MKT320: Retailing - Trading Area Analysis and Site Selection

Trading-Area Analysis

  • Trading-area analysis is understanding the geographic area from which a retail store draws its customers.
  • It helps determine the best store locations, optimize market potential, forecast sales, and develop localized marketing strategies.
  • A trading-area is a geographic area containing the customers of a particular firm or group of firms for specific goods or services.
  • It reflects the location where customers live and the distance they could travel to another location.

Criteria to consider for Trading-Area Analysis:

  • Population size and traits
  • Competition
  • Transportation access
  • Parking availability
  • Nature of nearby stores
  • Property costs
  • Length of agreement
  • Legal restrictions

Importance of Trading-Area Analysis

  • Optimizing Store Location: Helps retailers select store locations based on customer accessibility and competition.
  • Discovery of consumer demographics and socioeconomic characteristics: Understands customer distribution in terms of where customers live, work, and shop.
  • Competitive Benchmarking: Assesses the presence and strength of competing retailers.
  • Demand Estimation: Forecasts potential sales based on population density and consumer behavior.
  • Discovery of ideal number of outlets, geographic weaknesses.
  • Marketing Strategy Development: Tailors advertising and promotional efforts to the target audience within the trade area.
  • Franchise and Chain Store Management: Ensures optimal spacing between stores to prevent cannibalization.

Methods of Trading-Area Analysis

  • Geographic Information Systems (GIS)
  • Reilly’s Law of Retail Gravitation
  • Huff’s Gravity Model
  • Census and Demographic Data Analysis

Geographic Information Systems (GIS)

  • GIS uses digital mapping and spatial data to analyze customer distribution, competitor locations, and accessibility.
  • GIS collects data such as population density, traffic patterns, and customer spending behavior.
  • It allows retailers to visualize trade areas on a map, making it easier to see where potential customers live and how far they are willing to travel.
  • Majid Al Futtaim uses GIS to determine the best locations for new hypermarkets in UAE. The system helps analyze footfall, residential expansion, and competition before selecting store locations.

GIS Software in Action

  • Analyzing revenues per customer by distance to determine where most customers are coming from (e.g., 84% of revenues come from customers north of the store).
  • Helps decide how to attract more customers from other areas.

Reilly’s Law of Retail Gravitation

  • Reilly’s Law states that customers are more likely to travel to larger retail centers than smaller ones, even if the larger centers are farther away.
  • The law assumes that a retail center’s “gravitational pull” depends on its size and variety of offerings.
  • The law is based on the idea that consumers prefer a larger variety of products, services, and entertainment options.
  • A shopping mall with more stores, restaurants, and attractions can pull customers from farther distances, reducing the attractiveness of smaller, local retailers.
  • Businesses and retailers use this model to decide where to open new stores or distribution centers.
  • Dubai Mall example: attracts shoppers from across the country due to its wide range of luxury brands, entertainment options, and dining experiences.

Huff’s Gravity Model

  • Huff’s Gravity Model predicts the probability of customers visiting a particular retail center based on two main factors:
    • The size and attractiveness of the retail center
    • Its distance from the customer.
  • The larger and more attractive a shopping center is, the more likely it is to attract customers, even from farther away.
  • Sharjah Mega Mall example: attracts customers from neighboring emirates by offering mid-range and budget-friendly shopping options, making it an alternative to Dubai's high-end malls.

Census and Demographic Data Analysis

  • Retailers analyze population density, income levels, and other demographics to decide store locations and marketing strategies.
  • Spinneys and Lulu Hypermarket example: Use census data to strategically open stores in areas with a high concentration of expatriates, such as Jumeirah and Dubai Marina, tailoring their product offerings accordingly.

Computerized Trading-Area Analysis Models

  • Analog Model:
    • Simplest and most popular trading-area analysis tool.
    • Potential sales for a new store are estimated based on revenues for similar stores in existing areas.
    • Considers competition at a prospective location, the new store’s expected market share, and the size/density of the location’s primary trading area.
  • Regression Model:
    • Uses a series of mathematical equations showing the association between potential store sales and several independent variables.
    • Independent variables include population size, average income, the number of households, nearby competitors, transportation barriers, and traffic patterns.
  • Gravity Model:
    • Based on the premise that people are drawn to closer and more attractive stores than competitors’ stores.
    • Includes the distance between consumers and competitors, the distance from consumers to a given site, and the store image.

The Trading-Area of a New Store

  • When evaluating a new store location, businesses focus on potential opportunities rather than just existing customer traffic.
  • Several tools are used to predict future success, including:
    • Trend analysis
    • Consumer surveys
    • Computerized trading-area analysis models.

Trend Analysis

  • Involves studying market data, demographic shifts, economic indicators, and industry trends to predict future demand in a specific location.
  • Retailers use historical data and emerging patterns to forecast whether an area will be suitable for a new store.
  • Retailers analyze factors like population growth, urban expansion, income levels, and lifestyle changes.
  • It helps businesses anticipate future demand rather than just relying on current foot traffic.
  • Useful in identifying developing regions before competitors do.
  • Emaar developers use trend analysis to predict where new residential communities will flourish, ensuring that shopping malls and retail outlets (e.g., Dubai Hills Mall, Nakheel Mall) are built in high-growth areas.

Consumer Surveys

  • Consumer surveys collect direct feedback from potential customers about their shopping preferences, brand awareness, and expectations from a new store.
  • Surveys help in understanding demand and consumer sentiment before investing in a location.
  • This method validates market assumptions before launching a store.
  • It also helps retailers customize product assortments to local preferences.
  • Carrefour example: Before opening hypermarkets in residential communities like Dubai Silicon Oasis and Al Barsha, Carrefour conducts surveys to understand whether residents prefer organic food options, imported goods, or budget-friendly groceries.

Computerized Trading-Area Analysis Models

  • Software-driven models that use geospatial data, competitor mapping, and AI-driven analytics to determine the best store locations.
  • The models combine multiple data sources to predict customer traffic and profitability.

Three Types of Locations

  • Isolated Store
  • Planned Shopping Center
  • Unplanned Business District

Isolated Store

  • An isolated store is a stand-alone retail establishment that is not attached to any other stores. It may be located in suburban areas, highways, or rural locations where there is minimal competition.
  • Examples:
    • IKEA stores are often located in isolated areas with large parking spaces.
    • Gas stations along highways operate as isolated stores.
    • Standalone fast-food outlets like McDonald’s or KFC on highways.

Planned Shopping Center

  • A planned shopping center is a deliberately designed group of retail and service businesses that operate as a unit, often under a management firm.
  • Include neighborhood Centers, Community Centers, Regional Shopping Malls.
  • Example: Dubai Mall, A massive planned shopping center with luxury and retail stores.

Unplanned Business District

  • An unplanned business district is a collection of retail stores, services, and businesses that have evolved naturally over time rather than being developed as a unified shopping area.
  • Examples:
    • Karama Market in Dubai: Initially a residential area, it developed into a major retail district, particularly for affordable fashion, accessories, and small restaurants.
    • Al Fahidi (Bur Dubai): Originally a historical area, it has evolved into a dense business hub with small retail shops, eateries, and traditional markets.

Site Evaluation Process

  • The site evaluation process in retail management involves assessing potential locations to determine their suitability for a retail store.
  • A well-chosen site can significantly impact customer traffic, sales performance, and long-term success.
  • Step 1: Define Retail Objectives & Requirements
    • Before selecting a site, retailers must clearly define:
      • Target market (demographics, income levels, consumer behavior)
      • Store format (convenience store, supermarket, etc.)
      • Market expansion goals (new market entry vs. increasing coverage).
  • Step 2: Market Area and Location Analysis
    • Retailers assess the broader market conditions:
      • Demand Estimation
      • Competitive Landscape
      • Economic and Social Trends
    • Accessibility & Visibility of the location
    • Infrastructure & Facilities.
  • Step 3: Financial Feasibility Study
    • Retailers perform a cost-benefit analysis of the location in terms of:
      • Rent & lease terms
      • Revenue forecasting
      • Operational costs (like staffing, utilities, and supply chain expenses)
  • Step 4: Legal & Regulatory Considerations
    • Retailers must ensure compliance with:
      • Zoning Laws
      • Licenses & permits
      • Lease agreements & property rights etc.
  • Step 5: Final Site Selection & Decision Making

Location/Site Evaluation Checklist

  • Pedestrian Traffic
    • Number of people
    • Type of people
  • Vehicular Traffic
    • Number of vehicles
    • Type of vehicles
    • Traffic congestion
  • Parking Facilities
    • Number and quality of parking spots
    • Distance to store
    • Availability of employee parking
  • Transportation
    • Availability of mass transit
    • Access from major highways
    • Ease of deliveries
  • Store Composition
    • Number and size of stores
    • Affinity
    • Retail balance
  • Specific Site
    • Visibility
    • Placement in the location
    • Size and shape of the lot
    • Size and shape of the building
    • Condition and age of the lot and building
  • Terms of Occupancy
    • Ownership or leasing terms
    • Operations and maintenance costs
    • Taxes
    • Zoning restrictions
    • Voluntary regulations
  • Overall Rating
    • General location
    • Specific site