Trade Areas and Retail

Site Selection

Chapters 8 & 9
Location, Location,
Location!!!
❚ Importance of location decision:
❚ Requires complex decision making
❚ Costs lots of $$
❚ Little flexibility once a location has
been chosen
❚ Attributes of location have a strong
impact on the retailer’s strategy
Criteria to be considered:

❚ Size & characteristics of ❚ Property costs

population
❚ Length of
❚ Level of competition
❚ Access to transportation
agreement (if
❚ Availability of parking
lease)
❚ Attributes of nearby ❚ Population trends
stores ❚ Legal restrictions
Site Evaluation

❚ Accessibility
❚ Locational advantages
❚ Terms of occupancy
❚ Legal considerations (e.g.
environmental considerations,
zoning restrictions, building codes,
signs, licensing requirements)
Checklist for Site Evaluations

Local Demographics

• Population and/or household base

• Population growth potential
• Lifestyles of consumers
• Income potential
• Age makeup
• Population of nearby special markets,
that is, daytime workers, students,
and tourists, if applicable
• Occupation mix
 Checklist for Site Evaluations

Traffic Flow and Accessibility

• Number and type of vehicles passing location

• Access of vehicles to location
• Number and type of pedestrians passing
location
• Availability of mass transit, if applicable
• Accessibility of major highway artery
• Quality of access streets
• Level of street congestion
• Presence of physical barriers that affect
trade area shape
Checklist for Site Evaluations

Retail Competition

• Number and types of stores in area

• Analysis of “key” players in general area
• Competitiveness of other merchants
• Number and location of direct competitors
in area
• Possibility of joint promotions with local
merchants
Checklist for Site Evaluations
Site Characteristic
• Number of parking spaces available
• Distance of parking areas
• Ease of access for delivery
• Visibility of site from street
• History of the site
• Compatibility of neighboring stores
• Size and shape of lot
• Condition of existing building
• Ease of entrance and exit for traffic
• Ease of access for handicapped customers
• Restrictions on sign usage
• Building safety code restrictions
• Type of zoning
Checklist for Site Evaluations

Cost Factors

• Terms of lease/rent agreement

• Basic rent payments
• Length of lease
• Local taxes
• Operations and maintenance cost
• Restrictive clauses in lease
• Membership in local merchants
association required
• Voluntary regulations by local merchants
Site Selection

❚ Trade area -- contiguous geographic area that

accounts for the majority of a store’s sales and
customers
❚ Primary trade zone -- Usually 3-5 mile radius;
generates 60-65% of customers
❚ Secondary trade zone -- Usually 3-7 mile radius;
generates 20% of customers
❚ Tertiary trade zone -- Usually 15 - 50 mile radius
Steps in selecting a site:

❚ Evaluate alternative geographic areas in

terms of the characteristics of residents and
existing retailers (trading-area analysis)
❚ Determine whether to locate as stand-
alone, unplanned business district or
planned shopping center
❚ Make a decision about location type
❚ Analyze alternate sites
 Retailer
Retailer Formats
Formats for
for Accessing
Accessing Your
Your Target
Target Market
Market

Retail Formats

Store-Based Nonstore-Based

Business Shopping
District Centers/Malls

Freestanding Nontraditional Automated

Street
Mail-Order Merchandising
Peddling
Systems

Direct Interactive
Selling Internet
TV
 Types of Leases
• Percentage
• Fixed - Rate

Percentage leases - rent is based on a

percentage of sales.
• Retailers also typically pay a maintenance
fee based on a percentage of their square
footage of leased space.
• Most malls use some form of percentage
lease.
 Variations of Percentage Leases

Percentage lease with specified maximum -

percentage of sales up to a maximum amount.
• Rewards retailer performance by allowing retailer to
hold rent constant above a certain level of sales
Percentage lease with specified minimum - retailer
must pay a minimum rent no matter how low sales are.

Sliding scale - percentage of sales as rent decreases as

sales go up.
 Fixed Rate Leases

Fixed rate leases - used by community and

neighborhood centers.
• Retailer pays a fixed amount per month over the
life of the lease.
• Not as popular as percentage leases

Graduated lease - a variation of the fixed rate lease

• Rent increases by a fixed amount over a specified
period of time.
 Percentage or Fixed Rate Leases

Maintenance-increase-recoupment lease -
used with either a percentage or fixed rate lease.
• Rent increases if insurance, property taxes, or
utility bills increase beyond a certain point.
Net lease - retailer is responsible for all maintenance
and utilities.
 Prohibited Use Clause

• Limits the landlord from leasing to certain

tenants

• Some tenants take up parking spaces and don’t

bring in shoppers: bowling alley, skating rink,
meeting hall, dentist, or real estate office.

• Some tenants could harm the shopping center’s

wholesome image: bars, pool halls, game parlors,
off-track betting establishments, massage parlors
and pornography retailers.
 Exclusive Use Clause

Prohibits the landlord from leasing to retailers

selling competing merchandise
• Specify no outparcels
• Specify if certain retailer leaves center, they can
terminate lease.

Escape clause
• Allows the retailer to terminate its lease if sales don’t
reach a certain level after a specified number of years,
or if a specific co-tenant in the center terminates its
lease.
 Environmental Issues

“Above-ground” risks - such as asbestos-containing

materials or lead pipes used in construction.

Hazardous materials - e.g. dry cleaning chemicals,

motor oil, that have been stored in the ground.

Retailers’ Protection
• Stipulate in the lease that the lessor is responsible
for removal and disposal of this material if it’s found.
• Retailer can buy insurance that specifically protects
it from these risks.
 Other Legal Issues

Zoning and Building Codes

• Zoning determines how a particular site can be
used.
• Building codes determine the type of building, signs,
size, type of parking lot, etc. that can be used
Signs
• Restrictions on the use of signs can also impact a
particular site’s desirability
Licensing Requirements
• Some areas may restrict or require a license for
alcoholic beverages
Retail Trading Area
Identification
❚ Spotting Techniques: “spot” customer origins
❙ license plate surveys
❙ customer surveys
❙ customer records
❙ customer activities (contests, sweepstakes)
❚ Demographic data & GIS Vendors
❙ Census
❙ Buying Power Index (BPI)
❙ Measuring Competition
 Demographic Data
and GIS Vendors
Demographic data vendors specialize in
repackaging and updating census-type data.
Geographic Information System (GIS) is a
computer system that enables analysts to
visualize information about their customers’
demographics, buying behavior, and other data
in a map format.
• GIS is a spatial database that stores the location and
shape of information.
• Analysts can identify the boundaries of a trade area
and isolate target customer groups
 GIS Components
Physical Geography Cultural Geography
Data
Latitude/Longitude Demographics
Land/Water Inputs Man-Made Structures
Terrain Consumption Patterns
Rainfall/Snow Work Patterns
Temperature Leisure Behavior
Deviant Behavior

GIS
(Data Aggregation and
Analysis via Computer)

Output
Maps and Other Displays
of Information
Retail
Retail Location
Location Theories
Theories
1. Retail Gravity Theory
2. Saturation Theory
3. Buying Power Index
Retail
Retail Location
Location Theories
Theories
Retail 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.
 Huff’s Gravity Model

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 store or center grows and distance or
travel time from customer shrinks
Huff’s Law
❚ Assumptions:
❚ The proportion of consumers patronizing a given shopping area
varies with the distance from the shopping area
❚ The proportion of consumers patronizing various shopping areas
varies with the breadth and depth of merchandise offered by
each shopping area
❚ The distance that consumers travel to various shopping areas
varies for different types of products purchased
❚ The “pull” of any given shopping area is influenced by the
proximity of competing shopping areas
 Huff’s Model Formula

S j ÷ Tij b
Pij = n
∑ S j ÷ Tij b
j =1
Where
Pij = Probabilit y of a customer at a given point of origin i traveling to a
particular shopping center j
S j = Size of shopping center j

Tij = Travel time or distance from customer' s starting point to shopping

center
b = An exponent t o Tij that reflects the effect of travel time on different
kinds of shopping trips
University and Shopping Centers:
Gravity Model Illustration
 Huff’s Model: The Solution

Pij = 1000 ÷ 32
(1000 ÷ 32) + (500 ÷ 52) + (100 ÷ 12)

Probability = .43

.43 x 12,000 students = 5,160 customers

5,160 customers x $150 = $774,000

• Repeat steps 1 to 3 for the remaining areas

and then sum them.
Retail
Retail Location
Location Theories
Theories
Saturation theory
examines 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.
Retail
Retail Location
Location Theories
Theories
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
Retail Location
Location Theories
Theories
Index of Retail Saturation (IRS)

IRS = (H X RE)/RF
where IRS is the index of retail saturation
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)
Retail
Retail Location
Location Theories
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.
 Buying Power Index (BPI)

• Published annually in Demographics USA

• Measures a given market’s ability to buy
• Is expressed as a percentage of the total U.S.
potential

Source: The Census and You, U.S. Department of Commerce, Bureau of the Census.
Retail
Retail Location
Location Theories
Theories
Buying Power Index
BPI = 0.5(the area’s percentage of U.S. effective buying i
+ 0.3(the area’s percentage of U.S. retail sales)
+ 0.2(the area’s percentage of U.S. population)
Buying Power

❚ Web sites for additional information

❙ http://www.selig.uga.edu/forecast/totalbuy/total/tbp1.html
❙ http://www.repgroup.com/bpi.htm
❙ http://www.census.gov/epcd/www/97EC44.HTM
❙ http://demographicsusa.com/p_demographics.html

❚ Other
❙ http://www.mlb.ilstu.edu/ressubj/subject/business/home.htm
 Identifying Communities with High Demand
Potential for Fast-Food Drive-In Restaurant
Demographic Desired Target
Characteristic Market Community A Community B
Population per over 400 375 423
Square Mile
Median Family Income over $31,000 $28,024 $32,418
% Population 14-54 over 60% 48% 63%
% White Collar over 50% 38% 54%
% People Living in 1-3 over 70% 61% 72%
Person Units
% Workforce Traveling over 75% 49% 74%
0-14 Minutes to Work
Average Annual over $600 $521 $619
Household Expenditure
on Eating Out