessibility
• Natural & physical barriers
• Competition
• Nature of merchandise
• Assortment offered
• Location of alternative sources

©McGraw-Hill Education.
 Defining Trade Areas 3 of 6

3). Measuring the Trade Area for a Retail Site

• Customer spotting (process of locating the residences of
customers for a store on a map)

4). Sources of Information about Trade Areas

(a) Demographic data from the Census Bureau
• Census every ten years
• Census blocks
• Block group (a geographical unit used by the US)

Each household in the country is counted to determine the number

of persons per household, household relationships, sex, race, age
and marital status.
©McGraw-Hill Education.
 Defining Trade Areas 4 of 6

4). (b) Geographic Information System (GIS) Supplier

GIS – a system of hardware and software used to store,
retrieve, map and analyze geographic data along with
the operating personnel and the data that goes into the
system.

• Coordinate system (latitude and longitude)

• Spatial features (rivers and roads)

©McGraw-Hill Education.
 EXHIBIT 9-4 GIS Map for the Trade Area of a Bank

© McGraw Hill LLC Source: ESRI

Geographic Information System (GIS) CHAPTER 9
2
1

• GIS – Offers a market segmentation system that uses

both geographic and demographic characteristics to
classify consumers.
• Some firms offer services combine GIS with updated
census data, consumer spending patterns and
lifestyles
• ESRI (www.esri.com)
• Claritas (www.claritas.com)
• MapInfo (www. mapinfo.com)

9-37
 Exhibit 9-5 Information Provided by GIS Report

Gender. Occupation.
Income. Travel time to work.
Disposable Income. Transportation mode to work.
Net worth. Household composition.
Education. Household expenditures by NAICS
categories.
Age.
Geodemographic market segment.
Race/ethnicity.
Market potential index.
Employment status.
Spending potential index.

© McGraw Hill LLC

 EXHIBIT 9-6 GIS Data for Retail
Expenditures In a Trade Area

39

© McGraw Hill LLC Source: ESRI

 Defining Trade Areas 5 of 6

Sources of Information about Trade Areas (cont’d)

4). (c) Tapestry Segmentation
• Classifies all U.S. residential neighborhoods into
67 distinctive segments based on demographic
and socioeconomic characteristics
• https://clermontcountyohio.biz/wp-content/uploads/sites/3/esrita
pestrysegmentation.pdf

(d) Spending Potential Index

• Compares local average expenditure to national
average

©McGraw-Hill Education.
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Tapestry Segment Example: Metro Renters CHAPTER 9
2
1

• Young – 20’s
• Well educated
• Professional
• Large cities
• Median income
$50,000
• Spend on themselves
• Surf Internet

9-42
 EXHIBIT 9-7 Location of Target Customers In a
Shopping Center Trade Area

Green -
primary
trade area

Lavender
- secondary
trade area

Bluish
green -
tertiary
trade area
Note: Not desirable location for the shopping center (if not
©McGraw-Hill Education.
within primary or secondary trade area)
 Defining Trade Areas 6 of 6

5). Competition in the Trade Area

• Amount and Type of Competition

• Sources for Measuring Competition

• The Internet – lists current locations and future sites.
• Yellow Pages – Openrice, TripAdvisor etc.
• Other Sources

©McGraw-Hill Education.
 Free Shuttle Bus to reach more customers, CHAPTER 8
2
1
enhancing the trade area

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 Evaluating a Site for Locating a Retail Store

Estimating Potential Sales for a Store Site

a) Regression Analysis
• Factors that affect existing stores will have same impact on
stores being considered for new sites
• Statistical model predicts sales at existing locations

b) Analog Approach
• Used by small chains
• Retailer describes site and trade area for successful store and
tries to find a site that is similar

©McGraw-Hill Education.
 Regression Model for Estimating Store Sales

Regression Model Example (a chain of sporting

goods stores):

Stores sales = 275 (weight factor) x number of households in

trade area (15 minute drive time) PLUS
+ 1,800,000 x percent of household in trade with children under 15.
+ 2,000,000 x percent of households in trade area in Tapestry
segment “aspiring young.”
+ 8 x shopping center square feet.
+ 250,000 if visible from street.
+ 300,000 if Walmart (an anchor) in center.

©McGraw-Hill Education.
 Application of Regression Model

Target market of the sporting goods stores:

families with children under 15, and in the Aspiring Young Tapestry segment

©McGraw-Hill Education.
 Application of Regression Model

Store Sales at location A = Store Sales for location B =

$7,635,000 $6,685,000
= 275 × 11,000 = 275 × 15,000
+ 1,800,000 × 0.7 + 1,800,000 × 0.2
+ 200,000 × 0.6 + 2,000,000 × 0.1
+ 8 × 200,000 + 8 × 250,000
+ 250,000 × 1 + 250,000 × 0
+ 300,000 × 1 + 300,000 × 0

Conclusion:
Location “A” has greater forecasted sales.
©McGraw-Hill Education.
 ILLUSTRATION OF SITE SELECTION
EDWARD BEINER PURVEYOR OF FINE EYEWEAR 1 of 5

Using the “analog approach”

(less data, more subjective) to
evaluate potential sites
1. Conduct a competitive analysis.
2. Define present trade area.
3. Analyze trade area
characteristics.
4. Match characteristics of present
trade area with potential sites.

Example: Edward Beiner, 12-store retailer

selling upper-end, high-fashion eyewear
©McGraw-Hill Education.
Edward Beiner Optical CHAPTER 9
2
1
An upscale high fashion eyewear shop

Task:
Finding a
location for
a New Store

9-52
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 EXHIBIT 9-8 Competitive Analysis of Potential Locations
Edward Beiner Company
(4) (5) (6) Trade (7) (8)
(1) (2) (3) Total Estimated Area Trade Area Relative Level
Trade Eyeglasses/ Trade Area Eyeglasses Eyeglasses Potential Potential of
Area Year/Person Population Potential Sold Units Percentage Competition
= (2) x (3) = (4) - (5) = (6) / (4)

South
0.2 85,979   17,196   7,550 9,646  56.09% Low
Miami

Site A 0.2  91,683 18,337 15,800 2,537  13.83% Medium

Site B 0.2 101,972 20,394 12,580   7,814 38.32% Low

Site C 0.2 60,200 12,040  11,300     740    6.15% High

Site D 0.2  81,390 16,278 13,300 2,978 18.29% Medium

Current location: South Miami -- lacks entertainment and recreation in the

©McGraw-Hill Education. shopping centers, but low rent, high pedestrian traffic
 ILLUSTRATION OF SITE SELECTION
EDWARD BEINER PURVEYOR OF FINE EYEWEAR 2 of 5

Step 1: Conduct Competitive Analysis

• On the basis of the information in Exhibit 8–8,
Edward Beiner should locate its new store at site B.
The trade area potential is high and competition is
relatively low.
• However, relative competition is only one issue to
consider.

©McGraw-Hill Education.
 EXHIBIT 9-8 Competitive Analysis of Potential Locations
Edward Beiner Company
(4) (5) (6) Trade (7) (8)
(1) (2) (3) = (2) x (3) Estimated Area Trade Area Relative Level
Trade Eyeglasses/ Trade Area Total Eyeglasses Potential Potential of
Area Year/Person Population Eyeglasses Sold Units Percentage Competition
Potential = (4) - (5) = (6) / (4)
(Current store)
South
0.2 85,979   17,196   7,550 9,646  56.09% Low
Miami

Site A 0.2  91,683 18,337 15,800 2,537  13.83% Medium

(? New store)
Site B 0.2 101,972 20,394 12,580   7,814 38.32% Low

Site C 0.2 60,200 12,040  11,300     740    6.15% High

Site D 0.2  81,390 16,278 13,300 2,978 18.29% Medium

Current location: South Miami -- lacks entertainment and recreation in the

©McGraw-Hill Education. shopping centers, but low rent, high pedestrian traffic
 ILLUSTRATION OF SITE SELECTION
EDWARD BEINER PURVEYOR OF FINE EYEWEAR 3 of 5

Step 2: Define Present Trade Area

• The zones are based on drive times: 5 minutes for
the primary trade area (red), 10 minutes for the
secondary trade area (purple), and 20 minutes for
the tertiary trade area (green).
• Not only do the north–south highways bring traffic to
the area, but heavy traffic often makes them difficult
to cross. Biscayne Bay also limits the trade area on
the east.
• Edward Beiner’s trade area – limited on the south
by a large regional shopping center, with several
competitors.
©McGraw-Hill Education.
 EXHIBIT 9-9 Trade Area for Edward Beiner Purveyor
of Fine Eyewear

Red -
primary
trade area,
5-min drive

Purple –
secondary
trade area,
10-min
drive

green -tertiary
trade area,
20-min drive

©McGraw-Hill Education.
With the use of GIS software
 ILLUSTRATION OF SITE SELECTION
EDWARD BEINER PURVEYOR OF FINE EYEWEAR 4 of 5

Step 3: Analyze Trade Area Characteristics

• Average household income $92,653
• 3-mile ring around Edward Beiner is very affluent
• Population more than 50 percent Hispanic

©McGraw-Hill Education.
 ILLUSTRATION OF SITE SELECTION
EDWARD BEINER PURVEYOR OF FINE EYEWEAR 5 of 5

Step 4: Match Characteristics of Present Trade

Area with Potential Sites
• Edward Beiner current trade area:
 High income
 White-collar occupations
 Large percentage of older residents
 Upscale geodemographic segments
 Relatively low competition

©McGraw-Hill Education.
 EXHIBIT 9-10 Four Potential Locations for a New Store

Average Percentage Predominant

Store Household White-Collar Residents Age Geographic Level of
Location Income Occupations 45 and Over Segments Competition
Edward $100,000 High 37% Top One Low
Beiner Percent
Optical
Site A 60,000 High 25% Young Medium
Immigrant
Families
Site B 70,000 Low 80% Gray Power Low
Site C 100,000 High 30% Young Literati High
Site D 120,000 High 50% Upper-Income Medium
Empty-Nesters

Which one is the best location for Edward Beiner?

©McGraw-Hill Education.
 Negotiating a Lease

Types of Leases
• Percentage Leases (rent is based on a percentage of
sales)
Percentage lease with a specified maximum
Percentage lease with a specified minimum
Sliding scale lease

• Fixed-Rate Leases
Graduated lease

©McGraw-Hill Education.
Variations of Percentage Leases CHAPTER 9
2
1

• Percentage lease with specified maximum - percentage

of sales up to a maximum amount.

• Percentage lease with specified minimum - retailer must

pay a minimum rent no matter how low sales are.

• Sliding scale lease - percentage of sales as rent

decreases as sales go up (rewarding high-performing
retailers)

9-63
Fixed Rate Leases CHAPTER 9
2
1

• Fixed Rate Leases - used by community and

neighborhood centers.
• Retailer pays a fixed amount per month over the life of
the lease.
• Not as popular as percentage leases
• Graduated Lease - a variation of the fixed rate lease
• Rent increases by a fixed amount over a specified period of
time. (e.g., due to market conditions or an increase in the
value of the leased property.)

9-64
 Negotiating a Lease

Terms of the Lease

• Co-tenancy Clause
• Certain percentage of shopping center be leased to specified
stores (views as complements)
• Prohibited-use Clause
• Limits center from leasing to certain kinds of tenants

• Exclusive-use Clause
• Prohibits center from leasing to tenants that sell competing
products
• No outparcels (Note: An outparcel is a building or kiosk that sits
in the parking lot of a shopping center but is not attached to the
center)
©McGraw-Hill Education.
 Negotiating a Lease

Terms of the Lease cont’d

• Common Area Maintenance Costs
• Involve extensive negotiations
• Assign responsibility for taking care of common
areas
• Might include
 Contributions for capital improvements
 Paying for new roof
 Participate in purchase of adjoining land parcels

©McGraw-Hill Education.
CASE 26 – Hutch: Locating a New Store

Synopsis:
This case deals with a large chain of popularly priced women's
apparel stores that are generally located in small towns in the
Southeast, Midwest, and eastern fringe of the Southwest. The
company strategy is to sell to women between the ages of 18 and
40 who are in the lower-middle to middle-income range.

The principal issue is which of two available locations the

manager should choose as the location for the next store.
The manager is given information on the demographics, lifestyles,
and income of the populations for the trade areas of the proposed
locations. He is also provided with environmental information and
descriptions of each center's characteristics.
 CHAPTER 8
2
1

Dalton

Hinesville

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CASE 26 – Hutch: Locating a New Store
CHAPTER 9
2
1

9-69
Hutch Fashions
+
Hutch Extra
(selling large and
half-size apparel)

as a single
entity;

though two
separate frontal
areas
CASE 26 – Hutch: Locating a New Store

Which location? Dalton vs Hinesville