Trading-Area Analysis

Objectives
 To demonstrate the importance of store
location for a retailer and outline the
process for choosing a store location

9-2
 Location, Location, Location
 Criteria to consider include
population size and traits
competition
transportation access
parking availability
nature of nearby stores
property costs
length of agreement
legal restrictions

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 Importance of
Location to Esprit

9-4
 Choosing a Store Location
Step 1: Evaluate alternate geographic (trading)
areas in terms of residents and existing retailers

Step 2: Determine whether to locate as an

isolated store or in a planned shopping center

Step 3: Select the location type

Step 4: Analyze alternate sites contained in the

specific retail location type
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 Trading-Area Analysis

A trading area is a
geographic area containing
the customers of a
particular firm or group of
firms for specific goods or
services

9-6
 Benefits of Trading Area Analysis
 Discovery of  Assessment of effects
consumer of trading area overlap
demographics and  Ascertain whether
socioeconomic chain’s competitors
characteristics will open nearby
 Opportunity to  Discovery of ideal
determine focus of number of outlets,
promotional activities geographic
 Opportunity to view weaknesses
media coverage  Review of other issues,
patterns such as transportation
9-7
 Figure 9.2 The Trading Areas of
Current and Proposed Outlets

9-8
 GIS Software
 Geographic Information Systems
– digitized mapping with key locational
data to graphically depict trading-area
characteristics such as
• population demographics
• data on customer purchases
• listings of current, proposed, and
competitor locations

9-9
 The TIGER Map Service

9-10
 The TIGER Map Service

9-11
 GIS Software in Action - A

9-12
 GIS Software in Action - B

9-13
 Private Firms Offering
Mapping Software
Claritas

ESRI

GDT

GeoVue

Mapinfo

SRC
9-14
 Size & shape of trading areas

• Primary trading area – 50-80% of stores

customer (4 miles)
• Secondary trading area - + of 15-25% of
stores customer (5 miles)
• Fringe trading area – remaining customers
(10 miles)
Factors: store type,size, competitors location,
housing pattern, travel time,media
availability

9-15
 The Segments of a Trading Area

9-16
 Delineating Trading-Area
Segments

9-17
 Destinations versus Parasites

• Destination stores • Parasite stores do not

have a better create their own traffic
assortment, better and have no real
promotion, and/or trading area of their
better image own
• It generates a trading • These stores depend
area much larger than on people who are
that of its competitors drawn to area for other
• Dunkin’ Donuts: “It’s reasons
worth the trip!”

9-18
 Trading Areas and Store Type
Largest
Department stores

Supermarkets
TRADING
AREAS Apparel stores

Gift stores

Smallest Convenience stores

9-19
 Carrefour Shanghai

9-20
 The Trading Area of a New Store
Different tools must be used when an area
must be evaluated in terms of opportunities
rather than current patronage and traffic
patterns
– Trend analysis
– Consumer surveys
– Computerized trading area analysis
models

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 Computerized Trading-Area
Analysis Models

Analog Model

Regression Model

Gravity Model

9-22
 The Trading Area of a New Store

• Analog model(potential sales for new store)

Revenue for similar stores in existing areas,competition,new stores
expected market share & size/density of locations primary trading
area
• Regression model(series of mathematical eq.)
Association b/w potential store sales & independent variables at each
location as population size,avg. income. No. of households,nearby
competitors,transportation barriers & traffic patterns
• Gravity model
people are drawn to stores – closer & attractive than competitors.
Distance b/w -consumer & competitor,consumer & given site & store
image are included in this model

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 Reilly’s Law
Reilly’s law of retail gravitation, a
traditional means of trading-area
delineation, establishes a point of
indifference between two cities or
communities, so the trading area of
each can be determined
Point of indifference – Geographic break
point b/w two cities at which consumers
are indifferent to shopping at either.

9-24
 Reilly’s Law

• Dab = d
------------------------
1+ P b ⁄ Pa
• Dab – Limit of city A’s trading area(miles) along the road to city
B

• D – Distance in miles along a major roadway b/w cities A & B

• Pa – population of city A

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• Pb – Population of city B
 Limitations of Reilly’s Law
 Distance is only measured by major
thoroughfares; some people will travel
shorter distances along cross streets
 Travel time does not reflect distance
traveled. Many people are more concerned
with time traveled than with distance
 Actual distance may not correspond with
perceptions of distance

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 Huff’s Law

Huff’s law of shopper attraction delineates

trading areas on the basis of
*product assortment (of the items desired
by the consumer) carried at various
shopping locations,
*travel times from the shopper’s home to
alternative locations, and
*the sensitivity of the kind of shopping to
travel time.

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 Huff’s Law
Sj
---------

( Tij )λ
• Pij = -----------------------
• n
Sj
∀ ∑ ------
j=1
( Tij )λ

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 Huff’s Law
• Pij = probability of consumer’s traveling from home i to
shopping location j

• Sj = sq. ft. of selling space in shopping location j expected to

devote to a particular product category

• Tij = Travel time from customer’s home i to shopping location j

λ = parameter
• used to estimate the effect of travel time on different kinds of

shopping trips

• n = number of different shopping locations

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 Chief Factors to Consider in
Evaluating Retail Trading Areas

Population Size and Characteristics

• Total size and • Total disposable
density income
• Age distribution • Per capita disposable
• Average educational income
level
• Occupation
• Percentage of
distribution
residents owning
homes • Trends

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 Chief Factors to Consider in
Evaluating Retail Trading Areas

Availability of Labor
• Management
• Management trainee
• Clerical

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 Chief Factors to Consider in
Evaluating Retail Trading Areas

Closeness to Sources of Supply

• Delivery costs • Number of
• Timeliness wholesalers
• Number of • Availability of product
manufacturers lines
• Reliability of product
lines

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 Chief Factors to Consider in
Evaluating Retail Trading Areas

Economic Base
• Dominant industry • Freedom from
• Extent of economic and
diversification seasonal fluctuations
• Growth projections • Availability of credit
and financial facilities

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 Chief Factors to Consider in
Evaluating Retail Trading Areas

Competitive Situation
• Number and size of • Short-run and long-
existing competition run outlook
• Evaluation of • Level of saturation
competitor strengths
and weaknesses

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 Chief Factors to Consider in
Evaluating Retail Trading Areas

Availability of Store Locations

• Number and type of • Zoning restrictions
store locations • Costs
• Access to
transportation
• Owning versus
leasing opportunities

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 Chief Factors to Consider in
Evaluating Retail Trading Areas

Regulations
• Taxes • Minimum wages
• Licensing • Zoning
• Operations

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Analyzing
Retail
Trading
Areas

9-37
 Elements in Trading-Area
Selection

Population Economic Base

Characteristics Characteristics

Nature and Saturation

of Competition

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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 45.3 45.0

occupations (%), 2000

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 Survey of Buying power
• Total annual retail sales by area
• Annual retail sales for specific product
category
• Annual effective buying income
• 5 year population & retail sales projection
Key survey terms:
• Effective buying income(EBI)
• Buying power index(BPI)

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 Effective Buying Income -EBI
• Known as after tax personal income

• EBI = (personal income )–

( personal contribution for social security
insurance)

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 Buying Power Index(BPI)

• BPI – a weighted measure that combines effective buying

income, retail sales,& population size into an overall indicator
of an area’s sales potential,expressed in terms of total
country’s sale
• Each criterion is assigned weight based on its importance

• BPI = 0.5(area’s % of effective buying income) +

0.3(area’s % of retail sales) +
0.2(area’s % of population size)

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 • Understored Trading Area:
Too few stores selling specific goods to
satisfy the needs of population
• Overstored trading Area:
So many stores selling a specific goods
that some retailers cannot earn profit
• Saturated trading area:
proper amount of stores to satisfy the
needs of population for specific goods & to
enable retailers to prosper

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