1. Chapter 7 Marketing Selection and Retail Location Analysis

2. 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.

3. Learning Objectives
Define geographic information systems (GIS) and discuss their potential uses in a retail enterprise.
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.

4. Selecting a Target Market
The Internet is becoming a major force in retailing, with sales expected to reach a little more than 5 percent of total retail sales over the next decade.
Reaching the target market can be achieved through a:
store-based location in which the consumer travels to the store or
through a nonstore retailing format in which products and services are offered to the consumer at a more convenient or accessible location.
LO 1

5. Selecting a Target Market
Home page - Introductory or first material viewers see when they access a retailer’s Internet site. It is the equivalent of a retailer’s storefront in the physical world.
Virtual store - Collection of all the pages of information on the retailer’s Internet site.
Ease of access - Consumer’s ability to easily and quickly find a retailer’s Web site in cyberspace.
LO 1

6. 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.
LO 1

7. 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.
LO 1

8. Exhibit 7.2 - Retail Formats for Accessing Your Target Market
LO 2

9. Location of Store-Based Retailers
Central business
district (CBD)
Advantages
Disadvantages
An unplanned shopping
area around the
geographic point where all
public transportation
systems converge; it is
usually in the center of the
city and often where the
city originated historically.
Easy access to public transportation.
Wide product assortment.
Variety in images, prices, and services.
Proximity to commercial activities.
Inadequate and usually expensive parking.
Older stores.
High rents and taxes.
Traffic and delivery congestion.
Potentially high crime rate.
Decaying conditions of inner cities.
LO 2

10. Location of Store-Based Retailers
Secondary business district (SBD)
Shopping area that is smaller than the CBD and that revolves around at least one department or variety store at a major street intersection.
Neighborhood business district (NBD)
Shopping area that evolves to satisfy the 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.
LO 2

11. Location of Store-Based Retailers
Shopping center or
mall
Centrally owned or managed shopping district that is planned, has balanced tenancy (the stores complement 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.
LO 2

12. Location of Store-Based Retailers
Advantages of shopping centres
Disadvantages of shopping centres
Heavy traffic resulting from the wide range of product offerings
Cooperative planning and sharing of common costs
Access to highways and available parking
Lower crime rate
Clean and neat environment
Inflexible store hours
High rents
Restrictions as to what merchandise or services the retailer may sell
Inflexible operations and required membership in the center’s merchant
organization
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
LO 2

13. Location of Store-Based Retailers
Freestanding retailer
Advantages
Disadvantages
Locates along major traffic arteries and does not have any adjacent retailers to share traffic.
Lack of direct competition
Lower rents
Freedom in operations and hours
Facilities that can be adapted to individual needs
Inexpensive parking
Lack of drawing power from complementary stores
Difficulties in attracting customers for the initial visit
Higher advertising and promotional costs
Operating costs cannot be shared with others
Stores may have to be built rather than rented
Zoning laws may restrict some activities
LO 2

14. Geographic Information Systems
Geographic information system (GIS) - Computerized system that combines physical geography with cultural geography.
Culture - Buffer that people have created between themselves and the raw physical environment; it includes:
the characteristics of the population
humanly created objects
mobile physical structures
LO 3

15. Exhibit 7.4 - GIS Components
LO 3

16. Geographic Information Systems
Thematic maps - Use visual techniques such as colors, shading, and lines to display cultural characteristics of the physical space.
Trading area - Geographic area from which a retailer, or group of retailers, or community draws its customers.
LO 3

17. Geographic Information Systems
Uses of GIS
Market selection
Site analysis
Trade area definition
New store cannibalization
Advertising management
Merchandise management
Evaluation of store managers
LO 3

18. Exhibit 7.5 - Selecting a Retail Location

19. Market Identification
Retail location theories
Market demand potential
Market supply factors
LO 4

20. Retail Location Theories
Retail gravity theory
Suggests that there are underlying consistencies
in shopping behavior that yield to mathematical
analysis and prediction based on the notion or
concept of gravity.
Reilly’s law of retail gravitation
Based on Newtonian gravitational principles,
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.
LO 4

21. Retail Location Theories
Algebraic expression of the new formulation of Reilly’s law:
Dab is the breaking point from A, measured in miles along the road to B.
d is the distance between A and B along the major highway
Pa is the population of A
Pb is the population of B
LO 4

22. Retail Location Theories
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.
LO 4

23. Retail Location Theories
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.
LO 4

24. Retail Location Theories
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
LO 4

25. Retail Location Theories
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
LO 4

26. Retail Location Theories
Retail store saturation
There are just enough store facilities for a given type of store to 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.
LO 4

27. Retail Location Theories
Index of retail saturation (IRS) - Ratio of demand for a product divided by available supply.
IRS = (H × RE) /RF
Where:
IRS - Index of retail saturation for an area.
H - Number of households in the area.
RE - Annual retail expenditures for a particular line of trade per household in the area.
RF - Square footage of retail facilities of a particular line of trade in the area.
LO 4

28. Retail Location Theories
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.
BPI = 0.5(the area’s percentage of U.S. effective buying income) + 0.3(the area’s percentage of U.S. retail sales) + 0.2(the area’s percentage of U.S. population)
LO 4

29. Market Demand Potential
Major components are:
Population characteristics
Buyer behavior characteristics
Household income
Household age profile
Household composition
Community life cycle
Population density
Mobility
LO 4

30. Market Supply Factors Square feet per store Square feet per employee
Growth in stores
Quality of competition
LO 4

31. 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.
LO 5

32. 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.
LO 5

33. 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.
LO 5

34. Exhibit 7.10 - Demand Density Map
LO 5

35. Exhibit 7.11- Store Density and Site Availability Map
LO 5

36. 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.
LO 5

37. Exhibit 7.12 - Checklist for Site Evaluations
LO 5

38. Exhibit 7.12 - Checklist for Site Evaluations
LO 5

39. Exhibit 7.12 - Checklist for Site Evaluations
LO 5

40. Exhibit 7.12 - Checklist for Site Evaluations
LO 5

41. Exhibit 7.12 - Checklist for Site Evaluations
LO 5

42. 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.
LO 6

43. Nature of Site
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.
LO 6

44. Nature of Site 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.
LO 6

45. Nature of Site 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.
LO 6

46. Terms of Purchase or Lease
The retailer should review:
Length of lease
Exclusivity clause
Guaranteed traffic rate
Anchor clause
LO 6

47. 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.
LO 6