Trading-Area Analysis and Site Selection PDF

Trading-Area Analysis ===================== **THE IMPORTANCE OF LOCATION TO A RETAILER** Location decisions are complex. Costs can be quite high, there is little flexibility once a site is chosen, and locational attributes have a big impact on a strategy. **Firm moving from to another locale face...

Trading-Area Analysis ===================== **THE IMPORTANCE OF LOCATION TO A RETAILER** Location decisions are complex. Costs can be quite high, there is little flexibility once a site is chosen, and locational attributes have a big impact on a strategy. **Firm moving from to another locale faces three potential problems.** 1. Some loyal shoppers and employees may be lost; the greater the distance between the old and new sites, the bigger the loss. 2. A new site may not have the same traits as the prior one. 3. Most store fixtures and renovations at a site cannot be transferred; **Store location affects long- and short-run planning** 1. In the *long run*, the choice of location influences the overall strategy. 2. In the *short run*, a location has an impact on specific elements of a strategy mix. **Retailers should follow these four steps in choosing a store location:** 1. Evaluate alternate geographic (trading) areas in terms of the characteristics of residents and existing retailers. 2. Determine whether to locate as an isolated store in an unplanned business district or in a planned shopping center within the geographic area. 3. Select the general isolated store, unplanned business district, or planned shopping center location. 4. Analyze alternate sites contained in the specified retail location type. TRADING-AREA ANALYSIS ===================== **[Trading Area]** is a geographical area containing the customers and potential customers of a particular retailer or group of retailers for specific goods and/or services. The Size and Shape of Trading Areas ----------------------------------- A. The **primary trading area** encompasses 50 to 80 percent of a store's customers. It is the area closest to the store and possesses the highest density of customers to population and the highest per capita sales. There is little overlap with other trading areas. B. The **secondary trading** **area** contains an additional 15 to 25 percent of a store's customers. It is located outside the primary area, and customers are more widely dispersed. C. The **fringe trading area** includes all the remaining customers, and they are the most widely dispersed. ***WHEN ONE STORE HAS A BETTER ASSORTMENT, PROMOTES MORE, AND/OR CREATES A STRONGER IMAGE, IT MAY THEN BECOME A [DESTINATION STORE] AND GENERATE A TRADING AREA MUCH LARGER THAN THAT OF A COMPETITOR WITH A "ME-TOO" APPEAL**.* ***A [PARASITE STORE] DOES NOT CREATE ITS OWN TRAFFIC AND HAS NO REAL TRADING AREA OF ITS OWN. IT DEPENDS ON PEOPLE WHO ARE DRAWN TO THE LOCATION FOR OTHER REASONS.*** Delineating the Trading Area of an Existing Store ================================================= **The size, shape, and characteristics of the trading area for an existing store---or shopping district or shopping center---can usually be delineated quite accurately.** **[Store records (secondary data)] or a [special research study (primary data)] can measure the trading area. And many firms offer computer-generated maps that can be tailored to individual retailers' needs.** Delineating the Trading Area of a New Store =========================================== **[Trend analysis---]**projecting the future based on the past---can be used by examining government and other data for predictions about population location, auto registrations, new housing starts, mass transportation, highways, zoning, and so on. **Three computerized trading-area models are available for assessing new store locations:** 1. An **analog model** is the simplest and most popular trading-area analysis tool. Potential sales for a new store are estimated on the basis of revenues for similar stores in existing areas, the competition at a prospective location, the new store's expected market share at that location, and the size and density of the location's primary trading area. 2. A **regression model** uses a series of mathematical equations showing the association between potential store sales and several independent variables at each location, such as population size, average income, the number of households, nearby competitors, transportation barriers, and traffic patterns. 3. A **gravity model** is based on the premise that people are drawn to stores that are closer more attractive than competitors' stores. The distance between consumers and competitors, the distance from consumers to a given site, and store image can be included in this model. **More specific methods for delineating new trading areas** **REILLY'S LAW** The traditional means of trading-area delineation is **Reilly's law of retail gravitation**. It establishes a point of indifference between two cities or communities, so the trading area of each can be determined. According to Reilly's law, more people go to a larger city or community because there are more stores; the assortment makes travel time worthwhile. Reilly's law rests on these assumptions: **[Two competing areas are equally accessible]** from a major road, and retailers in the two areas are equally effective. **Reilly's law has three limitations:** 1. Distance is measured only by major thoroughfares; some people will travel shorter distances along streets that cross major thoroughfares. 2. Travel time does not necessarily reflect the distance traveled. Many people are more concerned about time than distance. 3. Actual distance may not correspond with the perceptions of distance. **HUFF'S LAW Huff's law of shopper attraction** delineates trading areas on the basis of the product assortment (of the items desired by the consumer) carried at various shopping locations, travel times from the shopper's home to alternative locations, and the sensitivity of the kind of shopping to travel time. CHARACTERISTICS OF TRADING AREAS ================================ **Characteristics of the Population** Knowledge about population attributes can be gained from secondary sources. They offer data on population size, households, income distribution, education, age distribution, and more. **ECONOMIC BASE CHARACTERISTICS** The economic base reflects a community's commercial and industrial infrastructure and residents' sources of income. A firm seeking stability normally prefers an area with a diversified economic base (a large number of nonrelated industries) to one with an economic base keyed to a single major industry. The latter area is more affected by a strike, declining demand for an industry, and cyclical fluctuations. **The Nature of Competition and the Level of Saturation** Site Selection ============== **TYPES OF LOCATIONS** There are three different location types: **isolated store**, **unplanned business district**, and **planned shopping center**. **The Isolated Store** An **isolated store** is a freestanding retail outlet located on either a highway or a street. There are no adjacent retailers with which this type of store shares traffic. **The Unplanned Business District** An **unplanned business district** is a type of retail location where two or more stores situate together (or in close proximity) in such a way that the total arrangement or mix of stores is not due to prior long-range planning. **CENTRAL BUSINESS DISTRICT** A **central business district (CBD)** is the hub of retailing in a city. It is synonymous with the term *downtown.* **SECONDARY BUSINESS DISTRICT** A **secondary business district (SBD)** is an unplanned shopping area in a city or town that is usually bounded by the intersection of two major streets. **NEIGHBORHOOD BUSINESS DISTRICT** A **neighborhood business district (NBD)** is an unplanned shopping area that appeals to the convenience shopping and service needs of a single residential area. **STRING** A **string** is an unplanned shopping area comprising a group of retail stores, often with similar or compatible product lines, located along a street or highway. There is little extension of shopping onto perpendicular streets. **The Planned Shopping Center** A **planned shopping center** consists of a group of architecturally unified commercial establishments on a site that is centrally owned or managed, designed and operated as a unit, based on balanced tenancy, and accompanied by parking facilities. 1. **REGIONAL SHOPPING CENTER** A **regional shopping center** is a large, planned shopping facility appealing to a geographically dispersed market. 2. **COMMUNITY SHOPPING CENTER** A **community shopping center** is a moderate-sized, planned shopping facility with a branch department store (traditional or discount) and/or a category killer store, as well as several smaller stores (similar to those in a neighborhood center). 1. A **power center** is a shopping site with (1) up to a half-dozen or so category-killer stores and a mix of smaller stores or (2) several complementary stores specializing in one product category. 2. A **lifestyle center** is an open-air shopping site that typically includes 150,000 to 500,000 square feet of space dedicated to upscale, well-known specialty stores as well as dining and entertainment. THE CHOICE OF A GENERAL LOCATION ================================ The second decision is that a firm must select its general store placement. **LOCATION AND SITE EVALUATION** Assessment of general locations and the specific sites within them requires extensive analysis. In any area, the optimum site for a particular store is called the **one-hundred percent location**. **Pedestrian Traffic** The most crucial measures of a location's and site's value are the number and type of people passing by. Other things being equal, a site with the most pedestrian traffic is often best. **Vehicular Traffic** The quantity and characteristics of vehicular traffic are very important for retailers that appeal to customers who drive there. **Parking Facilities** In many business districts, parking is provided by individual stores, arrangements among stores, and local government. In planned shopping centers, parking is shared by all stores there. **Transportation** Mass transit, access from major highways, and ease of deliveries must be examined. **Store Composition** The number and size of stores should be consistent with the type of location. A retailer in an isolated site wants no stores nearby; **Retail balance**, the mix of stores within a district or shopping center, should also be considered. 1. Proper balance occurs when the number of store facilities for each merchandise or service classification is equal to the location's market potential 2. a range of goods and services is provided to foster one-stop shopping 3. there is an adequate assortment within any category, 4. there is a proper mix of store types (balanced tenancy). **Specific Site** Selecting the specific site for the retail store depends on visibility; placement in the location, size, and shape of the lot; size and shape of the building; and condition and age of the lot and building. **Visibility** is a site's ability to be seen by pedestrian or vehicular traffic. **Terms of Occupancy** **Terms of occupancy**---ownership versus leasing, type of lease, operations and maintenance costs, taxes, zoning restrictions, and voluntary regulations---must be evaluated for each prospective site. **OWNERSHIP VERSUS LEASING** A retailer with adequate funding can either own or lease premises. Ownership is more common in small stores, in small communities, or at inexpensive locations. It has several advantages.\ \ **TYPES OF LEASES** Property owners do not rely solely on constant rent leases, partly due to their concern about interest rates and the related rise in operating costs. Terms can be quite complicated 1. **Straight lease**---a retailer pays a fixed dollar amount per month over the life of the lease. The simplest, most direct arrangement. 2. A **percentage lease** stipulates that rent is related to sales or profits. This differs from a straight lease, which requires constant payments. 3. **graduated lease** calls for precise rent increases over a stated period of time. 4. A **maintenance-increase-recoupment lease** has a provision allowing rent to increase if a 5. property owner's taxes, heating bills, insurance, or other expenses rise beyond a certain point. 6. A **net lease** calls for all maintenance costs (such as heating, electricity, insurance, and interior repair) to be paid by the retailer. Developing Merchandise Plans ============================ **Merchandising** consists of the activities involved in acquiring particular goods and/or services and making them available at the places, times, and prices and in the quantity that enable a retailer to reach its goals. MERCHANDISING PHILOSOPHY ------------------------ A **merchandising philosophy** sets the guiding principles for all the merchandise decisions that a retailer makes. - ***[Product-focused merchandising]*** involves analyzing SKU-level sales performance and profitability metrics to find and invest in the most profitable products based on store size, volume, and sell-through for each category. - ***[Consumer-focused merchandising]*** involves creating product assortments based on customer insights, their preferences, and their path to purchase based on an analysis of loyalty data, social network signals, shopping patterns, and other potential "big data" sources. **Micromerchandising**, a retailer adjusts shelf-space allocations to respond to customer and other differences among local markets. **Cross-merchandising**, a retailer carries complementary goods and services to encourage shoppers to buy more. BUYING ORGANIZATION FORMATS AND PROCESSES ----------------------------------------- **Level of Formality** 1. ***[Formal buying organization]***, merchandising (buying) is a distinct retail task and requires the setup of a separate department. 2. ***[Informal buying organization]***, merchandising (buying) is not a distinct task. **Degree of Centralization** 1. **Centralized buying organization**, all purchase decisions emanate from one office. 2. **Decentralized buying organization**, purchase decisions are made locally or regionally. **Organizational Breadth** 1. **General buying organization**, one or several people buy all the merchandise for the firm. A general approach is better if a retailer is small or there are few products involved. 2. **Specialized organization**, each buyer is responsible for a product category. A specialized, approach is better if a retailer is large or carries many products. **Personnel Resources** 1. **I*nside buying organization*** is staffed by a retailer's personnel, and merchandise decisions are made by permanent employees. 2. ***Outside buying organization***, a firm or personnel external to the retailer are hired, usually on a fee basis. 3. **Resident buying office**, which can be an inside or outside organization, is used when a 4. retailer wants to keep in close touch with key market trends and cannot do so through only the headquarters buying staff. 5. **Cooperative buying**, a group of retailers gets together to make quantity purchases from suppliers and obtain volume discounts. **Functions Performed** 1. **"Merchandising"** view, merchandise personnel oversee all buying and selling functions, including assortments, advertising, pricing, point-of-sale displays, employee utilization, and personal selling approaches. 2. **"Buying"** view, merchandise personnel oversee the buying of products, advertising, and pricing, whereas in-store personnel oversee assortments, displays, employee utilization, and sales presentations. **Staffing** 1. **Buyer** is responsible for selecting the merchandise to be carried by a retailer and setting a strategy to market that merchandise. 2. **Sales Manager** typically supervises the on-floor selling and operational activities for a specific retail department. He or she must be a good organizer, administrator, and motivator. 3. ***Merchandising Buyer*** must possess attributes of each. DEVISING MERCHANDISE PLANS -------------------------- **Forecasts** **Forecasts** are projections of expected retail sales for given periods. **DIFFERENT TYPES OF MERCHANDISE** 1. **Staple merchandise** consists of the regular products carried by a retailer. 2. **Basic Stock List** specifies the inventory level, color, brand, style category, size, package, and so on for every staple item carried by the retailer. 3. **Assortment merchandise** consists of apparel, furniture, autos, and other products for which the retailer must carry a variety of products in order to give customers a proper selection. These goods are harder to forecast than staples. a. **Decisions are two-pronged:** i. Product lines, styles, designs, and colors are projected. ii. A **model stock plan** is used to project specific items, such as the number of green, red, and blue pullover sweaters of a certain design by size. 4. **Fashion merchandise** consists of products that may have cyclical sales due to changing 5. tastes and lifestyles. 6. **Seasonal merchandise** consists of products that sell well over nonconsecutive time periods. 7. **Fad Merchandise**, High Sales are generated for a short time. 8. **Never-out list** to determine the amount of merchandise to purchase for resale. **Innovativeness** **Product life cycle**, which shows the expected behavior of a good or service over its life. The basic cycle comprises introduction, growth, maturity, and decline stages. 1. ***Introduction* stage**, a retailer should anticipate a limited target market. 2. As innovators buy a new product and recommend it to friends, sales increase rapidly and the ***growth* stage begins**. 3. In the ***maturity* stage,** sales reach their maximum, the largest part of the target market is attracted, and shoppers select from broad product offerings. 4. ***Decline*** is brought on by a shrinking market (due to product obsolescence, newer substitutes, and boredom) and lower profit margins. 1. ***Vertical Trend*** occurs when a fashion is first introduced to and accepted by upscale consumers and then undergoes changes in its basic form before it is sold to the general public. a. **This type of fashion goes through three stages** 1. distinctive---original designs, designer stores, custom-made, worn by upscale shoppers; 2. emulation---modification of original designs, finer stores, alterations, worn by middle class; and 3. economic emulation---simple copies, discount stores, mass-produced, mass-marketed. 3. ***Horizontal Trend***, a new fashion is marketed to a broad spectrum of people at its introduction while retaining its basic form. **Assortment** 1. **Assortment** is the selection of merchandise a retailer carries. It includes both the breadth of product categories and the variety within each category. 2. **Width of assortment** refers to the number of distinct goods/services categories (product lines) a retailer carries. 3. **Depth of assortment** refers to the variety in any one goods/services category (product line) a retailer carries. i. **Retail Assortment Strategies** 1. ***Scrambled Merchandising***, a retailer adds unrelated items to generate more revenues and lift profit margins 2. **Complementary Goods And Services** lets the retailer sell both basic items and related offerings (such as stereos and CDs) via cross-merchandising. 3. **Substitute Goods And Services** (such as competing brands of toothpaste) may shift sales from one brand to another and have little impact on overall retail sales. **Brands** 1. **Manufacturer (national) brands** are produced and controlled by manufacturers. 2. **Private (dealer or store) brands** contain names designated by wholesalers or retailers. 3. **Generic brands** feature products' generic names as brands (such as canned peas); they are a form of private, no-frills goods stocked by some retailers. 4. **Battle of the brands**, whereby manufacturer, private, and generic brands fight each other for more space and control. **Timing** The retailer should take into account its forecasts and other factors: peak seasons, order and delivery time, routine versus special orders, stock turnover, discounts, and the efficiency of inventory procedures. **Allocation** The last part of merchandise planning is the allocation of products. A single-unit retailer chooses how much merchandise to place on the sales floor, how much to place in a stockroom, and whether to use a warehouse. CATEGORY MANAGEMENT ------------------- **Category management** is a merchandising technique that some firms--- including supermarkets, drugstores, hardware stores, and general merchandise retailers---use to improve productivity. MERCHANDISING SOFTWARE ---------------------- **General Merchandise Planning Software** **Forecasting Software** **Innovativeness Software** **Assortment and Allocation Software** **Category Management Software**