Retail Management: A Strategic
Approach
Thirteenth Edition
Chapter 9
Trading-Area
Analysis
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Learning Objectives
9.1 To demonstrate the importance of store location for a
retailer and to outline the process of choosing a store
location
9.2 To discuss the concept of a trading-area and its related
components
9.3 To show how trading-areas may be delineated for
existing and new stores
9.4 To examine three major factors: population
characteristics, economic base characteristics, and
competition/level of saturation
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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
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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
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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.
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Benefits of Trading-Area Analysis
• Discovery of consumer • Assessment of effects of
demographics and trading area overlap
socioeconomic characteristics
• Ascertain whether chain’s
• Opportunity to determine competitors will open nearby
focus of promotional activities
• Discovery of ideal number of
• Opportunity to view media outlets, geographic
coverage patterns weaknesses
• Review of other issues (e.g.
transportation)
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The Trading-Areas of Current and
Proposed Outlets
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GIS Software
• Geographic Information Systems
– Digitized mapping with key location-specific data used
to graphically depict trading-area characteristics such
as
▪ population demographics
▪ data on customer purchases
▪ listings of current, proposed, and competitor
locations
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(A) GIS Software in Action
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(B) GIS Software in Action
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(C) GIS Software in Action
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(D) GIS Software in Action
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The Segments of a Trading Area
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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
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Destination Versus Parasite Stores
• Destination stores have a • Parasite stores do not create
better assortment, promotion, their own traffic and have no
and image. real trading-area of their own.
• They generate trading-areas • These stores depend on
much larger than competitors. people who are drawn to area
for other reasons.
• Dunkin’ Donuts: “It’s worth
the trip!” • Magazine stand in office
building
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Trading Areas and Store Types
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Delineating Trading-Area of an Existing
Store
• Multiple data sources must be used: Secondary data:
– Store records (cash, credit customers)
– Purchase frequency, ticket amount, geographic location
• Primary data:
– Patronage, traffic patterns
– Demographic & lifestyle info (PRIZM)
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The Trading-Area of a New Store
• Different tools must be used when an area is evaluated in
terms of opportunities rather than current patronage and
traffic patterns:
– Trend analysis
– Consumer surveys
– Computerized trading-area analysis models
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Computerized Trading-Area Analysis
Models
• Analog Model
• Regression Model
• Gravity Model
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Analog, Regression and Gravity Models
• Analog models– simplest. Revenue estimates based on
similar stores, competition, expected market share, size
and population density
• Regression models- looks at population size, average
income, transportation barriers and traffic patterns
• Gravity models– looks at distance and shopping selection
at given location
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Reilly’s Law (1 of 2)
Reilly’s law of retail gravitation—a traditional means of
trading-area delineation—establishes a point of
indifference between two cities or communities so that
the trading-area of each can be determined.
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Reilly’s Law (2 of 2)
d
Dab =
Pb
1+
Pa
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Exercise: Reilly’s Law
Cities A and B are 50 miles apart. City A has a population of
400,000 and City B has a population of 100,000. According
to Reilly's law, what is the point of indifference for City B?
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Calculation: Reilly’s Law
50 miles
Dab =
100,000
1+
400,000
Point of indifference for City B = 16.7 miles
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Exercise Solution: Reilly’s Law
• Dab =
50 , i.e., 16.7 miles from smaller city and 33.3 miles
1.5
from larger city Indifference point
• Assumes that larger city has more retail facilities and
greater drawing power as a result
• Assumes that road conditions, congestion, driving
conditions are equal in both cities
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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.
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Huff’s Law
Huff’s law of shopper attraction delineates trading-areas on
the basis of product assortment 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.
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Exercise: Huff’s Law
Use Huff’s law to compute the probability of consumers’
traveling from their homes to each of three shopping areas:
square footage of selling space—Location 1, 15,000;
Location 2, 20,000; Location 3, 25,000; travel time—to
Location 1, 15 minutes; to Location 2, 21 minutes; to
Location 3, 25 minutes; effect of travel time on shopping trip
—2
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Solution: Huff’s Law
(15,000)/(15)2
pil = = 43.9%
2 2
(15,000)/(15) + (20,000)/(21) + (25.000)/(25)2
(20,000)/(21)2
pil = = 29.8%
2 2
(15,000)/(15) + (20,000)/(21) + (25.000)/(25)2
(25,000)/(25)2
pil = = 26.3%
2 2
(15,000)/(15) + (20,000)/(21) + (25.000)/(25)2
• The probabilities of consumers, traveling to locations 1, 2, and
are 43.9 percent, and 26.3percent, respectively.
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Elements in Trading-Area Selection
• Population Characteristics
• Economic Base Characteristics
• Nature and Saturation of Competition
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Chief Factors to Consider in Evaluating
Retail Trading-Areas (1 of 7)
Population Size and Characteristics
• Total size and density
• Age distribution
• Average educational level
• Percentage of residents owning homes
• Total disposable income
• Per-capita disposable income
• Occupation distribution
• Trends
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Chief Factors to Consider in Evaluating
Retail Trading-Areas (2 of 7)
Availability of Labor
• Management
• Management trainees
• Clerical
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Chief Factors to Consider in Evaluating
Retail Trading-Areas (3 of 7)
Closeness to Sources of Supply
• Delivery costs
• Timeliness
• Number of manufacturers
• Number of wholesalers
• Availability of product lines
• Reliability of product lines
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TChief Factors to Consider in Evaluating
Retail Trading-Areas (4 of 7)
Economic Base
• Dominant industry
• Extent of diversification
• Growth projections
• Freedom from economic and seasonal fluctuations
• Availability of credit and financial facilities
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Chief Factors to Consider in Evaluating
Retail Trading-Areas (5 of 7)
Competitive Situation
• Number and size of existing competition
• Evaluation of competitor strengths and weaknesses
• Short- and long-run outlook
• Level of saturation
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Chief Factors to Consider in Evaluating
Retail Trading-Areas (6 of 7)
Availability of Store Locations
• Number and type of store locations
• Access to transportation
• Owning versus leasing opportunities
• Zoning restrictions
• Costs
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Chief Factors to Consider in Evaluating
Retail Trading-Areas (7 of 7)
Regulations
• Taxes
• Licensing
• Operations
• Minimum wages
• Zoning
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Trading Area Saturation Indices
• Number of persons per retail establishment
• Average sales per retail store
• Average sales per capita
• Average sales per square foot of selling area
• Average sales per employee
• Saturated, oversaturated and under saturated conditions
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Copyright
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