Chapter 08 – Retail Site Location
8-1
CHAPTER 8
RETAIL SITE LOCATION
ANNOTATED OUTLINE
INSTRUCTOR NOTES
• Selecting retail locations involves the analysis of a large
amount of data and the use of sophisticated statistical
models.
I. Evaluating Areas for Locations and Determining the Number of
Stores in an Area
• Retail site selection is a very strategic decision. Once a
location is chosen, a retailer must live with it for many years.
LO 8-1 Summarize the factors
considered in locating a number
of stores.
See PPT 8-4
A. Metropolitan Statistical Area
• In the United States, retailers often focus their analysis on a
Metropolitan Statistical Area (MSA) because consumers
tend to shop within an MSA.
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B. Considerations in Evaluating Store Locations
• The best areas for locating stores are those that generate
the highest long-term profits for a retailer.
1. Economic Conditions
• It is important to examine an area’s level and growth of
population and employment because locations involve a
commitment of resources over a long time horizon.
• A large, fully employed population means high purchasing
See PPT 8-5
Under what circumstances is it
2. Competition
• The level of competition in an area also affects demand for a
retailer’s merchandise.
Ask students if they think
Walmart’s early location
strategy could work for another
3. Strategic Fit
• In addition to population level, growth, and competition,
the area needs to have consumers who are in the retailer’s
See PPT 8-7
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4. Operating Costs
• Costs of operating stores can vary dramatically across areas.
C. Number of Stores in an Area
• Retailers must consider the trade-offs between lower
See PPT 8-9
1. Economies of Scale from Multiple Stores
• Since retail chains plan to go into an area with a network of
stores, they attempt to achieve promotion and distribution
Ask students for examples of
retail chains with multiple
locations within, say, a 20-mile
2. Cannibalization
• While there are scale economies gained from opening
multiple locations in an area, there also are diminishing
returns associated with locating too many additional stores
in an area due to cannibalization (one store taking sales
away from another).
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II. Evaluating Specific Sites
• Having decided to locate stores in an area, the
retailer’s next step is to evaluate and select the specific
LO 8-2 Review the
characteristics of a particular
site.
See PPT 8-10 and 8-11 for a
A. Site Characteristics
1. Traffic Flow and Accessibility
• One of the most important factors affecting store sales is
the number of vehicles and pedestrians that pass by the
site, or the traffic flow.
See PPT 8-12
Ask students to describe two
2. Parking
• The amount and quality of parking facilities are critical to a
See PPT 8-13
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3. Visibility
• Visibilityrefers to customers’ ability to see the store from
the street.
4. Adjacent Tenants
• Locations with complementary, as well as competing,
adjacent retailers have the potential to build traffic.
5. Restrictions and Costs
• Some locations may place restrictions on the type of
retail tenants that are allowed in a shopping center in
their lease agreements. These restrictions may work in
See PPT 8-17
B. Locations Within a Shopping Center
• Since the better locations cost more, retailers must consider
their importance.
Ask students, given cost
considerations, where would
you locate a florist or a shoe
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applies to both stores that sell complementary merchandise
and those that compete directly with one another.
• The same issues apply to evaluating locations within a
multilevel, enclosed shopping mall. Stores that cater to
consumers engaging in comparison shopping (e.g., buyers of
III. Defining Trade Areas
• Retailers estimate the demand for a new location by
defining its trade area and then estimating how much
people within the trade area will spend.
LO 8-3 Understand how retailers
analyze the trade area for a site.
zones by distance.
A. Trade Area Definition
• A trade area is a contiguous geographic area which accounts
for the majority of a store’s sales and customers. Trade
areas can be divided into three zones.
• The tertiary trading area, or fringe trading area (the
outermost area), includes customers who occasionally shop
at the store or shopping center but come from widely
dispersed areas.
See PPT 8-19
explain how they would
determine the primary and
secondary zones.
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B. Factors Affecting the Size of the Trade Area
• The actual boundaries of a trade area are determined by the
store’s accessibility, natural and physical barriers, level of
See PPT 8-20
C. Measuring the Trade Area for a Retail Site
• The purpose of the customer spotting technique is to spot,
or locate, the residences of the customers for a store or
shopping center.
See PPT 8-21
D. Sources of Information about Trade Areas
• Two widely used sources of information about the nature of
consumers in a trade area are (1) data published by the U.S.
See PPT 8-21
1. Demographic Data from the U.S. Census Bureau
• A census gathers demographic information from every
household in the United States every 10 years.
• Census information includes: number of persons per
household, household relationships, sex, race, age, and
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• There are 8 million census blocks in the United States, each
containing the residences of about 40 people.
• The smallest unit of analysis is the block group, a collection
of adjacent blocks that contain between 600 and 3,000
people.
the system are maps that enable retailers to visualize the
2. Geographic Information System Suppliers
• A geographic Information Systems (GIS) is a system of
hardware and software used to store, retrieve, map, and
analyze geographic data, along with the operating personnel
and the data that go into the system. This computerized
system enables analysts to visualize information about their
See PPT 8-22 and 8-23
Ask students why they would
3. Tapestry Segmentation
• ESRI and other GIS suppliers have developed schemes for
classifying geographical areas in the United States by
combining census and survey data about people’s lifestyles
and purchasing behavior with the mapping capabilities of
GIS.
See PPT 8-24 and 8-25 for
discussion and an example of a
tapestry segment.
Students can visit the website and
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4. Spending Potential Index
• The Spending Potential Index (SPI) compares the local
average expenditure by product to the national average
amount spent.
E. Competition in the Trade Area
• One of the powerful methods of measuring competition is
See PPT 8-26
IV. Estimating Potential Sales for a Store Site
• Methods for estimating potential sales for a store site
include regression analysis and the analog method.
LO 8-4 Determine the
forecasted sales for a new store
location.
See PPT 8-27
A. Regression Analysis
• The regression analysis approach is based on the
assumption that factors that affect the sales of existing
See PPT 8-31 through 8-33 for a
regression analysis application
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B. Analog Approach
• Using the analog approach, the retailer simply describes the
site and trade area characteristics for its most successful
stores and attempts to find a site with similar
characteristics.
V. Illustration of Site Selection: Edward Beiner Purveyor of Fine
Eyewear
• This takes students through the steps of site selection using
LO 8-5 Illustrate the site
selection process.
VI. Negotiating a Lease
• Once a particular site is chosen, retailers still face a
multitude of decisions, including the types and terms of the
lease.
LO 8-6 Explain the different
types and terms of leases.
Ask students why is it important
to understand lease terms when
choosing a site?
A. Types of Leases
1. Percentage lease
• The most common form of lease is a percentage lease. Rent
See PPT 8-35
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Percentage lease with specified maximum/minimum
• Maximum: Retailer pays percentage of sales up to a
Sliding scale
• Percentage/sale amount decreases in specified dollar
2. Fixed-Rate Lease
• The second basic type of lease is a fixed-rate lease.
Commonly used by community and neighborhood centers.
See PPT 8-36
B. Terms of the Lease
• Leases can be changed to reflect the relative power of the
retailer and shopping center management and specific
1. Cotenancy Clause
• Contenancy clauses may require that a certain percentage
2. Prohibited-Use Clause
• A prohibited-use clause limits the landlord from leasing to
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3. Exclusive-Use Clause
• An exclusive-use clause prohibits the landlord from leasing
to retailers selling competing products. A discount store, for
4. Common Area Maintenance Costs
• In retail leases, common area maintenance (CAM) clauses
VII. Summary
• Location decisions have strategic importance because
they have significant effects on store choice and are
difficult advantages for competitors to duplicate.
Picking good sites for stores is part science and part art.
Chapter 08 – Retail Site Location
ANSWERS TO SELECT “GET OUT AND DO IT!” QUESTIONS
http://www.esri.com/data/esri_data/tapestry.html and type in your zip code.” Compare the
segments that are found in your zip code with your initial prediction. Are they similar or
different?
Answers will vary depending on zip code.
geographical information system, and read about GIS. Afterwards, explain how retailers can
make better decisions with GIS.
“A geographic information system (GIS) integrates hardware, software, and data for
4. INTERNET EXERCISE The U.S. Census Bureau tracks key population characteristics, such as
age, gender, disability, employment, income, language, poverty, and race. Go to the U.S.
and, using the community facts search, look up key demographic data for your state. Explain
which factors would be most important for retailers considering this location to evaluate.
This list should include some/all of the following characteristics:
Description of family and household Educational attainment
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5. GO SHOPPING Go to a shopping mall. Get or draw a map of the stores. Analyze
whether the stores are clustered in some logical manner. For instance, are all the high–
end stores together? Is there a good mix of retailers catering to comparison shoppers
near one another?
Responses will vary depending on the mall selected. Differences and similarities could
6. GO SHOPPING Visit a jewelry store in an enclosed mall and one in a neighborhood
strip shopping center. List the pros and cons for each location. Which location is the
most desirable? Why is this the case?
Students’ answers will vary. Some pros of locating in an enclosed mall include:
increased security, increased pedestrian traffic, and more opportunity for comparison
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ANSWERS TO DISCUSSION QUESTIONS AND PROBLEMS
1. Which factors do retailers consider when evaluating an area of the country to locate
stores? How do retailers determine the trade area for a store?
The best areas for locating stores are those that generate the highest long-term profits for a
retailer. Some of these factors include: (1) economic conditions, (2) competition, (3)
2. True Value Hardware plans to open a new store. Two sites are available, both in middle–
income neighborhood centers. One neighborhood is 20 years old and has been well
maintained. The other was recently built in a newly planned community. Which site is
preferable for True Value? Why?
Due to the high cost of home maintenance, middle-income neighborhoods are good
candidates for a store such as True Value. The neighborhood that is 20 years old is a good
3. At Del Frisco’s Steakhouse, steaks run from about $42 to $89 whereas at Outback
Steakhouse they run from about $12 to $27. What characteristics would Del Frisco’s look
for in a trade area for a new location? How would those characteristics change for
Outback?
To analyze the attractiveness of a potential store site, retailers use information about both
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4. Trade areas are often described as concentric circles emanating from the store or
shopping center. Why is this practice used? Suggest an alternative method. Which
would you use if you owned a store in need of a trade area analysis?
In general, consumers would prefer to shop within their area(s) of primary residence to
minimize travel and other times. The more a consumer must travel to obtain a product, the
more the actual physical and opportunity costs (of time) for the consumer— something the
5. Under what circumstances might a retailer use the analog approach for estimating
demand for a new store? What about regression analysis?
The analog approach is also called the similar store approach since it attempts to match the
current store’s trading area characteristics with potential new areas having similar
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6. Retailers have a choice of locating on a mall’s main floor or second or third level.
Typically, the main floor offers the best, but most expensive, locations. Why would
specialty stores such as The Body Shop or Foot Locker choose the second or third floor?
These two stores are destination stores with a national reputation. When people are in the
7. What kind of lease should a new retail enterprise, opening its first store in an urban
location that is experiencing gentrification and growth, seek to negotiate with the
building owner?
Since the process of gentrification—the renewal and rebuilding of offices, housing, and
retailers in deteriorating areas—coupled with an influx of more affluent people that
8. If you were considering the ownership of a Taco Bell franchise, what would you want to
know about the location in terms of traffic, population, income, employment, and
competition? What else would need to be researched about a potential location?
Several factors should be considered in learning about a potential franchise location. In
Chapter 08 – Retail Site Location
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Chapter 08 – Retail Site Location
CONNECT ACTIVITIES FOR CHAPTER 8
Activity Type
Topic(s)
Learning Objective(s)
Hutch: Locating a
New Store
Case Analysis
Evaluating Retail
Sites,
Trade Areas and the
Site Selection Process
8-1 Summarize the
factors considered in
locating a number of
stores.
8-2 Review the
characteristics of a
particular site.