Chapter 7 Marketing Selection and Retail Location Analysis

Chapter 7 Marketing Selection and Retail Location Analysis

Learning Objectives • Explain the criteria used in selecting a target market. • Identify the different options, both store-based 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. • 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 • The Internet is becoming a major force in retailing, with sales expected to reach a little more than 5 percent of total retail sales over the next decade. • Reaching the target market can be achieved through a: • store-based location in which the consumer travels to the store or • through a nonstore retailing format in which products and services are offered to the consumer at a more convenient or accessible location. LO 1

Selecting a Target Market • Home page - Introductory or first material viewers see when they access a retailer’s Internet site. It is the equivalent of 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 in cyberspace. LO 1

Selecting a Target Market • Market segmentation • Target market - Group of customers that the retailer is seeking to serve. • It is not easy to reach every target market, because each target market is different from the other. LO 1

Selecting a Target Market • Criteria to successfully reach a target market • Seek a measurable market segment. • Accessibility or the degree to which the retailer can target its promotional or distribution efforts to a particular market segment. • 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 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; it includes: • the 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 such as colors, shading, and lines to display cultural characteristics of the physical space. • Trading area - Geographic area from which a retailer, or group of retailers, or community draws its customers. LO 3

Geographic Information Systems • Uses of GIS • 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 • Retail location theories • Market demand potential • Market supply factors LO 4

Retail Location Theories LO 4

Retail Location Theories • Algebraic expression of the new formulation of Reilly’s law: • 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 that distance or the consumer’s perception of that distance or time involved. 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. • This analysis produces three outcomes: • Retail store saturation • Understored • Overstored LO 4

Retail Location Theories LO 4

Retail Location Theories • Index of retail saturation (IRS) -Ratio of demand for a product divided by available supply. • IRS = (H × RE) /RF Where: • 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

Retail Location Theories • Buying power index (BPI) - An indicator of a market’s overall retail potential and is composed of weighted measures of effective buying income, retail sales, and 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) LO 4

Market Demand Potential • Major components are: • 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 • Square feet per employee • Growth in stores • Quality of competition LO 4

Site Analysis • An evaluation of the density of demand and supply within each market with the goal of identifying the best retail site(s). • Description of trading area • Retailers can access, at a relatively low cost, information concerning the trading area for various retail locations and the buyer behavior of the trading area. LO 5

Site Analysis • Size of trading areas • William Applebaum designed a technique specifically for determining and evaluating trading areas for an individual store, which was based on customer spottings. • It is relatively easy to define the trading area of an existing store, as compared to a new store. LO 5

Site Analysis • Demand density - The extent to which the potential demand for the retailer’s goods and services is concentrated in certain census tracts, ZIP code areas, or parts of the community. • To determine the extent of demand density, 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 - The extent to which retailers are concentrated in different areas of the market under question. LO 5

Exhibit 7.10 - Demand Density Map LO 5

Exhibit 7.11- Store Density and SiteAvailability Map LO 5

Site Analysis • Site availability • Eminent domain law- The inherent power of the government to seize private property without the owner’s consent in order to benefit the community. • A map should be constructed of available sites in each community being analyzed. LO 5

Exhibit 7.12 - Checklist for SiteEvaluations LO 5

Site Selection • 100 percent location - When there is no better use for a site than the retail store that is being planned for that site. • The traffic that passes a site, whether it is vehicular or pedestrian, can be an important determinant of the potential sales at that site. LO 6

Nature of Site • Two traffic-related aspects of the site should be evaluated. • Availability of sufficient parking, either at the site or nearby. • Whether direction of traffic is relative to the shopping area. LO 6

Nature of Site • Type of neighbors • A good neighboring business will be one that is compatible with the retailer’s line of trade. • Research has found that retailers experience a benefit from store compatibility. • Store compatibility - Exists when two similar retail businesses locate next to or nearby each other and they realize a sales volume greater than what they would have achieved if they were located apart from each other. LO 6

Nature of Site • Type of neighbors • Retail clusters - Groups of stores closely located that share similar characteristics. • The major benefit of clustering is twofold for customers. • Once potential customers identify a need for a line of merchandise or service, they don’t need to decide on the specific store to visit; they just need to decide to travel to the retail cluster. • It allows customers to walk from store to store, comparing prices, products, and service. LO 6

Terms of Purchase or Lease • The retailer should review: • Length of lease • Exclusivity clause • Guaranteed traffic rate • Anchor clause LO 6

Expected Profitability • The final step in site-selection analysis is construction of a pro forma (expected) return-on-asset model for each possible site. • The return-on-asset model comprises of net profit margin, asset turnover, and return on assets. LO 6

Chapter 7 Marketing Selection and Retail Location Analysis