dc lecture two : market selection and location analysis

Distribution Channels MKTG 1058LECTURE TWO

MARKET SELECTION & LOCATION ANALYSIS(Chapter 7)

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Learning Objectives for Chapter 7:

1. Explain the criteria used in selecting a target market.

2. Identify the different options, both store-based and non-store-based, for effectively reaching a target market and identify the advantages and disadvantages of business districts, shopping centers, and freestanding units as sites for retail location.

3. Define geographic information systems (GIS) and discuss their potential uses in a retail enterprise.

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Learning Objectives

4. Describe the various factors to consider in identifying the most attractive geographic market for a new store.

5. Discuss the various attributes to consider in evaluating retail sites within a retail market.

6. Explain how to select the best geographic site for a store.

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Importance of Topic Vital to doing well in your group project

You need to apply the concepts of LA and discuss critically the issues required in the project brief

Read the project brief in detail and note each requirement!!

Do not stray out of point.

Location!! Location!! Location!!

� These words resonate in retailing� A key decision is where to locate the retail

shop/s and mall� Location will determine where you draw

your target customers from� We call this “Trading Area”� This topic forms the basis of your project-

learn it very well!!

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Location is typically prime consideration in customer’s store choice.

Location decisions have strategic importance because they can help to develop sustainable competitive advantage.

Location decisions are risky: invest or lease?

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Why is Store Location Important for a Retailer?

Geographic space and cyberspace must be considered

Traditionally, reaching the target market has been associated with selecting the best physical location for a store.

The Internet is becoming a viable alternative for reaching one’s customers.

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Virtual Stores

The equivalence of a store on the Internet is a retailer's World Wide Web (www) site.

The retailer's home page is the introductory or first material viewers see when they access a retailer's Internet site. It is equivalent to a retailer's storefront in the physical world.

Virtual store is the total collection of all the pages of information on the retailer's Internet site.

The counterpart to location on the Internet is the "ease of access." This refers to the consumer’s ability to find a Web site in cyberspace easily and quickly.

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Market Segmentation

a method retailers use to segment, or break down, heterogeneous consumer populations into smaller, more homogeneous groups based on their characteristics.

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Segmentation

No single retailer can serve all potential customers; it is important that it segment the market and select a target market(s).

A target market is the segment of the market that the retailer decides to pursue through its marketing efforts.

The topics of target market selection and location analysis are combined because a retailer must identify its target market(s) before it decides how best to reach that market(s).

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Marketing : An IntroductionAn Asian Perspective © Armstrong, Kotler & da Silva

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Identifying a Target Market

To reach a target market successfully

Market segment should be measurable

Market should be accessible

Market should be sustainable enough to be profitable

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Target marketIs the group of customers that the retailer is seeking to serve.How do you know which particular segment

is the most attractive for your firm? What factors would you consider when selecting and penetrating a given target market?

Market Segmentation

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Target Market UNIQLO has a well-

defined target market: customers who desire good quality but reasonably priced casual fashion apparel

Think of some local retailers that focus on specific customer segments. What examples come to mind? Is narrow or broad targeting a preferred strategy and why?

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Target marketing in retailing

Using this framework, think of examples of retailers who apply each of these 3 types of targeting strategies.

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Targeting the Fashion Conscious

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Targeting Kids

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Targeting the Budget Conscious Segment

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Different ways of achieving competitive advantages in marketing and retailing (differentiation strategies)

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Marketing : An IntroductionAn Asian Perspective© Armstrong, Kotler & da Silva

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POSITIONING IN MARKETING

Positioning Map for Retailer Categories

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Positioning based on Margins and Nature of Merchandise:

Positioning of Malls- possible criteria

Landmark City Location

Neighborhood/ Suburban Location

Upscale International

Branded Tenants

Local Tenants

Lot 1

i-ON Orchard

Loyang Point

Orchard Central

Chelsea Premium Outlets coming to Johore in 2011

Reaching Your Target Market

Location of Store-based RetailersNon-store-based Retailers

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Location of Store-Based Retailers

Store-Based Retailers operate from a fixed store location that requires customers to travel to the store to view and select merchandise or service.Non-store-Based Retailers intercept

customers at home, at work, or at a place other than a store where they might be susceptible to purchasing.

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Retail Formats for Accessing A Target Market

Exhibit 7.22-26


Central Business Districts (CBD) usually consists of an unplanned shopping area around the geographic point at which all public transportation systems converge; it is usually in the center of the city and often where the city originated historically.

Secondary Business District (SBD) is a shopping area that is smaller than the CBD and that revolves around at least one department or variety store at a major street intersection.

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Central Business District

ADVANTAGES Draws people into areas during business

hours Hub for public transportation Pedestrian traffic Residents DISADVANTAGES High security required Shoplifting Parking is poor Evenings and weekends are slow

Location of Store-Based Retailers Neighborhood Business District (NBD) is a chopping

area that evolves to satisfy the convenience-oriented shopping needs of a neighborhood, generally contains several small stores (with the major retailer being a supermarket or a variety store), and its located on a major artery of a residential area. (Example our HDB heartland stores)

Shopping Center (or mall) is a centrally owned or managed shopping district that is planned, has balanced tenancy (the stores complement each other in merchandise offerings), and is surrounded by parking facilities. (note: quite often in Singapore our Shopping Centre is located within the city or main street) 2-29

ISCS Shopping Center Definitions

Exhibit 7.32-30


Exhibit 7.32-31


Exhibit 7.3

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Shopping Center Advantages

Heavy traffic resulting from the wide range of product offerings.

Cooperative planning and sharing of common resources.

Access to highways and availability of parking.

Lower crime rate. Clean, neat environment.

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Shopping Center Disadvantages

Inflexible store hours (open during mall hours only).

High rents. Restrictions as to what merchandise the

retailer may sell. Inflexible operations and required

membership in the center’s merchant organization.

Possibility of too much competition and the fact that much of the traffic is not interested in a particular product offering.

Dominance of the smaller stores by the anchor tenants.

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The Largest Shopping Malls

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Advantages and Disadvantages of Shopping Malls

Advantages:Many different types of storesMany different assortments availableAttracts many shoppersMain Street for today’s shoppersNever worry about the weatherComfortable surrounding to shopUniform hours of operation

Disadvantages:Occupancy costs are highTenants may not like mall management control of operationsCompetition can be intense

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Challenges to Malls

Time pressured society makes it impractical to wander malls

Fashion apparel sold in malls experiencing limited growth

Malls are getting old and rundown –unappealing to shop

Anchor tenants are decreasing due to retail consolidation

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Lifestyle Centers• Usually located in affluent residential

neighborhoods

• Includes 50K sq. ft. of upscale chain specialty stores

• Open-air configuration

• Design ambience and amenities

• Upscale stores

• Restaurants and often a cinema or other entertainment

• Small department store format may be there2-38

Lifestyle Centers: examples in Singapore

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Clarke Quay

Holland Village/ Rochester Park

Fashion / Luxury Specialty Centers

Branded goods Located in upscale malls Target at up-market

clients

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Outlet CentersThese shopping centers contain mostly manufacturers and retail outlet stores

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There is one coming soon to Johore soon!!

http://www.cnngo.com/singapore/shop/chelsea-premium-outlets-open-johor-709556

The new Johor project is expected to attract 4 million visitors a year, according to Malaysian Prime Minister Najib Razak. It's a joint venture between Chelsea Premium Outlets and Genting Group that's being developed in Johor as part of the Iskandar Malaysia project, and understandably, Malaysia has bragging rights to it. "It is the first (Chelsea) center in the (Asean) region and I'm very happy that they have chosen Malaysia," said PM Najib. He said he understood other countries in the region had been trying to woo the Chelsea Group to set up the center


Anchor Stores are the stores in a shopping center that are the most the most dominant and are expected to draw customers to the shopping center.

Free-Standing Retailer generally locates along major traffic arteries and does not have any adjacent retailers to share traffic with.

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Unplanned Retail Locations

Merchandise Kiosks – small temporary selling stations located in walkways of enclosed malls, airports, train stations or office building lobbies.

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Unplanned Retail Locations

Freestanding Sites– location for individual store unconnected to other retailer

Advantages of Freestanding Retailing

Lack of direct competition.Generally lower rents.Freedom in operations and hours.Facilities that can be adapted to individual needs.Inexpensive parking.

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Limitations of Freestanding Retailing

Lack of drawing power from complementary stores.Difficulties in attracting customers for the initial

visit.Higher advertising and promotional costs.Operating costs that cannot be shared with

others.Stores that may have to be built rather than

rented.Zoning laws that may restrict some activities.

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• Mixed Use Developments

• Airports

• Resorts

•Hospitals

• Store within a Store

Other Retail Location Opportunities

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Alternative LocationsMixed Use Developments (MXDs)

Civic Centers

Office Buildings

Hotels

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Airports: Why wait with nothing to do?

Rents are 20% higher than mallsSales/sq ft are 3‐4 times higher than mallsBest airports are ones with many connecting flights

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Airports as retail locations

Captive audienceWell-to-do customer

Customers have time to shop

Hilton Singapore Banyan Tree

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Alternative Locations- Hotels and Resorts

Captive LocationPatients cannot leaveGifts are available

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Alternative Locations - Hospitals

Non-store-based Retail Formats

Direct SellingStreet PeddlingInteractive TVMail-OrderInternetAutomated Merchandising Systems

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While we discuss location, we don’t just consider the retailer’s perspective of store choice location

What about customers’ shopping patterns? How, where, when and why do customers

buy? There are different patterns…

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Location must also to be considered from the “customer’s perspective”

Minimize the customer’s effort to get the product or service by locating store close to where customers are located

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Shopping SituationsConvenience Shopping

Shopping SituationsComparison Shopping

Customers have a good idea of what type of product they want, but don’t have a strong preference for brand, model or retailer.

Typical for furniture, appliances, apparel, consumer electronics, hand tools and cameras.

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Category Specialists

Consumers can see almost all brands and models in one store

IKEA is a “destination store”

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Shopping SituationsSpecialty Shopping

•Customers know what they want•Designer labels•Convenient location matters less

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Destinations Versus “Parasites”Destination stores have a

better assortment, better promotion, and/or better image

They generate trading areas much larger than competitors

Going to IKEA- this is a destination store

Parasite stores do not create their own traffic and have no real trading area of their own

These stores depend on people who are drawn to the area for other reasons

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Question to Ponder

Given the wide variety of locations available to target specific consumer groups, what new locations will provide the greatest opportunities for the retailers of tomorrow?

Trends will vary across Asia. More malls will spring up in city centers. Others will still rely on traditional retail locations. Within Asia location is important for tourism retailing. Other comments?

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LOCATION ANALYSIS METHODS

These topics will be important for your completion of your DC

project

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Geographic Information Systems

These comprise: digitized mapping with key locational

data to graphically depict trading-area characteristics such as population demographicsdata on customer purchases listings of current, proposed, and competitor locations

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Geographic Information Systems

The GIS combines physical geography with cultural geography.Cultural geography: is the buffer that people

have created between themselves and the raw physical environment and includes the characteristics of the population, humanly created objects, and mobile physical structures. Thematic Maps use visual techniques such as

colors, shading, and lines to display cultural characteristics of the physical space.

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GIS Components

Exhibit 7.4 2-64

Uses of GIS

Market selection.Site analysis.Trade area definition.New store cannibalization.Advertising management.Merchandise management.Evaluation of store managers.

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Market Identification Market Identification - involves three

sequential steps:

1. First, the retailer must identify the most attractive markets in which to operate.

2. Second, one must evaluate the density of demand and supply within each market and identify the most attractive sites that are available within each market.

3. Third, select the best site or sites available.

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Selecting a Retail Location

Exhibit 7.5 2-67

Location analysis is like a filtering process…

Overall market

Trading area

Site

1

2

3

Target market segment

The locality or catchment

area

The actual

location of the

store/mall2-68

Market Identification

Trading AreaIs the geographic area from which a retailer, or group of retailers, or community draws its customers.

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Elements in Trading-Area Selection

Population Characteristics

Economic BaseCharacteristics

Nature and Saturationof Competition

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Benefits of Trading Area Analysis

Discovery of consumer demographics and socioeconomic characteristics

Opportunity to determine focus of promotional activities

Opportunity to view media coverage patterns

Assessment of effects of trading area overlap

Ascertain whether chain’s competitors will open nearby

Discovery of ideal number of outlets, geographic weaknesses

Review of other issues, such as transportation

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Selected Population Statistics for Trading Areas A and B

Characteristics Area A Area B Total population, 2000 13,732 15,499

Population change, 1990-2000 +8.2 +2.5

College graduates, 25 +, 2000 (%) 41.4 39.2

Median household income, 2000 $61,236 $61,242

Managerial and professional occupations (%), 2000

45.3 45.0

Which trading area would you consider as being the most attractive and why?

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The Segments of a Trading Area

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Trading Areas and Store Types

Largest

TRADINGAREAS

Smallest

Department stores

Supermarkets

Apparel stores

Gift stores

Convenience stores

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Market Identification

Retail Location TheoriesMarket Demand PotentialMarket Supply Factors

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Retail Location Theories

Retail Gravity TheorySaturation TheoryBuying Power Index

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Retail Location TheoriesRetail Gravity Theory

Suggests that there are underlying consistencies in shopping behavior that yield to mathematical analysis and prediction based on the notion or concept of gravity.It is based on Newtonian gravitational principles, explains how large urbanized areas attract customers from smaller rural communities.

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Retail Location TheoriesThe Formula used:

Dab

d

1 +Pb

Pa

=

where Dab is the breaking point from city A, measured in miles along the road to city B;

d is the distance between city A and city B along the major highway;Pa is the population of city A; and

Pb is the population of city B.2-78


Point of IndifferenceIs the extremity of a city’s trading area where households would be indifferent between shopping in that city or an alternative city in a different geographical direction.

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Trading Area for City A

Exhibit 7.62-80

The break points are computed based on the formula:

Exhibit 7.62-81

Computation of the values using Reilly’s Law of Retail GravitationFrom City_ to Central City (A)

Computed value using the equation

Point of Indifference:

From B to A X = 18 –14.5 = 3.5

From C to A Y = 14 –10.8 = 3.2

From D to A Z = 5 – 3.7 = 1.3

18

1 + √

√1 +

1 + √

14

5

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14000240000

240000

240000

21000

30000

= 14.5

= 10.8

= 3.7

Limitations of Reilly’s Law

Distance is only measured by major thoroughfares; some people will travel shorter distances along cross streetsTravel time does not reflect distance

traveled. Many people are more concerned with time traveled than with distanceActual distance may not correspond

with perceptions of distance

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Illustration of Location Analysis

How to apply Reilly’s Law for the Project

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The challenge of doing LA analysis in Singapore context

Urban state Small geographical area Efficient transportation system (no issue

about mobility unlike US where customers commute if there larger malls)

In this project we will substitute population size (as shown in text) with mall size (square feet)Reason: mall size becomes the “surrogate

measure” of a centre’ attractiveness2-85

Mall B

Floor Area 450K Sq Ft

25 km

10km

Your Site

Mall C


Mall A


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Work out using the Reilly model

Dab

d

1 +Pb

Pa

=

where Dab is the breaking point from city A, measured in miles along the road to city B;d is the distance between city A and city B along the major highway;Pa is the population of city A; and

Pb is the population of city B.

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Substitute with floor area (square feet) of your own mall site

Substitute with floor area (square feet) of another nearby mall that may attract similar customers

Mall A and Mall B

Dab

25

1 +450

250

=

= 10.6km

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Mall A and Mall C

Dab

10

1 +150

250

=

= 5.6 km

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Mall B


25 km

10km

Your Site

Mall C


Mall A


25 km

10km

Mark off the break points

10.65.6

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Mall B


25 km

10km

Your Site

Mall C


Mall A


25 km

10km10.6

5.6

Zone off the Trading Area

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Show the maps…your trading area could be triangular or even polygon

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Trading area mapped out against three malls


Saturation TheoryExamines how the demand for goods and services of a potential trading area is being served by current retail establishments in comparison with other potential markets.

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Retail Store Saturation:is a condition where there is just

enough store facilities for a given type of store to efficiently and satisfactorily serve the population and yield a fair profit to the owners.

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Understored:is a condition in a community

where the number of stores in relation to households is relatively low so that engaging in retailing is an attractive economic endeavor.

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Overstored:is a condition in a community where the number of stores in relation to households is so large that engaging in retailing is usually unprofitable or marginally profitable.

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Index of Retail Saturation (IRS) is the ratio of demand for a product (households in the geographic area multiplied by annual retail expenditures for a particular line of trade per household) divided by available supply (the square footage of retail facilities of a particular line of trade in a geographic area).


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Index of Retail Saturation (IRS)

IRS = (H X RE)/RF

Where IRS is the index of retail saturation for an area; H is the number of households in the area; RE is the annual retail expenditures for a particular line of trade per household in the area; RF is the square footage of retail facilities of a particular line of trade in the area (including square footage of the proposed store).

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Sample Question 11 from the text:

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11. Compute the index of retail saturation for the following three markets. The data for department stores are as follows: MARKET A B C Retail expenditures per household $789 $875 $943 Square feet of retail space 600,000 488,000 808,000 Number of households 121,000 102,000 157,000 Based on these data, which market is most attractive? What additional data would you find helpful in determining the attractiveness of the three markets?

Solution to Question 11

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IRS (Market A) = (121,000 x $789) / 600,000 = 159.12 IRS (Market B) = (102,000 x $875) / 488,000 = 182.89 IRS (Market C) = (157,000 x $943) / 808,000 = 183.23 The most attractive market is Market-C with an IRS of 183.23 or $183.23 in expected sales per square foot. It would be helpful if additional information on various factors that influence market demand potential such as population characteristics, buyer behavior characteristics, household income, household age profile, household composition, community life cycle, population density and mobility. In addition supply factors such as square feet per store, square feet of space per employee, store growth, and the quality of competition should be analyzed.

See also the ‘Planning Your Own Retail Business’ example

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The retail store that you are planning has an estimated circular trade radius of four miles. Within this four-mile radius, there is an average of 1,145 households per square mile. In a normal year, you expect that 47 percent of these households would visit your store (referred to as penetration) an average of 4.3 times (referred to as frequency). Based on these figures, what would you expect to be the traffic (i.e., number of visitors to your store per year)? (Hint: Traffic can be viewed as the square miles of the trade area multiplied by the household density multiplied by penetration, which is in turn multiplied by frequency.) Once you answer this question, do some sensitivity analysis, which is an assessment of how sensitive store traffic is to changes in your assumptions about penetration and frequency. What happens if penetration drops to 45 percent or rises to 50 percent? What happens if frequency drops to 4.0 times annually or rises to 4.5 times annually? In this analysis, only change one thing at a time and hold all other assumptions constant.

Solution:

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Suggested Answer: One needs to first compute the following. 1. square miles of trade area = r2 = (22/7)(4)2 = 50.286 2. traffic = (square miles in trade area) x (household density) x (penetration) x (frequency) traffic = (50.286) x (1,145) X (47%) X (4.3) traffic = 116,364 Next do some sensitivity analysis.

Solution (sensitivity analysis)

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Consider the following possible parameter values SQUARE HOUSEHOLD MILES IN (x) DENSITY (x) PENETRATION (x) FREQUENCY = TRAFFIC TRADE AREA 1 50.286 x 1145 x 47% x 4.3 = 116,364 2 50.286 x 1145 x 45% x 4.3 = 111,412 3 50.286 x 1145 x 50% x 4.3 = 123,792 4 50.286 x 1145 x 47% x 4.0 = 108,246 5 50.286 x 1145 x 47% x 4.5 = 121,776


Buying Power Index (BPI):is an indicator of a market’s overall retail potential and is composed of the weighted measures of effective buying income (personal income, including all nontax payments such as social security, minus all taxes), retail sales, and population size.

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Buying Power Index (BPI)

BPI =

+ 0.3(the area’s percentage of U.S. retail sales)

+ 0.2(the area’s percentage of U.S. population)

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0.5(the area’s percentage of U.S. effective buying income)

Other Demand and Supply Factors

- Market Demand Potential

- Market Supply Factors

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Market Demand Potential

Population CharacteristicsBuyer Behavior CharacteristicsHousehold IncomeHousehold Age ProfileHousehold CompositionCommunity Life CyclePopulation DensityMobility

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Identifying Communities with High Demand Potential for Fast-Food Drive-In Restaurant

Exhibit 7.7

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Market Supply Factors

Square Feet Per StoreSquare Feet Per EmployeeGrowth in StoresQuality of Competition

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Site Analysis

Site AnalysisIs the evaluation of the density of demand and supply within each market with the goal of identifying the best retail site(s).

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Site Analysis

Size of Trading AreasDescription of Trading AreaDemand DensitySupply DensitySite Availability

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Site Analysis

Size of Trading Areas Applebaum developed a technique for estimating the

trade area of a current store. It involved interviewing a customer for each $100 in

weekly sales. The customers were randomly selected and their home addresses obtained.

After the home addresses of the shoppers were plotted on a map one could make inferences about the trading area size and the competition.

This is sometimes referred to as ‘customer spotting’

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But for new stores… the task is more difficult; however, there are some general rules that apply.

1. Stores that sell products that the customer wants to buy in the most convenient manner will have a smaller trading area

2. As customer mobility increases, the size of the trading area increases

3. As the size of the store increases, its trading area increases, because it can stock a broader and deeper assortment of merchandise, which will attract customers from greater distances.

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Some conclusions…

4. As the distance between competing stores increases, their trading areas will increase.

5. Natural and synthetic obstacles such as rivers, mountains, railroads, and freeways can abruptly stop the boundaries of a trading area

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Description of Trading Areas

Retailers can access at relatively low cost information concerning the trading area for various retail locations and the buyer behavior of the trading area.

Use descriptors to profile trading areas Start with geo-demographic variables Can be supplemented with lifestyle and

behavioral factors Neighborhood analysis MapInfo www.mapinfo.com 2-116

Demand Density

Demand DensityIs the extent to which the potential demand for the retailer’s goods and services is concentrated in certain census tracts, ZIP (postal) code areas, or parts of the community.

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Demand Density Map

Exhibit 7.11

Supply Density

Supply DensityThe extent to which retailers are concentrated in different areas of the market under question.

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Store Density and Site Availability Map

Exhibit 7.12 2-120

Checklist for Site Evaluations

Exhibit 7.13 2-121


Exhibit 7.13 2-122


Exhibit 7.132-123


Exhibit 7.13 2-124


Exhibit 7.132-125

Site Selection

Nature of SiteTerms of Purchase or LeaseExpected Profitability

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Site Selection

100 Percent LocationIs when there is no better use for a site than the retail store that is being planned for that site.

After all, all retailers should attempt to find a 100 percent location for their stores. A 100 percent location is a location where there is no better use for the site then the retail store that is being planned. Retailers should remember that what may be a 100 percent site for one store may not be for another. The best location for a supermarket may not be the best location for a discount department store

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Nature of Site

Store CompatibilityExists when two similar retail businesses locate next to or nearby each other and they realize a sales volume greater than what they would have achieved if they were located apart from each other.

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Past Year Exam Questions

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MARKET SELECTION & LOCATION ANALYSIS

(Chapter 7)

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October 2006