09. Retail Site Location
Evaluating Areas for Retail
When a retailer needs to evaluate areas for potential siting of a brick-and-mortar location, there are four main considerations that must be made
- The retailer needs to determine is there is a strategic fit with the target market.
- The retailer needs to evaluate the economic conditions of the area
- The retailer needs to determine the cost of operating the store
- The retailer needs to evaluate the competition in the area.
Let’s look at each of these in depth.
Strategic fit is determined by ensuring that an area has consumers in the retailer’s target market. We can do this by evaluating the demographics, psychographics, size and composition of households in an area. How do we do this?
We can look to the US Census site data.census.gov for demographic data for specific populations extracted from census data. But this tool only tells us who the populations are, not how they act.
We can also use ArcGIS by ESRI to run reports of demographics and many other factors. ArcGIS also includes Tapestry a tool to understand the demographic and psychographic breakdown of the entire United States. You’ll be able to understand your customers’ lifestyle choices, what they buy, and how they spend their free time. Tapestry also gives you insights to help you identify your best customers, optimal sites, and underserved markets. As a result you’ll get higher response rates, avoid less profitable areas, and invest your resources more wisely.
McDonald’s could use these tools determine where to locate its restaurant based on neighborhoods with high numbers of families with kids.
REI could locate its retail stores based on the prevalence of individuals who are outdoor enthusiasts.
So if we were Costco and we were looking to open up a new location, what factors would we want to consider? We might look to current membership to determine the types of customers that are attracted to Costco and look for those same patterns in areas we don’t already service. We’d probably also want to consider that we will sell more to larger households and homeowners as opposed to apartment renters who don’t have the room for bulk products. We would also want to consider real estate needs. Costco’s are typically quite large, so we would like be in a suburban area where there’s still large tracts of land to build on.
Economic conditions are also an important consideration for determining strategic fit.
We need to ensure that population growth and employment will sustain our business. We need to determine if there are enough qualified individuals who can be employed in our store. Census economic data for MSAs (we’ll touch on that in a minute) can help us here. How will the economic conditions affect demand for our products in the future?
Certain areas of the country see economic booms that impact large business as well as retail expansion. For many years, the Seattle area of Washington state has seen economic growth. First due to Microsoft’s ascendence and more recently due to Amazon’s growth. Some of the fastest growing cities in the US are now Austin, TX, Miami, FL; and Henderson, NV just outside Las Vegas.
Next, there are operating costs to consider. These costs can vary drastically depending on the area that you are considering. They are affected by proximity of area considered as opposed to existing stores. We look at metropolitan statistical areas to help us analyze these costs.
MSAs are core urban areas containing at least 50,000 inhabitants. They can actually span across counties. They are economic in nature, not political. And they are often named for the major urban area located within the MSA. The Milwaukee MSA, which encompasses Milwaukee, Waukesha, Washington, and Ozaukee counties, being one example. Retailers can use the US Census Bureau reports or ArcGIS to understand the economic and workforce makeup for this areas.
Last, but definitely not least, there’s competition. We wouldn’t want to open a store in an area with tons of competition, just like we wouldn’t want to open a store in an area with little to no demand. Walmart, in fact, gained a lot of traction early on by locating in areas with very little competition.
And they continue to innovate with their store formats by introducing the Walmart To Go stores.
Retail Location Considerations
So you’ve found the general area you’re going to use to site your new retail location, whether it’s choosing an MSA or other method. Now what are the considerations that need to be made when picking a specific location? They are numerous.
- Traffic Flow and Accessibility issues
- How many cars drive by daily?
- Is there access to major highways?
- Is there pedestrian traffic?
- Legal Restrictions
- Is an area zoned for your type of business?
- What type of signage can you have?
- There are also Costs
- How much is rent going to cost?
- How bad are the area’s taxes?
- And finally, Location Characteristics
- How many parking spaces are available for your customers?
- How much visibility will your business have from the street or interstate?
- What condition is the building in?
- Who are the adjacent retailers?
That last one, adjacent retailers is an important one. It’s well-known that both complementary and competing adjacent retailers help build traffic to shopping centers both vehicular and pedestrian. Think of it as a rising tide lifts all boats.
We even have a name for this phenomenon, it’s called Cumulative Attraction. As you can see with this shopping center signage example. BigLots, Save-a-lot, and Family Dollar are all direct competitors, but all serve the same customer. The customer may come for one store, but might wander into the others. A great example of cumulative attraction.
Number of Stores to Open
Now that we’ve determined the right area to move into, how many stores should we open? As retailers, we need to find the right balance of store saturation of an area while avoiding the associated risks .
By maintaining a number of stores in one area you gain the advantage of economies of scale at many levels.
- Your promotional costs are lower. An advertising campaign can run in one large area and benefit multiple stores.
- You will likely be able to serve many locations from one distribution center, which lowers inventory and travels costs.
- And you can provide customized assortments of merchandise to specific stores, though that might mean more inventory at the distribution center level.
The biggest risk associated with over saturation of an area is cannibalization. Cannibalization is when one store starts to erode the profits of neighboring stores by siphoning off customers. One relatively easy way for a retailer to know when to stop opening stores in an area is keep opening them as long as profits continue to increase.
To wrap up, to properly evaluate areas for site location, retailers need to determine strategic fit, economic costs, operating costs, and competition. When an area choice has been made, retailers must consider multiple considerations such as traffic flow and accessibility issues, legal restrictions, costs, and location characteristics. Finally, once the first store has been opened, retailers will need to determine if others should follow. Economies of scale need to be balanced with concerns of cannibalism.