Chapter 7
Marketing Selection
and Retail Location
Analysis
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The International Student Task Force and the Executive Director of Teaching and Learning
would like to make you aware of a documentary that International Programs plans to
feature on Wednesday, November 13, at LaSells Stewart Center starting at 6:00 pm during
International Education Week. The faculty/staff and the MBA students will run their own
screenings at different times/dates. Here is some information about the film:
The Documentary:
The Dialogue is a 70-minute documentary that follows four American and four Chinese
university students as they travel together through Hong Kong and Southwest China.
Intrigued by the complex context of Sino-US relations, together the characters explore
elements of meaningful dialogue and cultural identity. Their shared travel adventures,
emotion of culture shock, honest confrontations and discoveries about each other become
doorways to deepen their understanding of the “other” and themselves. Although the film
is set in Hong Kong and China, the “lessons learned” about intercultural understanding and
the communication skills needed for conflict mediation and collaborative problem solving
are applicable globally.
Here is a 2-minute trailer: http://isp.msu.edu/cbe.
Learning Objectives
• Explain the criteria used in selecting a target
market
• Identify the different options, both storebased and nonstore-based, for effectively
reaching a target market and identify the
advantages and disadvantages of business
districts, shopping centers, and freestanding
units as sites for a retail location
Learning Objectives
• Define geographic information systems (GIS)
and discuss their potential uses in a retail
enterprise
• Describe the various factors to consider when
identifying the most attractive geographic
market for a new store
Learning Objectives
• Discuss the various attributes to consider
when evaluating retail sites within a retail
market
• Explain how to select the best geographic site
for a store
Selecting a Target Market
• Target market can be reached through a:
• Store-based location in which the consumer
travels to the store
• Nonstore retailing format in which products and
services are offered at a more accessible location
LO 1
Selecting a Target Market
• Home page
• Introductory material on a retailer’s Internet site
• Equivalent to a retailer’s storefront in the physical
world
• Virtual store: Collection of all the pages of
information on the retailer’s Internet site
• Ease of access: Consumer’s ability to easily
and quickly find a retailer’s Web site
LO 1
Selecting a Target Market
• Market segmentation
• Target market: Group of customers that the
retailer is seeking to serve
LO 1
Selecting a Target Market
• Criteria to successfully reach a target market
• Seek a measurable market segment
• Accessibility
• Segment should be substantial or large enough to
be profitable for the retailer
LO 1
Exhibit 7.2 - Retail Formats for
Accessing Your Target Market
LO 2
Location of Store-Based Retailers
Central business
district (CBD)
Advantages
Disadvantages
An unplanned shopping
area around the
geographic point where
all
public transportation
systems converge; it is
usually in the center of
the
city and often where the
city originated historically
 Easy access to public
transportation
 Wide product
assortment
 Variety in images,
prices, and services
 Proximity to
commercial activities
Inadequate and
usually expensive
parking
Older stores
High rents and taxes
Traffic and delivery
congestion
Potentially high crime
rate
Decaying conditions of
inner cities
LO 2
Location of Store-Based Retailers
Secondary business district
(SBD)
Shopping area that is smaller than the CBD and
that revolves around at least one department or
variety store at a major street intersection
Neighborhood business
district (NBD)
Shopping 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 is located
on a major artery of a residential area
LO 2
Location of Store-Based Retailers
Shopping center or
mall
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.
Anchor stores
Stores in a shopping center that are the most dominant
and are expected to draw customers to the shopping
center.
LO 2
Location of Store-Based Retailers
Advantages of shopping centers
Disadvantages of shopping centers
 Heavy traffic resulting from the
wide range of product offerings
 Cooperative planning and sharing
of common costs
 Access to highways and available
parking
 Lower crime rate
 Clean and neat environment
 Inflexible store hours
 High rents
 Restrictions as to what merchandise or
services the retailer may sell
 Inflexible operations and required
membership in the center’s merchant
organization
 Potentially too much competition and
much of the traffic is not interested in a
particular product offering
 An anchor tenant’s dominance of the
smaller stores
LO 2
Location of Store-Based Retailers
Freestanding
retailer
Advantages
Disadvantages
Locates along
major traffic
arteries and does
not have any
adjacent retailers
to share traffic
 Lack of direct
competition
 Lower rents
 Freedom in
operations and hours
 Facilities that can be
adapted to individual
needs
 Inexpensive parking
 Lack of drawing power from
complementary stores
 Difficulties in attracting
customers for the initial visit
 Higher advertising and
promotional costs
 Operating costs cannot be shared
with others
 Stores may have to be built
rather than rented
 Zoning laws may restrict some
activities
LO 2
Geographic Information Systems
• Geographic information system (GIS)
• Computerized system that combines physical
geography with cultural geography
• Culture
• Buffer that people have created between
themselves and the raw physical environment
• Includes:
• Characteristics of the population
• Humanly created objects
• Mobile physical structures
LO 3
Exhibit 7.4 - GIS Components
LO 3
Geographic Information Systems
• Thematic maps
• Use visual techniques to display cultural
characteristics of the physical space
LO 3
Geographic Information Systems
• Uses of GIS
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Market selection
Site analysis
Trade area definition
New store cannibalization
Advertising management
Merchandise management
Evaluation of store managers
LO 3
Exhibit 7.5 - Selecting a Retail
Location
LO 4
Market Identification
• Trading area
• Geographic area from which a retailer, or group of
retailers, or community draws its customers
• Retail location theories
• Market demand potential
• Market supply factors
LO 4
Retail Location Theories
Retail gravity theory
There are underlying consistencies
in shopping behavior that yield to mathematical
analysis and prediction based on the notion or
concept of gravity
Reilly’s law of retail
gravitation
Based on Newtonian gravitational principles,
explains how large urbanized areas attract
customers from smaller rural communities
Point of indifference
Is the breaking point between two cities where
customers are indifferent to shopping in either
city
LO 4
Retail Location Theories
• Algebraic expression of the new formulation
of Reilly’s law:
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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
LO 4
Retail Location Theories
• Assumptions of the retail gravity theory
• The two competing cities are equally accessible
from the major road
• Population is a good indicator of the differences in
the goods and services available in different cities
LO 4
Retail Location Theories
• Limitations of the retail gravity theory
• City population does not always reflect the
available shopping facilities
• Distance is measured in miles, not the time
involved for the consumer to travel
LO 4
Retail Location Theories
• Factors that the retail gravity theory fails to
consider:
• Perceived differences between local and other
trading centers
• Variety-seeking behavior
• Medical services or entertainment facilities
LO 4
Retail Location 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
• Outcomes
• Retail store saturation
• Understored
• Overstored
LO 4
Retail Location Theories
Retail store
saturation
There are 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
Understored
The number of stores in relation to households is relatively low
so that engaging in retailing is an attractive economic endeavor
Overstored
Where the number of stores in relation to households is so large
that to engage in retailing is usually unprofitable or marginally
profitable
LO 4
Retail Location Theories
• 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
LO 4
Market Demand Potential
• Major components are:
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Population characteristics
Buyer behavior characteristics
Household income
Household age profile
Household composition
Community life cycle
Population density
Mobility
LO 4
Market Supply Factors
• Square feet per store
• Indicates whether the community tends to have largeor small-scale retailing
• Square feet per employee - High number indicates:
• High level of retail technology
• Self-service retailing
• Growth in stores
• Strength of retail competition will be greater when the
community has: Recently experienced rapid growth in
number of stores
LO 4
Market Supply Factors
• Quality of competition
• Determined by asking following questions about
competitors
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What is their market share or profitability?
How promotional- and price-oriented are they?
Are they customer-oriented?
Are they community-oriented?
Do they financially sponsor many civic and community
activities?
• How do they react to new market entrants?
Site Analysis
• An evaluation of the density of demand and
supply:
• Within each market with the goal of identifying
the best retail site(s)
• Size of trading areas
• Applebaum’s technique (1966)
• Based on customer spotting and interviewing
• Home addresses of the shoppers are plotted on a map
• Analysts draw inferences about trading size and
competition
LO 5
Site Analysis
• Factors pertaining to size of trading areas
• Stores that sell products that consumers want , in the
most convenient way, will have smaller area
• As consumer mobility increases trading area increases
• As the size of the store increases, its trading area
increases because it can stock:
• Broader and deeper assortment of merchandise
• As the distance between competing stores increases,
their trading areas will increase
• Natural and human-made obstacles limit trading area
LO 5
Exhibit 7.9- Customer Spotting
Map for a Supermarket
Site Analysis
• Description of trading area
• Information concerning:
• Trading area for various retail locations
• Buyer behaviour of the trading area
Site Analysis
• Demand density
• Extent to which the potential demand for the retailer’s
goods and services is concentrated in certain areas
• Retailers need to identify the major variables influencing
their potential demand, which can be examined by:
• The types of customers who already shop in the retailer’s present
stores
• Supply density
• Extent to which retailers are concentrated in
different areas of the market in question
LO 5
Exhibit 7.11 - Demand Density Map
LO 5
Exhibit 7.12- Store Density and Site
Availability Map
LO 5
Site Analysis
• Site availability
• Eminent domain law
• Inherent power of the government to seize private
property without the owner’s consent in to benefit the
community
• Construct a map of available sites in each
community being analyzed
LO 5
Site Selection
• 100 percent location
• No better use for a site than building a retail store
• What may be a 100-percent site for one store may
not be a 100-percent site for another
• To evaluate a site, consider:
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The nature of the site
Traffic characteristics
Type of neighbors
The terms of purchase or lease
LO 6
Nature of Site
• Traffic characteristics
• Amount of traffic that passes a site is an important
determinant of the potential sales at that site
• Traffic-related aspects to be evaluated
• Availability of sufficient parking
• Direction of traffic relative to the shopping area
LO 6
Nature of Site
• Type of neighbors - Good neighboring
businesses:
• Are compatible with the retailer’s line of trade
• Help generate additional business for each other
• Store compatibility: Two similar retail businesses
located next to each other:
• Realize a sales volume greater than what they would
have achieved if they were located far apart
LO 6
Nature of Site
• Retail clusters - Groups of
stores closely located and
share similar characteristics
• Benefits
• Customers don’t need to decide on the
specific store to visit but just need to
decide to travel to the retail cluster
• Allows customers to walk from store to
store, comparing prices, products, and
service
• Do not always benefit competitors
LO 6
Terms of Purchase or Lease
• The retailer should review:
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Length of lease
Exclusivity clause
Guaranteed traffic rate
Anchor clause
LO 6
Expected Profitability
• Construct of a pro forma return-on-asset
model for each possible site comprising of :
• Net profit margin, asset turnover, and return on
assets
• To evaluate sites on their potential return on
assets, estimate:
• Total sales
• Total assets
• Net profit
LO 6