dc lecture two : market selection and location analysis
TRANSCRIPT
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Distribution Channels MKTG 1058LECTURE TWO
MARKET SELECTION & LOCATION ANALYSIS(Chapter 7)
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Learning Objectives for Chapter 7:
1. Explain the criteria used in selecting a target market.
2. Identify the different options, both store-based and non-store-based, for effectively reaching a target market and identify the advantages and disadvantages of business districts, shopping centers, and freestanding units as sites for retail location.
3. Define geographic information systems (GIS) and discuss their potential uses in a retail enterprise.
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Learning Objectives
4. Describe the various factors to consider in identifying the most attractive geographic market for a new store.
5. Discuss the various attributes to consider in evaluating retail sites within a retail market.
6. Explain how to select the best geographic site for a store.
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Importance of Topic Vital to doing well in your group project
You need to apply the concepts of LA and discuss critically the issues required in the project brief
Read the project brief in detail and note each requirement!!
Do not stray out of point.
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Location!! Location!! Location!!
� These words resonate in retailing� A key decision is where to locate the retail
shop/s and mall� Location will determine where you draw
your target customers from� We call this “Trading Area”� This topic forms the basis of your project-
learn it very well!!
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Location is typically prime consideration in customer’s store choice.
Location decisions have strategic importance because they can help to develop sustainable competitive advantage.
Location decisions are risky: invest or lease?
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Why is Store Location Important for a Retailer?
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Geographic space and cyberspace must be considered
Traditionally, reaching the target market has been associated with selecting the best physical location for a store.
The Internet is becoming a viable alternative for reaching one’s customers.
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Virtual Stores
The equivalence of a store on the Internet is a retailer's World Wide Web (www) site.
The retailer's home page is the introductory or first material viewers see when they access a retailer's Internet site. It is equivalent to a retailer's storefront in the physical world.
Virtual store is the total collection of all the pages of information on the retailer's Internet site.
The counterpart to location on the Internet is the "ease of access." This refers to the consumer’s ability to find a Web site in cyberspace easily and quickly.
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Market Segmentation
a method retailers use to segment, or break down, heterogeneous consumer populations into smaller, more homogeneous groups based on their characteristics.
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Segmentation
No single retailer can serve all potential customers; it is important that it segment the market and select a target market(s).
A target market is the segment of the market that the retailer decides to pursue through its marketing efforts.
The topics of target market selection and location analysis are combined because a retailer must identify its target market(s) before it decides how best to reach that market(s).
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Marketing : An IntroductionAn Asian Perspective © Armstrong, Kotler & da Silva
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Identifying a Target Market
To reach a target market successfully
Market segment should be measurable
Market should be accessible
Market should be sustainable enough to be profitable
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Target marketIs the group of customers that the retailer is seeking to serve.How do you know which particular segment
is the most attractive for your firm? What factors would you consider when selecting and penetrating a given target market?
Market Segmentation
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Target Market UNIQLO has a well-
defined target market: customers who desire good quality but reasonably priced casual fashion apparel
Think of some local retailers that focus on specific customer segments. What examples come to mind? Is narrow or broad targeting a preferred strategy and why?
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Target marketing in retailing
Using this framework, think of examples of retailers who apply each of these 3 types of targeting strategies.
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Targeting the Fashion Conscious
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Targeting Kids
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Targeting the Budget Conscious Segment
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Different ways of achieving competitive advantages in marketing and retailing (differentiation strategies)
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Marketing : An IntroductionAn Asian Perspective© Armstrong, Kotler & da Silva
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POSITIONING IN MARKETING
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Positioning Map for Retailer Categories
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Positioning based on Margins and Nature of Merchandise:
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Positioning of Malls- possible criteria
Landmark City Location
Neighborhood/ Suburban Location
Upscale International
Branded Tenants
Local Tenants
Lot 1
i-ON Orchard
Loyang Point
Orchard Central
Chelsea Premium Outlets coming to Johore in 2011
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Reaching Your Target Market
Location of Store-based RetailersNon-store-based Retailers
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Location of Store-Based Retailers
Store-Based Retailers operate from a fixed store location that requires customers to travel to the store to view and select merchandise or service.Non-store-Based Retailers intercept
customers at home, at work, or at a place other than a store where they might be susceptible to purchasing.
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Retail Formats for Accessing A Target Market
Exhibit 7.22-26
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Location of Store-Based Retailers
Central Business Districts (CBD) usually consists of an unplanned shopping area around the geographic point at which all public transportation systems converge; it is usually in the center of the city and often where the city originated historically.
Secondary Business District (SBD) is a shopping area that is smaller than the CBD and that revolves around at least one department or variety store at a major street intersection.
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Central Business District
ADVANTAGES Draws people into areas during business
hours Hub for public transportation Pedestrian traffic Residents DISADVANTAGES High security required Shoplifting Parking is poor Evenings and weekends are slow
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Location of Store-Based Retailers Neighborhood Business District (NBD) is a chopping
area that evolves to satisfy the convenience-oriented shopping needs of a neighborhood, generally contains several small stores (with the major retailer being a supermarket or a variety store), and its located on a major artery of a residential area. (Example our HDB heartland stores)
Shopping Center (or mall) is a centrally owned or managed shopping district that is planned, has balanced tenancy (the stores complement each other in merchandise offerings), and is surrounded by parking facilities. (note: quite often in Singapore our Shopping Centre is located within the city or main street) 2-29
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ISCS Shopping Center Definitions
Exhibit 7.32-30
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ISCS Shopping Center Definitions
Exhibit 7.32-31
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ISCS Shopping Center Definitions
Exhibit 7.3
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Shopping Center Advantages
Heavy traffic resulting from the wide range of product offerings.
Cooperative planning and sharing of common resources.
Access to highways and availability of parking.
Lower crime rate. Clean, neat environment.
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Shopping Center Disadvantages
Inflexible store hours (open during mall hours only).
High rents. Restrictions as to what merchandise the
retailer may sell. Inflexible operations and required
membership in the center’s merchant organization.
Possibility of too much competition and the fact that much of the traffic is not interested in a particular product offering.
Dominance of the smaller stores by the anchor tenants.
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The Largest Shopping Malls
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Advantages and Disadvantages of Shopping Malls
Advantages:Many different types of storesMany different assortments availableAttracts many shoppersMain Street for today’s shoppersNever worry about the weatherComfortable surrounding to shopUniform hours of operation
Disadvantages:Occupancy costs are highTenants may not like mall management control of operationsCompetition can be intense
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Challenges to Malls
Time pressured society makes it impractical to wander malls
Fashion apparel sold in malls experiencing limited growth
Malls are getting old and rundown –unappealing to shop
Anchor tenants are decreasing due to retail consolidation
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Lifestyle Centers• Usually located in affluent residential
neighborhoods
• Includes 50K sq. ft. of upscale chain specialty stores
• Open-air configuration
• Design ambience and amenities
• Upscale stores
• Restaurants and often a cinema or other entertainment
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Lifestyle Centers: examples in Singapore
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Clarke Quay
Holland Village/ Rochester Park
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Fashion / Luxury Specialty Centers
Branded goods Located in upscale malls Target at up-market
clients
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Outlet CentersThese shopping centers contain mostly manufacturers and retail outlet stores
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There is one coming soon to Johore soon!!
http://www.cnngo.com/singapore/shop/chelsea-premium-outlets-open-johor-709556
The new Johor project is expected to attract 4 million visitors a year, according to Malaysian Prime Minister Najib Razak. It's a joint venture between Chelsea Premium Outlets and Genting Group that's being developed in Johor as part of the Iskandar Malaysia project, and understandably, Malaysia has bragging rights to it. "It is the first (Chelsea) center in the (Asean) region and I'm very happy that they have chosen Malaysia," said PM Najib. He said he understood other countries in the region had been trying to woo the Chelsea Group to set up the center
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Location of Store-Based Retailers
Anchor Stores are the stores in a shopping center that are the most the most dominant and are expected to draw customers to the shopping center.
Free-Standing Retailer generally locates along major traffic arteries and does not have any adjacent retailers to share traffic with.
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Unplanned Retail Locations
Merchandise Kiosks – small temporary selling stations located in walkways of enclosed malls, airports, train stations or office building lobbies.
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Unplanned Retail Locations
Freestanding Sites– location for individual store unconnected to other retailer
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Advantages of Freestanding Retailing
Lack of direct competition.Generally lower rents.Freedom in operations and hours.Facilities that can be adapted to individual needs.Inexpensive parking.
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Limitations of Freestanding Retailing
Lack of drawing power from complementary stores.Difficulties in attracting customers for the initial
visit.Higher advertising and promotional costs.Operating costs that cannot be shared with
others.Stores that may have to be built rather than
rented.Zoning laws that may restrict some activities.
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• Mixed Use Developments
• Airports
• Resorts
•Hospitals
• Store within a Store
Other Retail Location Opportunities
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Alternative LocationsMixed Use Developments (MXDs)
Civic Centers
Office Buildings
Hotels
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Airports: Why wait with nothing to do?
Rents are 20% higher than mallsSales/sq ft are 3‐4 times higher than mallsBest airports are ones with many connecting flights
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Airports as retail locations
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Captive audienceWell-to-do customer
Customers have time to shop
Hilton Singapore Banyan Tree
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Alternative Locations- Hotels and Resorts
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Captive LocationPatients cannot leaveGifts are available
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Alternative Locations - Hospitals
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Non-store-based Retail Formats
Direct SellingStreet PeddlingInteractive TVMail-OrderInternetAutomated Merchandising Systems
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While we discuss location, we don’t just consider the retailer’s perspective of store choice location
What about customers’ shopping patterns? How, where, when and why do customers
buy? There are different patterns…
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Location must also to be considered from the “customer’s perspective”
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Minimize the customer’s effort to get the product or service by locating store close to where customers are located
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Shopping SituationsConvenience Shopping
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Shopping SituationsComparison Shopping
Customers have a good idea of what type of product they want, but don’t have a strong preference for brand, model or retailer.
Typical for furniture, appliances, apparel, consumer electronics, hand tools and cameras.
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Category Specialists
Consumers can see almost all brands and models in one store
IKEA is a “destination store”
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Shopping SituationsSpecialty Shopping
•Customers know what they want•Designer labels•Convenient location matters less
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Destinations Versus “Parasites”Destination stores have a
better assortment, better promotion, and/or better image
They generate trading areas much larger than competitors
Going to IKEA- this is a destination store
Parasite stores do not create their own traffic and have no real trading area of their own
These stores depend on people who are drawn to the area for other reasons
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Question to Ponder
Given the wide variety of locations available to target specific consumer groups, what new locations will provide the greatest opportunities for the retailers of tomorrow?
Trends will vary across Asia. More malls will spring up in city centers. Others will still rely on traditional retail locations. Within Asia location is important for tourism retailing. Other comments?
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LOCATION ANALYSIS METHODS
These topics will be important for your completion of your DC
project
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Geographic Information Systems
These comprise: digitized mapping with key locational
data to graphically depict trading-area characteristics such as population demographicsdata on customer purchases listings of current, proposed, and competitor locations
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Geographic Information Systems
The GIS combines physical geography with cultural geography.Cultural geography: is the buffer that people
have created between themselves and the raw physical environment and includes the characteristics of the population, humanly created objects, and mobile physical structures. Thematic Maps use visual techniques such as
colors, shading, and lines to display cultural characteristics of the physical space.
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GIS Components
Exhibit 7.4 2-64
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Uses of GIS
Market selection.Site analysis.Trade area definition.New store cannibalization.Advertising management.Merchandise management.Evaluation of store managers.
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Market Identification Market Identification - involves three
sequential steps:
1. First, the retailer must identify the most attractive markets in which to operate.
2. Second, one must evaluate the density of demand and supply within each market and identify the most attractive sites that are available within each market.
3. Third, select the best site or sites available.
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Selecting a Retail Location
Exhibit 7.5 2-67
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Location analysis is like a filtering process…
Overall market
Trading area
Site
1
2
3
Target market segment
The locality or catchment
area
The actual
location of the
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Market Identification
Trading AreaIs the geographic area from which a retailer, or group of retailers, or community draws its customers.
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Elements in Trading-Area Selection
Population Characteristics
Economic BaseCharacteristics
Nature and Saturationof Competition
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Benefits of Trading Area Analysis
Discovery of consumer demographics and socioeconomic characteristics
Opportunity to determine focus of promotional activities
Opportunity to view media coverage patterns
Assessment of effects of trading area overlap
Ascertain whether chain’s competitors will open nearby
Discovery of ideal number of outlets, geographic weaknesses
Review of other issues, such as transportation
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Selected Population Statistics for Trading Areas A and B
Characteristics Area A Area B Total population, 2000 13,732 15,499
Population change, 1990-2000 +8.2 +2.5
College graduates, 25 +, 2000 (%) 41.4 39.2
Median household income, 2000 $61,236 $61,242
Managerial and professional occupations (%), 2000
45.3 45.0
Which trading area would you consider as being the most attractive and why?
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The Segments of a Trading Area
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Trading Areas and Store Types
Largest
TRADINGAREAS
Smallest
Department stores
Supermarkets
Apparel stores
Gift stores
Convenience stores
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Market Identification
Retail Location TheoriesMarket Demand PotentialMarket Supply Factors
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Retail Location Theories
Retail Gravity TheorySaturation TheoryBuying Power Index
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Retail Location TheoriesRetail Gravity Theory
Suggests that there are underlying consistencies in shopping behavior that yield to mathematical analysis and prediction based on the notion or concept of gravity.It is based on Newtonian gravitational principles, explains how large urbanized areas attract customers from smaller rural communities.
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Retail Location TheoriesThe Formula used:
Dab
d
1 +Pb
Pa
=
where Dab is the breaking point from city A, measured in miles along the road to city B;
d is the distance between city A and city B along the major highway;Pa is the population of city A; and
Pb is the population of city B.2-78
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Retail Location Theories
Point of IndifferenceIs the extremity of a city’s trading area where households would be indifferent between shopping in that city or an alternative city in a different geographical direction.
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Trading Area for City A
Exhibit 7.62-80
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The break points are computed based on the formula:
Exhibit 7.62-81
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Computation of the values using Reilly’s Law of Retail GravitationFrom City_ to Central City (A)
Computed value using the equation
Point of Indifference:
From B to A X = 18 –14.5 = 3.5
From C to A Y = 14 –10.8 = 3.2
From D to A Z = 5 – 3.7 = 1.3
18
1 + √
√1 +
1 + √
14
5
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14000240000
240000
240000
21000
30000
= 14.5
= 10.8
= 3.7
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Limitations of Reilly’s Law
Distance is only measured by major thoroughfares; some people will travel shorter distances along cross streetsTravel time does not reflect distance
traveled. Many people are more concerned with time traveled than with distanceActual distance may not correspond
with perceptions of distance
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Illustration of Location Analysis
How to apply Reilly’s Law for the Project
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The challenge of doing LA analysis in Singapore context
Urban state Small geographical area Efficient transportation system (no issue
about mobility unlike US where customers commute if there larger malls)
In this project we will substitute population size (as shown in text) with mall size (square feet)Reason: mall size becomes the “surrogate
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Mall B
Floor Area 450K Sq Ft
25 km
10km
Your Site
Mall C
Floor Area 150K Sq Ft
Mall A
Floor Area 250K Sq Ft
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Work out using the Reilly model
Dab
d
1 +Pb
Pa
=
where Dab is the breaking point from city A, measured in miles along the road to city B;d is the distance between city A and city B along the major highway;Pa is the population of city A; and
Pb is the population of city B.
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Substitute with floor area (square feet) of your own mall site
Substitute with floor area (square feet) of another nearby mall that may attract similar customers
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Mall A and Mall B
Dab
25
1 +450
250
=
= 10.6km
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Mall A and Mall C
Dab
10
1 +150
250
=
= 5.6 km
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Mall B
Floor Area 450K Sq Ft
25 km
10km
Your Site
Mall C
Floor Area 150K Sq Ft
Mall A
Floor Area 250K Sq Ft
25 km
10km
Mark off the break points
10.65.6
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Mall B
Floor Area 450K Sq Ft
25 km
10km
Your Site
Mall C
Floor Area 150K Sq Ft
Mall A
Floor Area 250K Sq Ft
25 km
10km10.6
5.6
Zone off the Trading Area
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Show the maps…your trading area could be triangular or even polygon
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Trading area mapped out against three malls
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Retail Location Theories
Saturation TheoryExamines how the demand for goods and services of a potential trading area is being served by current retail establishments in comparison with other potential markets.
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Retail Location Theories
Retail Store Saturation:is a condition where there is just
enough store facilities for a given type of store to efficiently and satisfactorily serve the population and yield a fair profit to the owners.
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Retail Location Theories
Understored:is a condition in a community
where the number of stores in relation to households is relatively low so that engaging in retailing is an attractive economic endeavor.
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Retail Location Theories
Overstored:is a condition in a community where the number of stores in relation to households is so large that engaging in retailing is usually unprofitable or marginally profitable.
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Index of Retail Saturation (IRS) is the ratio of demand for a product (households in the geographic area multiplied by annual retail expenditures for a particular line of trade per household) divided by available supply (the square footage of retail facilities of a particular line of trade in a geographic area).
Retail Location Theories
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Index of Retail Saturation (IRS)
IRS = (H X RE)/RF
Where IRS is the index of retail saturation for an area; H is the number of households in the area; RE is the annual retail expenditures for a particular line of trade per household in the area; RF is the square footage of retail facilities of a particular line of trade in the area (including square footage of the proposed store).
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Sample Question 11 from the text:
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11. Compute the index of retail saturation for the following three markets. The data for department stores are as follows: MARKET A B C Retail expenditures per household $789 $875 $943 Square feet of retail space 600,000 488,000 808,000 Number of households 121,000 102,000 157,000 Based on these data, which market is most attractive? What additional data would you find helpful in determining the attractiveness of the three markets?
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Solution to Question 11
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IRS (Market A) = (121,000 x $789) / 600,000 = 159.12 IRS (Market B) = (102,000 x $875) / 488,000 = 182.89 IRS (Market C) = (157,000 x $943) / 808,000 = 183.23 The most attractive market is Market-C with an IRS of 183.23 or $183.23 in expected sales per square foot. It would be helpful if additional information on various factors that influence market demand potential such as population characteristics, buyer behavior characteristics, household income, household age profile, household composition, community life cycle, population density and mobility. In addition supply factors such as square feet per store, square feet of space per employee, store growth, and the quality of competition should be analyzed.
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See also the ‘Planning Your Own Retail Business’ example
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The retail store that you are planning has an estimated circular trade radius of four miles. Within this four-mile radius, there is an average of 1,145 households per square mile. In a normal year, you expect that 47 percent of these households would visit your store (referred to as penetration) an average of 4.3 times (referred to as frequency). Based on these figures, what would you expect to be the traffic (i.e., number of visitors to your store per year)? (Hint: Traffic can be viewed as the square miles of the trade area multiplied by the household density multiplied by penetration, which is in turn multiplied by frequency.) Once you answer this question, do some sensitivity analysis, which is an assessment of how sensitive store traffic is to changes in your assumptions about penetration and frequency. What happens if penetration drops to 45 percent or rises to 50 percent? What happens if frequency drops to 4.0 times annually or rises to 4.5 times annually? In this analysis, only change one thing at a time and hold all other assumptions constant.
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Solution:
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Suggested Answer: One needs to first compute the following. 1. square miles of trade area = r2 = (22/7)(4)2 = 50.286 2. traffic = (square miles in trade area) x (household density) x (penetration) x (frequency) traffic = (50.286) x (1,145) X (47%) X (4.3) traffic = 116,364 Next do some sensitivity analysis.
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Solution (sensitivity analysis)
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Consider the following possible parameter values SQUARE HOUSEHOLD MILES IN (x) DENSITY (x) PENETRATION (x) FREQUENCY = TRAFFIC TRADE AREA 1 50.286 x 1145 x 47% x 4.3 = 116,364 2 50.286 x 1145 x 45% x 4.3 = 111,412 3 50.286 x 1145 x 50% x 4.3 = 123,792 4 50.286 x 1145 x 47% x 4.0 = 108,246 5 50.286 x 1145 x 47% x 4.5 = 121,776
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Retail Location Theories
Buying Power Index (BPI):is an indicator of a market’s overall retail potential and is composed of the weighted measures of effective buying income (personal income, including all nontax payments such as social security, minus all taxes), retail sales, and population size.
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Buying Power Index (BPI)
BPI =
+ 0.3(the area’s percentage of U.S. retail sales)
+ 0.2(the area’s percentage of U.S. population)
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0.5(the area’s percentage of U.S. effective buying income)
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Other Demand and Supply Factors
- Market Demand Potential
- Market Supply Factors
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Market Demand Potential
Population CharacteristicsBuyer Behavior CharacteristicsHousehold IncomeHousehold Age ProfileHousehold CompositionCommunity Life CyclePopulation DensityMobility
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Identifying Communities with High Demand Potential for Fast-Food Drive-In Restaurant
Exhibit 7.7
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Market Supply Factors
Square Feet Per StoreSquare Feet Per EmployeeGrowth in StoresQuality of Competition
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Site Analysis
Site AnalysisIs the evaluation of the density of demand and supply within each market with the goal of identifying the best retail site(s).
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Site Analysis
Size of Trading AreasDescription of Trading AreaDemand DensitySupply DensitySite Availability
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Site Analysis
Size of Trading Areas Applebaum developed a technique for estimating the
trade area of a current store. It involved interviewing a customer for each $100 in
weekly sales. The customers were randomly selected and their home addresses obtained.
After the home addresses of the shoppers were plotted on a map one could make inferences about the trading area size and the competition.
This is sometimes referred to as ‘customer spotting’
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But for new stores… the task is more difficult; however, there are some general rules that apply.
1. Stores that sell products that the customer wants to buy in the most convenient manner will have a smaller trading area
2. As customer mobility increases, the size of the trading area increases
3. As the size of the store increases, its trading area increases, because it can stock a broader and deeper assortment of merchandise, which will attract customers from greater distances.
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Some conclusions…
4. As the distance between competing stores increases, their trading areas will increase.
5. Natural and synthetic obstacles such as rivers, mountains, railroads, and freeways can abruptly stop the boundaries of a trading area
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Description of Trading Areas
Retailers can access at relatively low cost information concerning the trading area for various retail locations and the buyer behavior of the trading area.
Use descriptors to profile trading areas Start with geo-demographic variables Can be supplemented with lifestyle and
behavioral factors Neighborhood analysis MapInfo www.mapinfo.com 2-116
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Demand Density
Demand DensityIs the extent to which the potential demand for the retailer’s goods and services is concentrated in certain census tracts, ZIP (postal) code areas, or parts of the community.
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Demand Density Map
Exhibit 7.11
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Supply Density
Supply DensityThe extent to which retailers are concentrated in different areas of the market under question.
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Store Density and Site Availability Map
Exhibit 7.12 2-120
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Checklist for Site Evaluations
Exhibit 7.13 2-121
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Checklist for Site Evaluations
Exhibit 7.13 2-122
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Checklist for Site Evaluations
Exhibit 7.132-123
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Checklist for Site Evaluations
Exhibit 7.13 2-124
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Checklist for Site Evaluations
Exhibit 7.132-125
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Site Selection
Nature of SiteTerms of Purchase or LeaseExpected Profitability
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Site Selection
100 Percent LocationIs when there is no better use for a site than the retail store that is being planned for that site.
After all, all retailers should attempt to find a 100 percent location for their stores. A 100 percent location is a location where there is no better use for the site then the retail store that is being planned. Retailers should remember that what may be a 100 percent site for one store may not be for another. The best location for a supermarket may not be the best location for a discount department store
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Nature of Site
Store CompatibilityExists when two similar retail businesses locate next to or nearby each other and they realize a sales volume greater than what they would have achieved if they were located apart from each other.
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Past Year Exam Questions
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MARKET SELECTION & LOCATION ANALYSIS
(Chapter 7)
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October 2006