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Notes

UNIT – II

Unit Structure

Lesson 2.1 - Trade Area Analysis


Lesson 2.2 - Site Evaluation and Selection
Lesson 2.3 - Store Design and Store Layout Design
Lesson 2.4 - S pace Planning and Location of Department

lesson 2.1 - Trade Area Analysis

Learning Objectives

➢➢ 
Understand Trade Area Analysis;
➢➢ 
Identify the theories on Retail

Introduction

Trade area analysis is a methodology, process or technique that


provides a basis for understanding, visualizing and quantifying the extent
and characteristics of known or approximated trade areas.

It is important to define the market area of any potential location.


You know that a retail market is any group of individuals who possess the
ability, desire and willingness to buy retail goods or services. The residents
of any neighborhood, city, region, country, or group of countries may
constitute a retail market. The retail trade is defined as the geographic
area within which the retail customers for a particular kind of store live
or work. The customer profile of a segment of the people within the
geographic area that the store decides to serve is the target market. For
example, jaxson’s restaurant in the US serves the residents and office
workers in the downtown and Westside areas of El Paso as well as visitors
from across the border in MEXICO.

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Notes
Trade area analysis provides the foundation for

➢➢ 
Understanding the geographic extent and characteristics of store
patronage.
➢➢ 
Spatially assessing performance.
➢➢ 
Performing competitive analysis.
➢➢ 
Evaluating market penetration and market gap analysis.
➢➢ 
Target marketing.
➢➢ 
Merchandising.
➢➢ 
Identifying/quantifying effects of cannibalization.
➢➢ 
Developing and exploiting demographic profiles.
➢➢ 
Site suitability and site selection studies.

Geographic Information System (GIS) technology is a fundamental


tool for analyzing retail trade areas today. This technology removes site
selection “blinders” because it identifies and illustrates the crucial factors
for site selection within a geographic framework.

Trade area analysis also employs theoretical techniques that are


used to approximate the potential patronage area. These techniques are
used in cases where customer level data is not available.

Choosing a retail site in the absence of sound trade area analysis


is a just like flying an aeroplane with blinders: It forces a business to
commit itself to a course in the absence of vital information such as store
patronage, local market opportunities, competing businesses, and barriers
that would dissuade consumers from visiting the site.

Size and Shape of Trading Area

A trade area is the geographic area that generates the majority of


the customers for the store.

Primary trade area: Primary trading area covers between 50-80%


of the store’s customers.
Secondary Trading Area: This area contains the additional 15- to
25% of the store’s customers.
Tertiary trading area: covers the balance customers

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Notes
These trading areas are dependent on distance and do not always
have to be concentric in nature

Source: www.InfoFan.zcom / Dr.Pooja Sharma

Defining the Trade Area

A trading area is a contiguous area from which a retailer gets


customers for the merchandise he is selling. A trade area may be a town,
city, district, state, and country or even beyond the country’s boundaries.
The trade area may be divided into few layers (zones) depending upon
the size and operations of the store, its location, merchandise offered and
services offered.

Since most of the retail sales especially in big cities take place
at stores, the selection of the store location and analyzing trade area
becomes essential. Retailers emphasize on trade area analysis because of
the following reasons:

a) A detailed analysis of trade area provides the retailer a picture about


demographic and socio-cultural aspects of consumers. For a new
store, the analysis of trade area becomes necessary to understand
the prevailing opportunities and threats (if any) that may be a
success path for new entrant.

b) It helps in identifying the consumer demographics and socio-


economic characteristics.

c) It helps in assessing in advance the effects of trade area overlapping.

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Notes
d) It helps in highlighting geographic weaknesses. For example,
trading area analysis reveals that people from trans-river hesitate
to come to city shopping areas due to pick-pocketers and thieves
in evening. Further, comprehensive study reveals the fact that
this is because of improper lighting arrangements and absence of
police personnel. Therefore, shopping center could exert political
pressure to make the area well lit and crossing safer.

e) It provides opportunity to understand and review the media


coverage patterns.

f) It helps in locating better site location by understanding the existing


trade areas around the potential locations.

g) It helps in understanding customers profile in terms of gender,


age, income level, consumption pattern, standard of living, local
requirements etc.

Issues Covered Under Trade Area Analysis

Trade area analysis is known as one of the most critical elements


in retail strategic planning process. Selecting store location is a long term
and non-repetitive decision that involves following issues:

a) Mapping of existing customers with regard to the present stores.

b) It covers calculating the estimate time taken by nearby customers


to various existing stores.

c) Determination of all possible variables that may have impact on


your store and trading areas.

d) To develop strategies to forecast trade areas around all possible


available sites.

e) To use the collected data to analyze market potential, developing


customer service levels and ultimately making decisions about site
location.

Factors Affecting Trade Area Analysis

(1) Entry or exit of a retail store will cause the trade area of nearby
stores to change

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Notes
(ii) Trade area analysis is not only time exercise It is in setting up a
new retail store. It plays a vital role for improving their sales and
marketing performance

(iii) Any change in product offering will have its impact on trade areas,
population shift, competitors’ existence and overall profitability of
nearby stores

Theories on Retail

1. Reilly’s Law of Retail Gravitation

Reilly’s Law of Retail Gravitation or simply Reilly’s Law was


developed by William J. Reilly in the year 1931.

The purpose of Reilly’s law of retail gravitation is to find a point


of indifference between two locations, so the trading area of each can be
determined. This point is assumed to be a function of the distance between
two locations pondered by their respective size (population often used for
this purpose). A location can thus be more attractive than the other. For
instance, in the figure below, two locations are 75 km apart. According
to the Hotelling principle, the point of indifference should be halfway in
between (35 km). However, since location A has a larger population, it is
assumed that it will draw more customers. Under such circumstances, the
point of indifference is 45.9 km away from location A.

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Notes
In 1931, William J. Reilly was inspired by the law of gravity to
create an application of the gravity model to measure retail trade between
two cities. His work and theory, The Law of Retail Gravitation, allows us
to draw trade area boundaries around cities using the distance between
the cities and the population of each city.

Reilly realized that the larger a city the larger a trade area it would
have and thus it would draw from a larger hinterland around the city.
Two cities of equal size have a trade area boundary midway between the
two cities. When cities are of unequal size, the boundary lies closer to the
smaller city, giving the larger city a larger trade area.

Reilly called the boundary between two trade areas the breaking
point (BP). On that line, exactly half the population shops at either of the
two cities.

The formula is used between two cities to find the BP between the
two. The distance between the two cities is divided by one plus the result of
dividing the population of city b by the population of city a. The resulting
BP is the distance from city A to the 50% boundary of the trade area.

One can determine the complete trade area of a city by determining


the BP between multiple cities or centers.

2. Huff’s Probability Model

The Huff Model is a special interaction model that calculates


gravity-based probabilities of consumers at each origin location
patronizing each store in the store dataset. From these probabilities, sales
potential can be calculated for each origin location based on disposable
income, population, or other variables. The probability values at each
origin location can optionally be used to generate probability surfaces and
market areas for each store in the study area. As a gravity model, the Huff

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Notes
Model depends heavily on the calculation of distance. This tool can use
two conceptualizations of distance - traditional Euclidean (straight-line)
distance as well as travel time along a street network.

To account for differences in the attractiveness of a store relative


to other stores, a measure of store utility such as sales volume, number
of products in inventory, square footage of sales floor, store parcel size,
or gross leasable area is used in conjunction with the distance measure.
Potential store locations can also be input into the model to determine
new sales potential as well as the probabilities of consumers patronizing
the new store instead of other stores.

The Huff Model can be used

➢➢ 
To delineate probability-based markets for store locations in the
study area\
➢➢ 
To model the economic impact of adding new competitive store
locations
➢➢ 
To forecast areas of high and low sales potential, which can guide
new store location placement or refined marketing or advertising
initiatives

First, a gravity analogy is used to estimate attractiveness of store j


for customers in area i.

Aij= Attraction to store j for customers in area i


Sj = Size of the store (e.g. square feet)
Tij= Travel time from area i to store j
lambda = Parameter reflecting propensity to travel

Sj
Aij =
Tij λ

Second, to account for competitors we calculate the probability


that customers from area i will visit a particular store j.

Aij
Pij = n

∑A
j =1
ij

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Notes
Third, annual customer expenditures for item k at store j can now
be calculated.

Pij = Probability customers from area i travel to store j


Ci = Number of customers in area i (e.g. census track)
Bik = Annual budget for product k for customers in area i
m = Number of customer areas in the market region

m
E jk = ∑ (Pij Ci Bik )
j =1

Fourth, market share of product k purchased at store j can now be


calculated by using the formula:

E jk
M jk = m
Β
∑ (C B
i =1
i ik )

3. Index of Retail Saturation Theory

The theory of retail saturation index is calculated to determine


the saturation index of retail shopping district within a particular retail
store types assumed potential demand per square meter of the potential
demand.

Retail saturation index theory (The Index of Retail Saturation


Theory) takes into account the saturation index to determine the specific
assumptions of the retail stores within the districts per square meter of
the type potential demand. This theory was developed in the Harvard
Business School in the 80s of the 20th century.

The theory is essentially a region by calculating the size of retail


saturation index to determine the number of retail outlets in the region
and to determine the suitability of shop. The saturation index is compared
by measurement of demand and supply retail stores within the district the
degree of saturation. The interaction between demand and supply and the
effect of creating market opportunities.

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Notes
The formula of Retail Saturation Index Theory is:

IRS = demand / store area = (H \u00B7 RE) / RF

IRS: 
certain types of goods within a retail shopping district
saturation index;

H: the number of households within the district;

RE: shopping district each families on certain types of goods


expenditures;

RF: certain types of goods existing business area. Retailers must


choose the area of the proposed comparative assessment of
the level observed saturation index. In general, the saturation
index is high, meaning that the retail potential, and means
that the retail potential of the low saturation index small.

Identify Alternate Sites and Select the Site

After taking decision on the location and market potential the retailer
has to select the site to locate the store based on the following parameters,
such as

➢➢ 
Traffic Accessibility of the market is also a key factor
➢➢ 
The total number of stores and the type of store that exist in the
area Amenities
➢➢ 
To buy or to lease
➢➢ 
The product mix to be offered by the retailer

Summary

Trade area analysis is a methodology, process or technique that


provides a basis for understanding, visualizing and quantifying the extent
and characteristics of known or approximated trade areas. A trade area
is the geographic area that generates the majority of the customers for
the store. Primary trading area covers between 50-80% of the store’s
customers, and secondary trading area contains the additional 15- to 25%
of the store’s customers.

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