Category: Retailing

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

1. The retailer needs to determine is there is a strategic fit with the target market.
2. The retailer needs to evaluate the economic conditions of the area
3. The retailer needs to determine the cost of operating the store
4. 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. 

1. Your promotional costs are lower. An advertising campaign can run in one large area and benefit multiple stores. 
2. You will likely be able to serve many locations from one distribution center, which lowers inventory and travels costs. 
3. 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.

In 1996, Michael Porter, a professor at Harvard Business School, wrote a seminal article on business strategy. The article was titled What is Strategy? and Professor Porter did a pretty excellent job of answering that question.

Through his research he discovered that strategy is not just about creating a more effective and efficient enterprise. Operational effectiveness, performing activities better—faster or with few inputs and defects—than rivals is not enough. The problem is these best practices can be easily emulated by competitors. All this does is move the so-called “productivity frontier” or the maximum value any company can deliver at a given cost, given the best available technology, skills, and management techniques, ever and ever further out. Operational effectiveness may improve, but it improves for everyone. And what you end up with is a competitive convergence, competitors offering similar products/services in the same ways with the same value profile.

So how does a firm break out of this? We look to strategy. 

First, strategy is the creation of a unique and valuable position, involving a different set of activities. 

Porter describes the types of activities that businesses can partake in that will make a difference. A business can serve the few needs of many customers. For example, Jiffy Lube has a limited range of services they provide (auto lubricants), but they can provide those needs across a large population.

Or a business can serve the broad needs of few customers. Bessemer Trust, as an example, targets just high-net-worth customers, but they provide a broad range of services to that select clientele. By the way, these aren’t the only types of positioning activities a firm can engage in, but they are the most common.

When creating a unique and valuable position involving a different set of activities than your competition, what you’re really looking at doing is determining your retail mix. That specific combination of location, merchandise management, pricing, communication, store design & display, and customer service that defines who your business is as a retailer.

Second, strategy requires you to make trade-offs in competing—to choose what not to do.

Some competitive activities are incompatible; thus, gains in one area can be achieved only at the expense of another area. 

For example, Neutrogena soap is positioned more as a medicinal product than as a cleansing agent. The company says “no” to sales based on deodorizing, gives up large volume, and sacrifices manufacturing efficiencies. By contrast, Whirlpool’s decision to extend its product line and acquire other brands represented a failure to make difficult trade-offs: the boost in revenues came at the expense of operational efficiency.

We’ve also got to make important decisions about the target market we want to appeal to. Or put another way, what target markets must we say “no” to. If we look at this matrix of markets in retail fashion, you can see that the target markets are made up of which fashion segment to target as well as the retail format. If you can identify an underserved combination within a marketplace like this, then you have a better shot at competing and more opportunity for profits.

Third, strategy involves creating “fit” among a company’s activities. Fit has to do with the ways a company’s activities interact and reinforce one an- other. Fit drives sustainable competitive advantage. When activities mutually reinforce each other, competitors can’t easily imitate them.

Let’s look at an example:

When Continental Lite Airlines—what you don’t remember Continental Lite Airlines? Well you’re about to see why—when they tried to compete with Southwest Airlines’ by matching some of their activities the results were disastrous. It’s not enough to replicate the operational effectiveness of a competitor by copying technologies, skills, or management techniques, you must also copy the unique positioning of your competitor and the decisions behind that positioning, which is virtually impossible to do.

In this graphic, you can see an interconnected network of higher-order strategic themes in green and the tightly linked activities that identify and implement those themes in yellow.

Take for example, Southwest’s theme of Limited Passenger Service at the top. Surely that would be easy to copy. Just cut out some services your airline provides and voila you can now compete with Southwest. But hold up, it’s not that easy. Southwest is able to offer those limited passenger services at low fares because it also features point-to-point flights and not the hub-and-spoke system that other airlines use. This means there are also no baggage transfers so airport operations are simplified. The fast gate turnarounds also mean that they can have more flights leaving out of the same gate per day than their competitors. The problem was Continental Lite tried to compete with Southwest by copying the broad strokes of what Southwest was accomplishing, but not all of the interconnected activities that really made their strategy work. Continental Lite folded shortly after.

A firm like Southwest doesn’t just benefit from the sum of its activities. 

The reality is those activities interact or multiply their efficiencies. A competitor can’t just replicate the parts that they think they can execute on to surpass a superior competitor, they would have to recreate all of it: the system, processes, people, as well as the technologies and offerings. Strategy is about creating something more than the sum of a businesses parts.

So, in a nutshell, strategy is about: 

1. Creating a unique and valuable position, involving a different set of activities than your competition. This is your unique retail mix.
2. Making trade-offs in competing—choosing what not to do. This is selecting the right target market.
3. Creating “fit” among a company’s activities. This is creating your sustainable competitive advantage though a tailored combination of activities that suits you and your customer’s needs.

Like the old real estate adage, the three most important things in retailing are Location, Location, Location.

It may be partially tongue-in-cheek, but there is a lot to it. That’s because location offers us a sustainable competitive advantage. Think about it. If I buy a fast food restaurant franchise and put in on a certain street corner. That’s it. No other business can locate their business there. And if you’ve done your homework and figured out the best possible location to reach your target audience, this gives you a tremendous advantage over your competitors.

The only question is: What type of retail location does my business need? 

When retailers decide to locate a business, they can choose one of two types of retail locations: Unplanned or planned.

Unplanned Locations

Unplanned locations do not have centralized management. The retailer is in charge and must handle all of the business requirements and legal restrictions that operating a business entails. Just because an unplanned location doesn’t have centralized management doesn’t mean the retailer won’t necessarily have a landlord though. Unplanned locations usually come in one of two forms: freestanding and urban locations. 

Freestanding locations are purpose built building meant only for that retailer. Much like a standalone Olive Garden or Container Store. 

Urban locations are usually ground floor spaces in densely populated downtown areas or high-rise buildings.

Planned Locations (Shopping Centers)

Planned Locations are far more varied and we have another name for planned locations, it’s shopping centers. A shopping center is a group of retail and other commercial establishments that is planned, developed, owned, and managed as a single property. The shopping center management controls most all aspects of what goes on in the shopping center including parking, security, external lighting, outdoor signage, advertising, and special events of customers. And there are many different types. Let’s take a look.

Neighborhood and Community Centers

Neighborhood and community centers was one of the most common forms of shopping center. Also known as “strip malls” these locations are usually in convenient locations, have easy parking, and relatively low occupancy costs (rent). The downside of these locations are the relatively limited trade areas (meaning the geographic area that they service), the lack of entertainment aspects, and very little protection from the weather.

Power Centers

Power centers consist primarily of collections of big-box retail stores such as discount stores (Target), off-price stores (Marshall’s), warehouse clubs (Costco), and category specialists (Lowe’s, Best Buy, Bed Bath & Beyond, Dick’s Sporting Goods). They have an open air setup, free-standing anchor tenants, limited small specialty stores, low occupancy costs, and tend to be located where land is more available. They also typically have large trade areas. The retail center in Grafton that houses the Costco would be a good example.

Enclosed Shopping Malls

When we think of shopping malls, enclosed shopping malls tend to be the type that spring to mind. These are climate-controlled environments with retail shops on one or both sides of an enclosed walkway. Shoppers of enclosed malls don’t have to worry about the weather (except perhaps when walking to and from their car), they will see a lot of other shoppers given how enclosed shopping malls attract a large and diverse groups of shoppers, and they are usually surrounded by comfortable, well-manicured environments. Enclosed shopping malls typically are “anchored” by large department stores referred to as anchor tenants and all store operating in the malls have standardized hours of operation. Unfortunately, these locations tend to be more expensive for retail tenants, the level of control exerted by shopping center management can sometimes be overbearing, and retail competition within the centers can sometimes be intense. These malls have faced a lot of challenges in the last few years and the COVID pandemic only exacerbated an already brutal situation. Many malls, like the Grand Ave Shops in downtown Milwaukee are experimenting with a conversion to a mix of retail and residential tenants.

Mixed Use Developments

Mixed use developments combine several different uses into one complex including shopping centers, offices, hotels, residential complexes, civic centers, and convention centers. They are often designed to be all-inclusive environments os that consumers can work, live, and play in one place.

Lifestyle Centers

Lifestyle centers a form of mixed use development incorporate an open-air configuration and tend to be located in affluent residential neighborhoods. They often feature restaurants, theaters, and other entertainment options. They also tend to feature upscale chain specialty stores and their department stores tend to be smaller in size. Many also incorporate residential properties with apartment or condominium units above the ground-level retail like Atlantic Station in Atlanta, Georgia.

Here we see a typical example with the Bayshore Town Center in Glendale, Wisconsin.

Outlet Centers

Outlet centers feature manufacturer retail locations and retail outlet stores. In the early days of these types of centers, shoppers could be seconds (or products with small manufacturing errors) or clearance items. Now, outlet stores often have their own dedicated product lines made to less stringent quality standards.

Nearby, we have the Pleasant Prairie Outlet Mall which is a great example.

Other Location Opportunities

Finally, many other types of managed properties see the benefits of incorporating retail stores into their facilities. For a while now, airport terminals have looked a lot more like malls than the sterile transportation hubs they were in the past. For example, the Milwaukee General Mitchel Airport recently opened a Summerfest Store replaced a Harley-Davidson store. 

We’re also seeing more temporary pop-up retail locations that offer seasonal products or one-off exciting retail experiences. These are used to create buzz around a brand, test new retailing concepts, or to evaluate a new neighborhood or city.

The store-with-a-store concept, pioneered by Ralph Lauren at Bloomingdales, is an agreement in which a retailer rents a part of the retail space in a store operated by another independent retailer.

Merchandise kiosks have also become a popular retailing alternative. These can be small, manned booths or high-tech vending machines. By taking advantage of portability and the latest technologies, retailers can connect with their customers in a more diverse range of environments.

To wrap up, retail locations come in two forms: unplanned—where retailers are essentially responsible for everything—and planned locations, otherwise known as shopping centers, where shopping center management is responsible for most elements of running the overall facility. The most common forms of planned locations are: Neighborhood and Community Centers, power centers, enclosed shopping malls, lifestyle centers, mixed use developments, and outlet centers. 

03. Merchandise Retailer Types

Retailers sell products. That’s what they do. But we have to make a distinction of what type of product a retailer sells. You see, while you you might envision a retailer selling physical products that a customer carry out of the store in a bag, that’s not what all retailers do. So there are two types of products: physical goods products and service products. We’re going to be talking about goods products, what we also call merchandise. We’ll be talking about service products or services later on.

When we speak about merchandise retailers, we typically put them into two broad categories: Food retailers and general merchandise retailers.

First Food retailers.

Supermarket

The typical supermarket carries perishable items (meaning meat, dairy, product, and baked goods) and those account for 30% of sales. They also tend to carry anywhere from 15 to 60 thousand different SKUs (or stock keeping units)—these are discreet inventory items with unique barcodes, so a 6-pack and a 12-pack of the exact same soda would be two different SKUs. 

There is also a subset of supermarkets call Limited Assortment Supermarkets. These typically carry less that 2000 SKUs and are designed to maximize efficiency and reduce costs. Stores such as Aldi, Lidl, and Trader Joes fit this category.

Supercenters

Supercenters come about in one of two ways. Either a full-line discount retailer adds supermarket (grocery) products. Or a supermarket adds discount store products. When Target, a full-line discount retailer, added grocery products, it because SuperTarget. But when Kroger, a supermarket, added full-line discount products, it became a Kroger Marketplace. The stores are designed to capture more of the customer’s wallet by providing the convenience of selling a wide range of products under one roof. The is especially appealing to young families where traveling from store to store is not as feasible given the time constraint young children impose.

Warehouse Clubs

Warehouse clubs are no-frills environments where the retailer can offer products at a steeper discount by removing the more refined environment of a typical retail location and offer products in larger quantities or in bulk.  Many require a yearly membership and oftentimes the memberships are the primary source of the retailer’s profits. Costco and Sam’s Club are great examples.

Convenience Stores

Convenience stores are small, neighborhood stores with limited SKUs (usually less than 1000). Many often sell gasoline as the primary mechanism for attracting customers. Other can be located in densely populated areas to attract foot traffic from passing shoppers. Most tend to focus on beverage products. These stores are always looking for new convenience capabilities to add to attract customers. Recent additions include EV charging and delivery self-service  lockers

Now let’s take a look at the retailers that sell general or (non-food) merchandise. 

Department Stores

Ever since one of the earliest department stores open in Paris in 1852, Le Bon Marché if you’re wondering, this has been a successful retail format. These stores feature a broad variety of products (many product categories) and a deep assortment (many options to choose from in each category). They separate the products by department (ladies’ wear, home goods, etc.) and most carry a variety of soft goods (clothing, linens, etc.) as well as hard goods (appliances, tools, etc.). These retailers also put an emphasis on customer service. Department stores like Macy’s have seen a lot of pressures on many fronts the past decades, most of which were intensified by the eCommernce revolution.

Full-line Discount Stores

Full-line discount stores offer a broad variety of merchandise, low prices, and somewhat limited service. Walmart, Target, and Kmart are good examples of these retailers. These stores have seen increased competition from stores specializing in specific product categories (category specialists) and they have a difficult time competing on price since category specialists tend to leverage their buying quantities into prices that full-line discount stores have a difficult time matching.

Category Specialist (Category Killers)

Category specialists pick a specific product category and try to meet the customer’s needs in every which way for that type of product. This means that category specialist retailers are excellent resources for shoppers to use for comparison shopping as the product selection is usually very good. We also call these types of retailers category killers, as once they move into a particular category they’ve effectively killed it off for the competition. For example, Dick’s Sporting Goods offers a huge selection in sports equipment and sports related products. Their buying power means that other non-specialist stores would have a difficult time competing. Other examples of category specialists include Staples in office products, Best Buy in electronics, Guitar Center for musical instruments, and Petsmart for pet-related goods.

Specialty Stores

Specialty stores are among the most profitable, fastest growing, and a great mechanism for product manufacturers to interface directly with customers. Apple is one great example. Before they open the retail stores, Apple had to rely on the selling skills of retail partners, which were often lacking. Apple now boasts the highest sales per square foot of any retailer at over $5500.

Drugstores

Drugstores are one of the most common forms of specialty retailers. So common we consider them a separate category. There has been a lot of consolidation among the drugstore retailers. The top 4 drugstore retailers earned over two-thirds of all drug revenue. Walgreens purchased RiteAid. CVS purchased Target’s pharmacy business. Kroger merged with Roundy’s and its pharmacy locations.

Extreme-Value Retailers

Extreme-value retailers also go by the name dollar stores as every prominent extreme-value retailer uses the word dollar in its name (Dollar General, Family Dollar, Dollar Tree and so on. These stores target low-income customers and locate their stores in low-income areas.

Off-Price Retailers

Finally, off-price retailers do not have a consistent inventory of products, but instead sell brand-name products as closeouts and irregulars. This randomness and inconsistency helps create a unique experience for shoppers every trip and drives bargain hunting behavior. Marshalls and TJ Maxx are good examples.

To wrap up, there are two overall types of merchandise retailers: food and general merchandise. Food retailers which consist of supermarkets, supercenters, warehouse clubs, and convenience stores. General merchandise retailers consist of department stores, full-line discount retailers, category specialists, speciality stores including drugstores, extreme value retailers, and off-price retailers.