Chapter 08 – Retail Site Location
8-1
CHAPTER 8
RETAIL SITE LOCATION
ANNOTATED OUTLINE
INSTRUCTOR NOTES
I. Evaluating Specific Areas for Locations
• 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.
• 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 is a smaller
unit of analysis with only 10,000 inhabitants
in its core urban area.
See PPT 8-4
See PPT 8-3
A. Economic Conditions
• It is important to examine an area’s level
and growth of population and employment
See PPT 8-5
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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.
Under what circumstances is it desirable for
retailers to establish stores in sparsely populated
areas? Is it ever a good idea?
B. Competition
• The level of competition in an area also
affects demand for a retailer’s merchandise.
merchandise at low prices.
Ask students if they think Wal-Mart’s early
location strategy could work for another type of
retailer. If so, which one(s)? If not, why not?
C. 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
See PPT 8-7
D. Operating Costs
• Costs of operating stores can vary
dramatically across areas.
See PPT 8-8
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also the local and state regulatory
environments.
II. 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
A. Economies of Scale from Multiple Stores
• Since retail chains plan to go into an area
with a network of stores, they attempt to
Ask students for examples of retail chains with
multiple locations within, say, a 20-mile radius.
B. 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).
• In this case, the retailer would continue to
open stores as long as the marginal revenues
achieved by opening a new store are greater
than the marginal costs.
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• To reduce the level of conflict, most
franchise agreements grant franchisees an
exclusive territory to protect them from
another franchisee cannibalizing their sales.
III. Evaluating a Site for Locating a Retail Store
See PPT 8-10 and 8-11 for a summary of
characteristics used to evaluate retail sites.
may also affect accessibility.
A. 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.
• The accessibility of a site is the ease with
which a customer can get into and out of it.
See PPT 8-12
Ask students to describe two local retail sites
See PPT 8-13
can result in customer delays.
B. Location Characteristics
• 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 parking ratios as a
starting point.
See PPT 8-13
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• Visibility refers to customers’ ability to see
the store from the street. Good visibility is
less important for stores with a well-
established and loyal customer base.
C. 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
See PPT 8-17
D. Locations Within a 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 in 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.
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complementary merchandise and those that
compete directly with one another.
IV. Trade Area Characteristics
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 zone (the outermost area)
includes customers who occasionally shop
at the store or shopping center and come
from widely dispersed areas.
See PPT 8-19
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, type of
shopping area, type of store, and level of
competition.
See PPT 8-20
Chapter 08 – Retail Site Location
its own traffic and whose trade area is
customers. It is a place where consumers
will go even if it is inconvenient.
• The level of competition also affects the
size and shape of a trade area for a
particular store. Trade areas may shrink for
retailers offering identical merchandise to
others, and expand for retailers offering
complementary goods to those carried by
other retailers.
area for a new store location than for
existing locations. However, retailers
areas for existing stores to estimate that
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.
• Another method is to record automobile
license plates in the parking lot and trace
them to the owner by purchasing the
information from state governments or
private research companies. This method is
thought to be less accurate and is illegal in
some states.
See PPT 8-21
D. Sources of Information about the Trade Area
• Retailers use Decennial Census of the
United States, demographic and GIS
(geographical information system) data to
describe their potential customer in an
attempt to assess how much they will buy in
the proposed trade area.
See PPT 8-21
8-8
1. Demographic Data from U.S. Census
Bureau
• A census is a count of the population of a
country as of a specified date.
• Census information includes: number of
persons per household, household
relationships, sex, race, age, and marital
status. Additionally, a report on each
building identifies the number of housing
units at the address, the status of plumbing
facilities, the number of rooms, whether the
dwelling is owner-occupied, the housing
value, the rent, and the vacancy status.
• The smallest unit for the sample data is the
block group, a collection of adjacent blocks
that contain between 300 and 3,000 people.
Data are also available at higher levels of
aggregation.
2. Geographic Information System (GIS)
Suppliers
• Geographic Information Systems (GIS) is
a system of hardware and software used to
store, retrieve, map and analyze geographic
See PPT 8-22 and 8-23
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assessing consumer demand in an area.
and other data in a map format.
• Using GIS, analysts can identify the
boundaries of a trade area and isolate target
customers groups.
3. Tapestry Segments
• 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 see (generally)
what Tapestry Segment they are in.
E. Competition in the Trade Area
• One of the powerful methods of measuring
competition is over the Internet.
• Other sources of competitive information
See PPT 8-26
V. Estimating Potential Sales for a Store Site
• Methods for estimating potential sales for a
store site include the Huff Gravity Model,
regression analysis and the analog method,
all described below.
See PPT 8-27
Chapter 08 – Retail Site Location
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A. Huff Gravity Model
• This model, following Newton’s law of
gravity, is based on the premise that the
probability that a given customer will shop
in a particular store or shopping center
becomes larger as the size of the store or
center grows and the distance or travel time
from customers to the store or center
shrinks.
See PPT 8-28 through 8-30 for an application
of the Huff Gravity Model
Pick two shopping centers, one big and one
small. Draw them on the board, and put an X
in the middle. Ask students if the two centers
were equidistant from where they lived, where
they would shop and why. They would
B. Regression Analysis
• The regression analysis approach is based
on the assumption that factors that affect the
sales of existing stores in a chain will have
the same impact on stores located at new
sites being considered.
See PPT 8-31 through 8-33 for a Regression
Analysis application
VII. Negotiating a Lease
Ask students why it is important to understand
lease terms when choosing a site?
A. Types of Leases
1. Percentage lease
See PPT 8-35
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• Rent 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, 3% for sales
>$200,000, etc.)
expenses increase beyond a certain point.
B. Fixed-Rate Lease
• Commonly used by community and
Graduated lease
• Changing fixed rent payments (i.e. first 3
years-$1,000 per month, next 5 years-
$1,250 per month.)
Maintenance-increase-recoupment lease
See PPT 8-36
C. Terms of the lease
• Lease terms may often be slanted in favor of
lessor. It is up to lessee (retailer) to make
sure that its needs are accounted for.
See PPT 8-37
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• 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.
VIII. Summary
• Location decisions have strategic
importance because they have
Chapter 08 – Retail Site Location
ANSWERS TO “GET OUT AND DO ITS”
What’s in a neighborhood?, and then 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.
Information Systems, 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
and, using the Population Finder, 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 be
used for a team or class discussion. Students will likely note that most anchor stores are
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:
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) strategic
Chapter 08 – Retail Site Location
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. 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 so as to
minimize travel and other times. The more a consumer has to travel to obtain a product, the
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4. 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
5. 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 Radio Shack and Foot Locker choose the second or third floor?
These two stores are destination stores with a national reputation. When people are in the
6. What retail locations are best for department stores, consumer electronics category
killers, specialty apparel stores, and warehouse stores? Discuss your rationale.
Department stores often occupy anchor positions in traditional shopping centers offering
them good pedestrian traffic and other incentives. Their location in shopping centers provides
Chapter 08 – Retail Site Location
7. 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,
pedestrian) traffic passes the site and at what times of day. In terms of population, the
8. A drugstore is considering opening a new location at shopping center A, with hopes of
capturing sales from a new neighborhood under construction. Two nearby shopping
centers located nearby, B and C, will provide competition. Using the following
information and the Huff gravity model, determine the probability that residents of the
new neighborhood will shop at shopping center A: