Lecture 3 PPT - Retail Location Strategy

Retail Location Strategy

Introduction

Presented by Dr. Deborah Leung, Lecture 3 focuses on the Retail Location Strategy from Chapter 5 of the course material.

Opening Discussion

The retail location is crucial in the purchasing decision process, influencing where consumers choose to shop.

Learning Objectives (LO)

After studying Chapter 5, students should be able to:

• Examine four major factors retailers consider when evaluating an area.

• Identify three factors retailers consider when selecting a specific site.

• Define a trade area and determine its characteristics.

• Review three approaches for estimating potential sales for a store site.

• Explore various types of locations available to retailers and their advantages.

• Discuss the suitability of locations for specific retail strategies.

Evaluating Specific Areas for Locations (LO1)

Retail locations possess unique strengths and weaknesses, requiring examination at four levels:

1. Country

2. Region

3. Trade area

4. Specific site

Factors Affecting Profit Potential

Key factors impacting profitability include:

• Economic Conditions: Population growth, employment rates.

• Competition: Types of trade area including saturated, understored, and overstored conditions.

• Operating Cost: Variations based on local conditions (e.g., legalities, square footage).

• Strategic Fit: Alignment with the retailer's target market and demographics.

Number of Stores in an Area (LO1)

Optimal store numbers should balance lower operational costs with potential cannibalization of sales. For company-owned stores, the goal is to maximize chain profits based on marginal revenue and costs, while franchise agreements often limit competition through exclusive geographical territories.

Cannibalization Discussion

This refers to the loss of sales due to competition among similar products within the same company’s portfolio.

Evaluating a Site for Locating a Retail Store (LO2)

Key Considerations:

• Site characteristics: Traffic flow, accessibility, location specifics, any restrictions on the site, and costs associated with the site.

Trade Area Characteristics (LO3)

• Definition: A contiguous geographic area that accounts for most of a store's sales and customers.

• Zones:

  • Primary Zone: 60-65% of customers; average driving time of about 5 minutes.

  • Secondary Zone: 20% of sales; average driving time of about 10 minutes.

  • Tertiary Zone: Occasional shoppers; driving time of about 20 minutes.

Factors Defining Trade Areas

• Attractiveness: Accessibility, barriers, and shopping area types.

• Type and Size of Shopping Area: Influences customer draw.

• Type of Store(s): Retailer offerings must align with consumer preferences.

• Competition: Significant in determining trade area success.

Sources of Information for Defining Trade Area (LO3)

• Customer Spotting: Through loyalty programs or credit data.

• Demographic and GIS Data: Utilization of government and analytics provider data.

• Competition Assessment: Research via internet resources and trade directories.

Estimating Potential Sales for a Store (LO4)

Three approaches:

1. Analogue Method: Compare sales analysis with existing stores.

2. Gravitational Theory: Considers factors like store size and travel time (Huff’s Model and Reilly’s Law).

3. Regression Analysis: Statistical approach using past performance metrics for predictions.

The Analogue Method

Involves competitive analysis, defining the trade area, and matching characteristics with potential new sites.

Gravitational Theories

Suggest consumers gravitate toward larger stores that are closer.

• Huff Model: Examines store size and access time to predict customer visits.

Reilly’s Law

Indicates that larger retail centers attract customers from longer distances, thus increasing their market sphere of influence.

Choosing the Best Methods (LO4)

More comprehensive data leads to improved sales estimation. Analogue and gravitational methods are preferred for smaller data sets, while regression is suitable for complex models with multiple factors.

Types of Retail Locations (LO5)

• Shopping Centres: Includes malls, regional, and lifestyle centres.

• Freestanding Sites: Independent locations not tied to other retailers (e.g., Costco).

• Other Opportunities: Merchandise kiosks, mixed-use developments, pop-up stores, etc.

Shopping Centre Definitions

• Strip Centre: Storefronts with parking in front.

• Malls: Parking is located away from storefronts.

Summary (LO6)

Key factors for determining effective retail locations include traffic flow, demographics, competition, and attractiveness. Utilize customer spotting, GIS, and analytical techniques to define trade areas and estimate demand. Models like Huff’s and Reilly’s enhance the understanding of consumer behavior relative to store locations.