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.
Even if a retailer finds the “right” neighborhood, the wrong
site can spell disaster.
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.
• A micropolitan statistical area (µSA) is a smaller unit of
analysis with only 10,000 inhabitants in its core urban area.
See PPT 8-3
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
power and high levels of retail sales.
See PPT 8-5
Under what circumstances is it
desirable for retailers to establish
stores in sparsely populated areas?
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
3. Strategic Fit
• In addition to population level, growth, and competition,
the area needs to have consumers who are in the retailer’s
target market, those who are attracted to the retailer’s
offering and interested in patronizing its stores.
See PPT 8-7
profiles.
4. Operating Costs
• Costs of operating stores can vary dramatically across areas.
retailer operates stores or distribution centers, and the local
and state regulatory environments.
C. Number of Stores in an Area
• Retailers must consider the trade-offs between lower
operating costs and potential sales cannibalization from
having multiple stores in an area.
See PPT 8-9
1. Economies of Scale from Multiple Stores
building a new distribution center.
Ask students for examples of
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).
• For franchise operations, the objectives of the franchisor
and the franchisee differ, and thus, disputes can arise over
the number of locations in an area.
• The franchisor is interested in maximizing total store sales,
while the franchisee is interested in just the sales and profits
from its store(s).
II. Evaluating Specific Sites
• Having decided to locate stores in an area, the
retailer’s next step is to evaluate and select the specific
site.
LO 8-2 Review the
characteristics of a particular
site.
See PPT 8-10 and 8-11 for a
summary of characteristics used
A. Site Characteristics
• Considerations in selecting a site are (1) the traffic flow past
the site and accessibility to the site, (2) parking, (3) visibility,
(4) adjacent tenants, and (5) restrictions and costs.
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.
• When the traffic is greater, more consumers are likely to
stop in and shop at the store.
See PPT 8-12
Ask students to describe two
local retail sites with high levels
of attractiveness. Then, ask for
See PPT 8-13
2. Parking
• The amount and quality of parking facilities are critical to a
site’s overall accessibility. It’s hard to assess how many
parking spaces are enough, although location analysts use
See PPT 8-13
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.
Complementary retailers target the same market but with
non-competing merchandise.
5. Restrictions and Costs
• Some locations may place restrictions on the type of
retail tenants that are allowed in a shopping center in
See PPT 8-17
B. Locations Within a Shopping Center
• Since the better locations cost more, retailers must consider
their importance.
• In a strip shopping center, the more expensive locations are
closest to the supermarket. Thus, these locations are most
desirable to retailers that rely on impulse shopping from the
supermarket’s customers.
Ask students, given cost
considerations, where would
you locate a florist or a shoe
repair shop in a neighborhood
shopping center.
• 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
fashionable apparel) benefit from being in more expensive
locations near the department store anchors, which are
destinations for comparison apparel shoppers.
applies to both stores that sell complementary merchandise
and those that compete directly with one another.
Ask students why stores in antique
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.
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.
zones by distance.
See PPT 8-19
boundaries, then get them to
explain how they would
determine the primary and
secondary zones.
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
competition, nature of the merchandise sold, the
assortment offered, and the location of alternative sources
for the merchandise.
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.
Census Bureau, based on the Decennial Census of the
United States; and (2) data from geographic information
systems, provided by several commercial firms.
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.
• The U.S. Census Bureau prepares periodic reports
summarizing the data from two sources: the census
demographics for each person and additional data collected
from a sample of the population.
• There are 8 million census blocks in the United States, each
containing the residences of about 40 people.
• Since the Census is taken only once every 10 years, it’s often
out of date, though the projections are reasonably accurate.
Another limitation is that the data are not particularly user-
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
customers’ demographics, buying behavior, and other data
in a map format.
• Major GIS firms, such as ESRI, Nielsen (which purchased
Claritas), and Pitney Bowes (which purchased MapInfo),
offer a wide range of tools that are useful for assessing
consumer demand in an area.
See PPT 8-22 and 8-23
Ask students why they would
use a demographic data or GIS
vendor when the Census
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
behavior patterns.
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
and municipal and county governments.
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
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
the example of Edward Beiner Purveyor of Fine Eyewear, a
12-store Florida retailer specializing in upper-end, high-
fashion eyewear.
LO 8-5 Illustrate the site
selection process.
VI. Negotiating a Lease
LO 8-6 Explain the different
A. Types of Leases
1. Percentage lease
• The most common form of lease is a percentage lease. Rent
See PPT 8-35
is based on a percentage of sales. Rents go up and down
with sales and inflation.
Percentage lease with specified maximum/minimum
Sliding scale
• Percentage/sale amount decreases in specified dollar
amount intervals as sales go up (e.g., 4% for first $200,000 in
sales, then 3% for sales greater than$200,000, etc.)
2. Fixed-Rate Lease
• The second basic type of lease is a fixed-rate lease.
Commonly used by community and neighborhood centers.
Retailer pays fixed monthly rent for the life of the lease.
•
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
needs of the retailer. In addition to the rent, some other
negotiable aspects of the lease are cotenancy, prohibited-
use, and exclusive-use clauses.
See PPT 8-37
1. Cotenancy Clause
2. Prohibited-Use Clause
• A prohibited-use clause limits the landlord from leasing to
certain kinds of tenants. For example, tenants that take up
parking but do not bring shoppers, such as a bowling alley.
Also, restricts against leasing to certain kinds of tenants such
as bars, pornography retailers, etc.
3. Exclusive-Use Clause
• An exclusive-use clause prohibits the landlord from leasing
to retailers selling competing products. A discount store, for
example, may not want another discounter leasing in the
same center.
4. Common Area Maintenance Costs
• In retail leases, common area maintenance (CAM) clauses
often require the most extensive negotiations. These
clauses traditionally assign responsibilities for taking care of
common areas, including sidewalks or parking lots.
VII. Summary
• Trade areas are typically divided into primary,
secondary, and tertiary trading areas.
• Retailers need to negotiate the terms of a lease.
ANSWERS TO SELECT “GET OUT AND DO IT!” QUESTIONS
2. INTERNET EXERCISE Go to
http://www.esri.com/library/fliers/pdfs/tapestry_segmentation.pdf and identify five
segments that you would expect to be found in your zip code. Then go to
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.
3. INTERNET EXERCISE Go to http://www.esri.com/what-is-gis, the home page for ESRI
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
capturing, managing, analyzing, and displaying all forms of geographically referenced
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.
Census Bureau homepage at http://factfinder2.census.gov/faces/nav/jsf/pages/index.xhtml
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
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
be used for a team or class discussion. Students will likely note that most anchor stores
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
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
choice, because the homes there will need repairs and continual maintenance. Since the
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
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
consumer would do only for lower priced products or for unique merchandise. Due to
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
characteristics. Retailers would use this approach when it is indeed possible to identify
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
displaces the former, lower-income residents is an unknown environment, a new retail
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
terms of traffic, the potential franchisee should learn how much vehicle (or in a food court,
potential franchisee needs to know both the actual population figures and projections of
growth. Is the area growing, stagnating or decreasing in terms of population? In terms of
income and employment, the potential franchisee should consider the level of employment
and incomes within its expected trade areas. In terms of competition, the potential
CONNECT ACTIVITIES FOR CHAPTER 8
Activity Type
Topic(s)
Learning Objective(s)
Katie’s Kids- Trade
Area Analysis
Decision Generator
Trade Areas and the
Site Selection Process,
The Importance of
Choosing a Store
Location
8-2 Review the
characteristics of a
particular site.
8-3 Understand how
retailers analyze the
trade area for a site.
Sub Hub-Retail Site
Selection
Case Analysis
Evaluating Retail Sites
8-2 Review the
characteristics of a
particular site.