Chapter 9
Trading-Area Analysis
Dr Pointer’s Notes
Chapter Objectives
To demonstrate the importance of store
location for a retailer and outline the
process for choosing a store location
To discuss the concept of a trading area
and its related components
To show how trading areas may be
delineated for existing and new stores
9-2
Chapter Objectives_2
To examine three major factors in
trading-area analysis
Population characteristics
Economic base characteristics
Competition and level of saturation
9-3
Importance of Selecting
Right location
• Location decisions are complex, costly and
little flexibility once selected
• Location attributes have a large affect
retailer’s success
• The right location may help compensate for
a less than stellar retail mix.
9-4
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
9-5
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
9-6
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.
Proposed trading areas should be
evaluated thoroughly
Any trading area overlaps?
9-7
Location-Trading Area
• Trading area overlap – where the same
customers are served by both stores
• Need to calculate the net increase in sales
to determine if it is worth while to open new
store
9-8
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
9-9
 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
Figure 9.2 The Trading Areas of
Current and Proposed Outlets
A
A. Trading area
of existing store
9-10
B
B. Trading area of
new store
GIS Software
Geographic Information Systems
software, which combines
– 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
9-11
Private Firms Offering
Mapping Software
Claritas
ESRI
GDT
GeoVue
Mapinfo
SRC
9-12
The Size and Shape of
Trading Areas
Primary trading area - 50-80% of a store’s
customers
Secondary trading area - 15-25% of a
store’s customers
Fringe trading area - all remaining
customers
9-13
The Segments of
a Trading Area
Figure 9.5
Store
Fringe
Secondary
9-14
Primary
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
reasons
• Dunkin’ Donuts: “It’s
worth the trip!”
9-15
Trading Areas and Store Type
Largest
Department stores
Supermarkets
TRADING
AREAS
Apparel stores
Gift stores
Smallest
9-16
Convenience stores
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-projecting future based on past
– Consumer surveys- gather information from
residents in the area
– Computerized trading area analysis modelsusing computers to evaluate potential areas.
9-17
Advantages of Computer Models for
Trading Area Analysis
• They are objective and systematic
• They offer insights as to how each locational
attribute should be weighted
• Useful in screening a large number of
locations
• Can be helpful in assessing performance by
comparing forecasts with results.
9-18
Computerized Trading-Area
Analysis Models
Analog Model
Regression Model
Gravity Model
9-19
Traditional Means of
Delineating Trading Areas
• Reilly’s law of retail gravitation – establishes a point
of indifference between 2 cities so the trading areas
of each can be determined
Point of difference – geographic breaking point
between 2 cities where consumers are indifferent to
shopping at either trading area
• Huff’s law of shopper attraction – delineates trading
areas on the basis of the product assortment (of the
items desired most by consumers) carried at
various shopping locations, travel times from the
shoppers’ home and etc.
9-20
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
9-21
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.
9-22
Table 9.1 Chief Factors to Consider in
Evaluating Retail Trading Areas
Population Size and Characteristics
• Total size and
density
• Age distribution
• Average educational
level
• Percentage of
residents owning
homes
9-23
• Total disposable
income
• Per capita disposable
income
• Occupation
distribution
• Trends
Table 9.1 Chief Factors to Consider in
Evaluating Retail Trading Areas
Availability of Labor
• Management
• Management trainee
• Clerical
9-24
Table 9.1 Chief Factors to Consider in
Evaluating Retail Trading Areas
Closeness to Sources of Supply
• Delivery costs
• Timeliness
• Number of
manufacturers
9-25
• Number of
wholesalers
• Availability of product
lines
• Reliability of product
lines
Table 9.1 Chief Factors to Consider in
Evaluating Retail Trading Areas
Economic Base
• Dominant industry
• Extent of
diversification
• Growth projections
9-26
• Freedom from
economic and
seasonal fluctuations
• Availability of credit
and financial facilities
Table 9.1 Chief Factors to Consider in
Evaluating Retail Trading Areas
Competitive Situation
• Number and size of
• Short-run and longexisting competition
run outlook
• Evaluation of
• Level of saturation
competitor strengths
and weaknesses
9-27
Table 9.1 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
9-28
Table 9.1 Chief Factors to Consider in
Evaluating Retail Trading Areas
Regulations
• Taxes
• Licensing
• Operations
9-29
• Minimum wages
• Zoning
Elements in Trading-Area
Selection
Population
Characteristics
Economic Base
Characteristics
Nature and Saturation
of Competition
9-30
Characteristics of the Population
• Need to have detailed analysis of population
• There are many secondary sources of information
• Census data –census of population
• Survey of Buying Power – annual retail sales by
area, annual retail sales by specific product
categories, annual effective buying income and 5 yr
population and retail sales projection. Buying Power
Index (BPI) weight measure which combines
different economic variables that determines the
attractiveness of a geographic area
9-31
Table 9.3 Selected Population
Statistics for Trading Areas A and B
Characteristics
Area A
Area B
13,732
15,499
Population change, 1990-2000
+8.2
+2.5
College graduates, 25 +, 2000 (%)
41.4
39.2
$61,236
$61,242
45.3
45.0
Total population, 2000
Median household income, 2000
Managerial and professional
occupations (%), 2000
9-32
Economic Basis
• This evaluates a city’s commercial and industrial
infrastructure and resident’s sources of income
• Good to seek a city with a diversified economic
base
• These factors should be evaluated
percentage of labor force in each industry,
transportation, banking facilities, impact of
economic fluctuations, future of different industries
operating in the city
9-33
Nature and Intensity of
competition
• Markets with intensive competitive competition are
unattractive
• These factors should be evaluating when assessing
competition in an area
1. number of existing stores
2. size distribution of existing stores
3. rate of new store openings, strength and
weaknesses of all stores
4. short-run and long run trends and level of
saturation
9-34
Nature and Intensity of
competition
• Understored trading area – too few stores
selling a specific good or service satisfy the
needs of population
• Overstored trading area – area has many
stores selling a specific goods and many
retailers cannot make enough profits to
survive
• Saturated trading area – proper amount of
stores to satisfy needs of it population
9-35
Measuring Trading Area
Saturation
•
•
Trading areas can support only a given number of stores or
square feet of selling space per good/service category.
Ratios that must be calculated/evaluated
average sales per store
average sales per store category
average store sales per capita or household
average sales per square foot of selling area
Average sales per employee
Saturation levels per cities can be compared
9-36
Questions
9-37