Ch 7 - 8th Ed

Dunne, Lusch, & Carver
Chapter 7
Market Selection
and Retail Location Analysis
Selecting a Target Market
• With the increased presence of alternative
ways to reach customers, both geographic
space and cyberspace must be considered.
• The counterpart to location on the Internet is the
"ease of access" a consumer has to the site
• The Internet is becoming a major force in retailing
• Sales expected to reach a little more than 5% over next decade.
Market Segmentation
• The method retailers use to break down
heterogeneous consumer populations into
smaller homogeneous groups.
• Because any single retailer cannot serve all
potential customers profitably*, it is important that
it segment the market and select a target market(s)
• Recall the 3rd pillar of a market orientation*
• Target market
• A group(s) of consumers that the retailer is seeking to serve.
Market Segmentation
• Although a retailer may identify several
segments within any given market, not all
targets should be considered for targeting.
• For a segment(s) to be considered attractive
enough for becoming one’s target market, it must
meet all three criteria.
1. It must be measurable
2. It must be accessible
3. It must be substantial
Reaching One’s Target Market
• Two Basic Retail Formats:
1. Store-Based Retailers
Retailers that operate from a fixed store location and
require customers to travel to the store to make a
2. Nonstore-Based Retailers
Retailers that reach the customer at home, work, or
any place other than at a traditional store
Potential Retail Formats
Business Districts
1. Central Business District (CBD)
• Characteristics:
1. Usually located around a geographic point at which all
public transportation systems converge.
2. Make-up usually depends on history, past retail trends,
and luck.
3. Usually their attractiveness is in decline, but they can
become enhanced by increased planning, community
support, and adaptation to enhance non-shopping
Business Districts (cont.)
1. Central Business District (CBD)
• Strengths:
1. Easy public access
2. Wide assortment of products sold
3. Proximity to commercial activities
1. Inadequate parking (not only for customers, but also
2. Older stores (often in decaying conditions)
3. Higher rent/taxes
4. Potentially higher crime rates
Business Districts (cont.)
2. Secondary Business District (SBD)
• Characteristics:
1. Smaller than a CBD
2. Revolves around at least one department/variety store
3. Located at a major street intersection
Business Districts (cont.)
3. Neighborhood District (ND)
• Characteristics:
1. Typically smaller than a SBD
2. Evolves to satisfy convenience
3. Generally many small stores centered around one
supermarket/variety store
4. Located on a major artery of a residential area
Shopping Centers / Malls
• Characteristics:
1. Centrally owned
2. Planned
3. Balanced tenancy
4. Large amounts parking
Shopping Centers / Malls (cont.)
• Strengths:
1. Heavy traffic
2. Cooperative planning and sharing of costs
3. Access to highways
4. Typically have clean and neat environments
5. Decreased crime rates
Shopping Centers / Malls (cont.)
• Weaknesses:
1. Inflexible hours
2. Higher rents
3. Restrictions on merchandise which can be sold
4. Potentially too much competition
Free-Standing Locations
• Characteristics:
1. Locate along major traffic routes
2. Lack of adjacent retailers selling competitive
3. Typically large, well-known retailers because of
the difficulty in attracting & holding customers in
an isolated location
Free-Standing Locations (cont.)
• Strengths:
1. Lack of direct competition
2. Generally lower rents
3. Freedom in operations and hours
4. Facilities that can be adapted to the retailer’s own
5. Inexpensive parking
Free-Standing Locations (cont.)
• Weaknesses:
1. Lack of drawing power by complimentary stores
2. Difficulties in attracting customers for the initial visit
3. Higher advertising and promotional costs
4. Operating costs that cannot be shared
5. Stores that may have to be built rather than rented
6. Zoning laws
Geographic Information Systems (GIS)
• Computerized system that combines physical
geography with cultural geography.
• Creates thematic maps
• Maps that use visual techniques such as color, shading,
and lines, to display cultural characteristics of the
physical space
Components of a GIS
Three Steps of All Retail Location Decisions
Market Identification
• Three Retail Location Theories
1. Retail Gravity Theory
2. Saturation Theory
3. The Buying Power Index
Retail Gravity Theory
• Seeks to understand how large urban areas attract
customers from smaller rural communities &
determine the breaking points at which customers
would be indifferent between shopping in either city.
• Formula:
• Where:
Dab is the breaking point from A, measured in miles along the road to B.
d is the distance between A and B along the major highway
Pa is the population of A
Pb is the population of B
Saturation Theory
• Seeks to understand how the demand for goods &
services of a potential trading area is being served
in comparison with other potential markets.
• Index of retail saturation (IRS) - Ratio of demand for a
product divided by available supply.
• IRS = (H × RE) /RF
• IRS - Index of retail saturation for an area.
• H - Number of households in the area.
• RE - Annual retail expenditures for a particular line of trade per
household in the area.
• RF - Square footage of retail facilities of a particular line of trade in
the area.
Buying Power Index
• An indicator of a market’s overall retail potential &
uses a weighted average of buying income (i.e.,
personal income, including all non-tax payments [e.g.
social security], minus all taxes), retail sales, &
population size.
• BPI = 0.5(the area’s percentage of U.S. effective buying
income) + 0.3(the area’s percentage of U.S. retail sales) +
0.2(the area’s percentage of U.S. population)
• Reflects only the demand levels of the two proposed trading areas
and not the supply levels; thus, it doesn’t reflect saturation levels.
• Doesn’t account for competing products or stores in nearby cities.
Other Demand & Supply Factors to
• Market demand potential:
• Population characteristics; Buyer behavior
characteristics; Household income; Household age
profile; Household composition; Community life
cycle; Population density; and Mobility
• Market supply potential:
• Square feet per store; Square feet per employee;
Growth of stores; and Quality of competition
Site Analysis
• An evaluation of the density of demand and
supply within each market with the goal of
identifying the best retail site(s).
• Estimating the Size of Trading Area
• Important factors to consider:
By selling specifically tailored merchandise, the trade area shrinks
As mobility increases, the size of the trade area increases.
As size and assortment increases, the size of the trade area increases.
As distance between competitors increases, the size of the trade area
• Natural and manmade obstacles (e.g. rivers and highways) can
abruptly limit the size of an otherwise large trade area
Description of the Trade Area
• Information about areas is easy and relatively
cheap to gain from information retailers (e.g.
• Demand Density – the extent to which potential
demand for a retailer’s goods is concentrated in one
area (e.g., census tracts, ZIP code areas, or parts of the
• Supply Density – the extent to which potential
competitors of a retailer’s goods are concentrated in
one area
• Site Availability – even though demand may be greater
than supply in a region, sites might not be available
(zoning laws, no roads available, no space, etc.)
Example of a Demand Density Map
Example of a
Store Density & Site Availability Map
Site Selection
• Nature of Site
• Involves its price, history, etc.
• The retailer needs to investigate why it’s available
before potentially choosing it.
• Traffic characteristics
• Parking availability
• Ease of reaching the store (traffic patterns, roads, congestion
at peak times, etc.)
• Types of neighbors
• Store compatibility – “Cluster” theory
• Cluster theory doesn’t work for retailers requiring a membership
(gyms, etc.)
What You Should Have Learned…
Chapter’s Learning Objectives
1. The criteria used in selecting a target market.
2. The different options for effectively reaching a target
market and the (dis)advantages of business districts,
shopping centers, & freestanding units.
3. What a GIS is & its potential uses in a retail enterprise.
4. The various factors to consider when identifying the
most attractive geographic market for a new store.
5. The various attributes to consider when evaluating retail
sites within a retail market.
6. How to select the best geographic site for a store.