Chapter 9

Trading-Area Analysis

RETAIL
MANAGEMENT:
A STRATEGIC
APPROACH

BERMAN EVANS
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
Figure 9.1 Importance of
Location to Esprit
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
 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.
Benefits of Trading Area Analysis

Discovery of Assessment of effects

consumer of trading area overlap
demographics and Ascertain whether
socioeconomic
chains competitors
characteristics
will open nearby
Opportunity to
Discovery of ideal
determine focus of
number of outlets,
promotional activities
geographic
Opportunity to view weaknesses
media coverage Review of other issues,
patterns such as transportation
 GIS Software
Geographic Information
Systems
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
Figure 9.5 The Segments of
a Trading Area
 The Size and Shape of
Trading Areas
Primary Trading Area - encompasses 50 to 80 percent
of a store's customers. It is the area closest to the store
and possesses the highest density of customers to
population and the highest per capita sales.

Secondary Trading Area - geographic area that

contains an additional 15 to 25 percent of a store's
customers. It is located outside the primary area, and
customers are more widely dispersed.

Fringe Trading Area -- includes customers not found in

primary and secondary trading areas. These are the
most widely dispersed customers.
Destinations versus Parasites

Destination stores
Parasite stores do
have a better
not create their own
assortment, traffic and have no
better promotion, real trading area of
and/or better their own
image These stores
It generates a depend on people
trading area much who are drawn to
larger than that of area for other
its competitors reasons
Dunkin Donuts:
 Trading Areas and Store
Type
Largest
Department stores

Supermarkets
TRADING
AREAS Apparel stores

Gift stores

Smallest 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
Consumer surveys
Computerized trading area
analysis models
Delineating the Trading Area
of An Existing Store
The size, shape, and characteristics of the
trading area for an existing store or group
of stores can be learned accurately - based
on store records, contests, recording
license plate numbers, surveys, and so on.
Time biases must be considered in
amassing data.
Results should be mapped and customer
densities noted.
Computerized Trading-Area
Analysis Models

Analog Model

Regression Model

Gravity Model
 Delineating the Trading Area of A
New Store
Analog Model - computerized site selection tool in
which potential sales for a new store are estimated
based on sales of similar stores in existing areas,
competition at a prospective location, the new store's
expected market share at that location, and the size
and density of a location's primary trading area.

Regression Model - computerized site selection tool

that uses equations showing the association between
potential store sales and several independent
variables at each location under consideration.

Gravity Model - computerized site selection tool

based on the premise that people are drawn to stores
that are closer and more attractive than competitors.
 Reillys Law

Reillys law of retail gravitation,

a traditional means of trading-
area delineation, establishes a
point of indifference between
two cities or communities, so
the trading area of each can
be determined
Limitations of Reillys 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
 Huffs Law

Huffs 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 shoppers home to
alternative locations, and the
sensitivity of the kind of shopping to
travel time.
Table 9.1 Chief Factors to
Consider in Evaluating
Retail Trading Areas
Population Size and Characteristics
Total size and Total disposable
density income
Age distribution
Per capita
Average
disposable income
educational level
Percentage of Occupation
residents owning distribution
homes Trends
Table 9.1 Chief Factors to
Consider in Evaluating
Retail Trading Areas
Availability of Labor
Management
Management trainee
Clerical
Table 9.1 Chief Factors to
Consider in Evaluating
Retail Trading Areas
Closeness to Sources of Supply
Delivery costs
Timeliness Number of
wholesalers
Number of
manufacturers Availability of
product lines
Reliability of
product lines
Table 9.1 Chief Factors to
Consider in Evaluating
Retail Trading Areas
Economic Base
Dominant
Freedom from
industry
economic and
Extent of seasonal
diversification fluctuations
Growth Availability of
projections credit and
financial facilities
Table 9.1 Chief Factors to
Consider in Evaluating
Retail Trading Areas
Competitive Situation
Number and size
of existing
competition Short-run and
Evaluation of long-run outlook
competitor Level of
strengths and saturation
weaknesses
Table 9.1 Chief Factors to
Consider in Evaluating
Retail Trading Areas
Availability of Store Locations
Number and type
of store locations
Access to Zoning
transportation restrictions
Owning versus Costs
leasing
opportunities
Table 9.1 Chief Factors to
Consider in Evaluating
Retail Trading Areas
Regulations
Taxes
Licensing
Operations
Minimum wages
Zoning
Characteristics of Trading Areas
A trading area cannot be properly
analyzed without studying the nature
of competition and the level of
saturation.
An area may be:
understored (too few retailers),
overstored (too many retailers), or
saturated (the proper number of
retailers).