In-Depth Notes on Trading-Area Analysis

Trading-Area Analysis in Retailing

Importance of Location

• Key Phrase: Location, Location, Location
• 78% of retail sales in the U.S. occur in physical stores.
• A good location can lead to retail success, even with mediocre strategies elsewhere.
• Consequences of Poor Location:
  • Significant liability for the retailer.
  • Requires extensive and often costly decision-making.
  • Represents a long-term commitment with limited flexibility once selected.
  • Moving locations may result in losing loyal customers and incurring new construction costs.

Evaluating Geographic Areas

Key Criteria to Consider:

• Population Characteristics:
  • Size, age, income levels, home ownership, presence of children.
• Competition:
  • Analyze the competitive landscape including other retailers in the vicinity.
• Transportation Access:
  • Importance of easy accessibility for customers (includes parking availability and mass transit).
• Nature of Nearby Stores:
  • Consider whether nearby stores enhance or detract from the retailer's target market.
• Property Costs & Agreements:
  • Analyze lease lengths and legal restrictions that may affect the business.

Choosing a Store Location

• Evaluate alternate geographic areas for existing residents and retailers.
• Deciding between:
  • Isolated store vs. planned shopping center.
• Analyze the types of locations available:
  • Independent vs. shopping center spaces.

Trading-Area Analysis

• Definition:
  • Geographic area containing customers for specific goods/services from a firm or groups of firms.
• Steps in Trading-Area Analysis:
  • Assess population characteristics.
  • Evaluate the economic base.
  • Examine competition and saturation levels in the area.

Benefits of Trading-Area Analysis

• Provides insights on consumer demographics and socioeconomic characteristics.
• Helps determine current retailer effectiveness and identifies potential new store opportunities.
• Evaluation of promotional activities and their reach.
• Notifies retailers of potential overlaps with existing customer databases.
• Highlights geographical weaknesses such as noise levels, traffic issues, and industry competition.

Size & Shape of Trading Areas

Classification of Trading Areas:

• Primary Trading Area:
  • Contains 50-80% of a store's customers.
• Secondary Trading Area:
  • Comprises 15-25% of a store's customers.
• Fringe Trading Area:
  • Encompasses all remaining customers, including those traveling longer distances.
• Factors Influencing Size:
  • Store type, size, competitor locations, housing patterns, and traffic barriers.

Store Types Related to Trading Areas

• Destination Store:
  • Offers a unique assortment or stronger promotional strategies, leading to a larger trading area.
• Parasite Store:
  • Lacks its own traffic; relies on customers drawn by other businesses.

Elements in Trading Area Selection

• After delineating trading areas, examine:
  • Population characteristics
  • Economic base characteristics
  • Nature and saturation of competition.
• Utilize data from the U.S. Bureau of the Census for analysis.
• Identify 'knockout' factors for potential locations; eliminate those that fall short.

Major Factors in Trade Area Analysis

Population Characteristics:

• Total population, age distribution, home ownership, disposable income levels.

Economic Base:

• Understanding local industry and commercial structures.
• Consider dominant industries, growth projections, and financial access.

Competitive Situation:

• Analyze existing competitors, their strengths and weaknesses, and market saturation.

Availability of Store Locations:

• Factors like the number/types of stores, costs, and zoning restrictions.

Labor and Supply Sources:

• Review available labor pools and proximity to supply sources, including delivery and reliability.

Regulatory Considerations:

• Factor in any regulations regarding taxes, licensing, and operational constraints.

Understanding Trading Area Saturation Levels

• Understored Trading Area:
  • Insufficient stores to meet demand, leading to unmet needs.
• Overstored Trading Area:
  • Excessive stores causing competition that prevents adequate profitability.
• Saturated Trading Area:
  • Right balance of stores to satisfy local demand, allowing retailers to thrive.