An Experian white paper

Spatial analysis

March 2011

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Lost in space? How spatial analysis can direct your market strategy

In these times of growing marketing complexity, fierce competition and an uncertain economic future, businesses need to reassess priorities and sharpen strategic business plans. The challenge of steering your company through an environment of increasingly marginal and dispersed opportunities means one thing – get back to basics.

The key to this knowledge lies in a full understanding of your customer base – where they live, what they want, and how they behave. If you combine this insight with high quality market intelligence you can then begin to select and exploit the right opportunities for your business.

Whilst this might sound like old news, our challenge to you is whether you have embraced and exploited the benefits of spatial analytics in this process. Spatial analytics is a method of deriving rich actionable insight from customer and market data and it could represent an important means to navigate your way through the current economic gloom, and plot a course towards profitability and growth.

This paper provides a concise explanation of the strategic importance of spatial analysis and its most important applications. Moreover, the development of a ‘spatial sensibility’ is shown to be critical to the establishment, and furtherance, of a successful market and customer strategy.

Spatial analytics is a method of deriving rich actionable insight from customer and market data and it could represent an important means to navigate your way through the current economic gloom, and plot a course towards profitability and growth.

This paper explores five areas:

A. What is spatial analysis?B. From data to insightC. From insight to strategyD. Bringing it togetherE. Getting started with spatial analysis

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A. What is spatial analysis?

1. A short definition

Spatial analysis utilises statistical, modelling, and mapping techniques, to reveal, measure, and predict, the geographical phenomena that influence the ability of a business to fulfil its profit making objectives.

It can provide decision makers with a vital injection of objective insight concerning the nature of their customer base and the dynamics of their marketplace. Indeed, many high profile consumer facing organisations embrace spatial analysis, using it to validate their strategic market plans and tailor their customer propositions.

However, for many, it remains unexplored territory - a spatial frontier in itself. Without a clear appreciation of the value of spatial analytics, decision makers are often feel ill-equipped to make a fully informed business case for investing in spatial tools and expertise.

2. Who is it for?

A more appropriate question is - who isn’t it for? If you have customers, and you care about where they live, how they behave, what products and services to offer them, and how to best communicate your messages, then spatial insight can help your business.

Many customer facing organisations, from a variety of sectors, actively engage in spatial analysis:

• Retailers:highstreet,shopping centre, retail park, superstore, and convenience, operators• Distributors:organisations reliant on sales through partner outlets• Property:retail,office,and industrial agents; investors, developers, and centre operators• Leisure:pubs,restaurants, cinemas, bookmakers, event organisers, tourist attractions• Professionalservices:financial, legal, and medical operators; other service providers • Publicsectorservices:health centres, libraries, and other public service providers

A geographical appreciation of your market will be particularly relevant if you rely on attracting consumers to physical outlets; yet, spatial insight is not the sole preserve of ‘bricks and mortar’ operators. Any business that seeks to attract consumers, whether its primary means of engagement is through direct mail, catalogues, the internet, or a store, has much to gain from spatial analysis.

3. Five good reasons to conduct spatial analysis

1. Identify the key customer and market variables that drive performance2. Assess the value of target consumers and rank geographical opportunities accordingly3. Ensure marketing initiatives are consistent with the needs of the underlying customer base4. Allocate sunk costs associated with property estates and marketing projects to their best possible uses 5. Achieve competitive advantage in a crowded market - identify great opportunities first

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4. Driving strategic direction

Robustspatialinsightreliesonrobust spatial data – these can be broadly categorised as, existing customer information, target consumer information, and wider marketplace information (Figure 1). Interrogated at various geographical scales, these variables will reveal a host of insights about your business, including the profile of existing and prospective target customers, the extent of your catchment areas, and key market and location factors that influence how you trade.

This insight will help you identify the primary market and customer drivers behind your performance, and empower you to shape the strategic activities by which success is measured:

5. What are spatial data?

Spatial data are customer and market variables that can be represented and interrogated geographically (Figure 2). Analysing the location of existing customers and the consumers from which they are drawn allows you to quantify your customer base. While data covering your market locations will let you consider location and market specific factors of relevance to your business.

Unfortunately, not all businesses are blessed with plentiful spatial data – indeed, data on existing customers can sometimes be hard to come by. Fortunately, what data you have can be enriched using a vast array of additional consumer and market variables sourced from spatial data providers. It is this process of data enrichment that truly brings your own to life.

True insight is only revealed once you start to apply socio-demographic profiles to your customers, or append location quality indicators to your stores. Together, these variables will paint a rich picture of the social, economic, and commercial, context in which your business operates.

Spatial data are highly pliable, and can be analysed at any strategic scale. A retailer entering a new country will be primarily concerned with understanding the overall value of the national market, while, at the other end of the spectrum, a convenience retailer will focus on the relative value of markets at street-scale.

...which fulfil your strategic objectives

Revenue Profitability Growth

...and carry out important activities...

Market prioritisation Predictingperformance Customer communication

...helping you to...

Identify drivers of business performance

...drives insight regarding...

Target customer groups Catchment areas Market intelligence

...at multiple geographical scales...

National Regional District catchment Location

Figure 1: From data to actionable insight, the strategic importance of spatial analysis(CopyrightExperianLtd)

Figure 2: Three broad categories of spatial data, and example enrichment variables(CopyrightExperianLtd)

Customer data Market data

Enriched by:

• Frequency of business• Recencyofbusiness• Value of business• Type of product or service bought• Channel used (on-line, shop, catalogue)

Consumer data

Enriched by:

• Socio-demographic segmentations• Affluence• Ethnicity and culture• Financial sophistication• Technological sophistication• Propensityto consume

Enriched by:

• Physicaland manmade geography• Market segmentation• Competitor activity• Complementary operator or activity• Locationtype, quality, dynamics

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B. From data to insight: four spatial activities

1. Profiling customers

The first priority of spatial analysis is the development of an intimate understanding of existing or prospective customers. Without this insight it is not only difficult to get to grips with what drives your business, but impossible to measure the potential value of market opportunities.

Customer addresses/postal information is typically drawn from transactional records (in-store, on-line etc.), surveys, or loyalty schemes. Where you do not have access to real customer data, your prospective consumer base can still be profiled – but on a more assumptive basis.

You can easily understand the extent of your existing market by geographically pinpointing your customers (Figure 3). However, it is only by going on to profile them using a range of enrichment data that you will gain a clear view of who you are dealing with.

This most basic of spatial activities will allow you to:

• Developaportraitofyourtarget customers: - Who are they, where do they live, how do they behave, and what do they want?

• Identify changes in the shape of your customer profile: - Are new customer types emerging? - Have established types diminished?

• Understand differences between groups: - Dodifferentgroupsbuy different products/services?

• Identify geographical variances: - Where are the hot spots and cold spots?

Profile existing or prospective customers by:

• Consumersegmentation,age,gender,life-stage,lifestyle,affluence, income, attitude• Areaofresidence• Ethnicity,culturalbackground• Financialbehaviour,economicresilience• Product/servicebought,frequencyofpurchase,channelused,value of purchase

Figure 3: locating and profiling customers(CopyrightExperianLtd,Navteq2009Q4.BaseduponCrownCopyrightmaterial)

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2. Creating catchment areas

Where you have stores, defining the limits of individual catchment areas is a natural progression from locating customers or target consumers (Figure 4). The insight derived from this practice is so powerful that it can underpin almost all market strategy activities conducted by store led businesses.

The process of catchment creation is the key to: • Identifyingregionaldifferences within your business• Assessingyourmarketvalue and share of catchment areas• Establishingareasofuntapped potential• Identifyingareasofmarket saturation• Identifyingareasofstrongand weak performance• Identifyingstrongandweak nodes in your store estate:• Analysingoverlapsbetween catchments and the potential for cannibalisation

• Monitoringtheimpactof competitor activity• Monitoringtheimpactof marketing or activity or new store investment• Predictingnewstorecatchment areas

In turn, this insight can feed into a number of important strategic decision making activities:

• Identificationofhighpotential markets to be prioritised for future investment: - Where to open new stores - Where to invest in existing stores

• Networkoptimisation,toensure efficient coverage of all markets: - Reachthemaximumnumber of consumers through minimum number of locations - Where to close weak stores

• Planningofstore/marketsupport: - Vary products/services in line with customer base - Channel marketing efforts into areas of greatest potential - Choose appropriate form of communication (on-line, in-store, media etc.)

Figure 4: plotting the boundaries of catchment areas, and estimating market size and share(CopyrightExperianLtd,Navteq2009Q4.BaseduponCrownCopyrightmaterial)

Catchment areas can be created using:

• Realcustomer location data• Drivetimebands• Distanceradii• Gravity models

Use catchment areas to:

• Assess market size• Visualise market share across an area• Establish the boundaries of markets

Micro-scale intelligence can be derived from a variety of sources including, your own surveys, location databases, footfall surveys, and bespoke pitch quality scores. It allows you to:

• Assessoveralllocationquality: - Where is the best possible location within a market? - What other retailers and operators are here? - What does the competitive landscape look like? - How many of my existing stores are in poor or great locations? • Understandtheimpactoflocalchanges: - How has a new development impacted one site, compared to others? - How has, or will, competitor activity affect me?

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3. Gathering market intelligence

Spatial analysis is essentially a process of intelligence gathering. The development of a robust picture of your customers and a clear understanding of market dynamics can only happen once you bring together all variables of relevance to your business. This process cannot be overstated – in competitive markets, market knowledge really is power.

At the macro-scale, market demand data should be collected by catchment area. However, because the difference between success and failure can be the matter of just a few yards, high quality micro-scale intelligence must also be collated (Figure 5). Indeed, where rental liabilities are high and lease commitments stringent, a poorly chosen location can become a long-term, debilitating problem.

Figure 5: gathering micro-level intelligence(CopyrightExperianLtd,Navteq2009Q4.BaseduponCrownCopyrightmaterial)

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4. Identifying drivers of business performance

Byprofilingconsumers,establishingyour catchments, and compiling market intelligence, you will yield a substantial database of variables. These must be sifted through to isolate those that are of greatest importance to your business - which of these factors are responsible for driving performance?

Many businesses approach this question by undertaking a performance audit. This approach will help you isolate and quantify the statistical significance of your customer and market variables in driving store performance, as measured by typical success factors such as profit, market share, and turnover (Figure 6).

Typically, regression analysis is used - a statistical technique that analyses the relationship between any number of independent variables (i.e. competition, consumer demographics) and a dependent variable(i.e.EBITDA,turnover,market share). This method will show you how the value of the dependent variable changes when one of the independent variables is varied – allowing for causal relationships to be inferred.

The audit process should distil a database of market and customer variables into a manageable short-list of factors that drive successful performance – providing you with a ‘blueprint for success.’ It is these variables that must be replicated as you grow and develop your business.

This insight can be used to:

• Interveneinpoorperforming markets with ‘positive’ underlying variables• Providetherationaletorank and prioritise future investment opportunities• Segmentyourexistingstore estate based on performance, and set different strategies• Benchmarkperformancefor different types of locations, and set justifiable targets• Developasalesprediction model to forecast optimal performance of existing and new locations

Figure 6: conceptual model of performance drivers, for a retailer(CopyrightExperianLtd)

Customer segments

Market size by category

Expenditure per head

Internet penetration

No. of competeing shops

Distance

No. of complementary shops

Age of fit-out

Rentandrates

Shop-fit

Size

Mystery shop score

Staff apraisal score

Stock management

Conversion

Footfall

Access/parking

Quality

Revenue and profitability

Catchment

Internal factors driving performance

Exernal factors driving performance

Measure of success

Pitch Competition

The shop Operations

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C. From insight to strategy: three spatial initiatives

1. Customer engagement

Understanding who your customers are, and where they are within your catchment, enables you to identify high concentrations of your target customers (Figure 7). This insight empowers you to not only direct promotional and advertising resources to the right places, but the right messages to the right consumers.

A spatial approach to your marketing strategy will help you to optimise your targeting activities, whether they are, door drop, media, or store, based. Clearly defining who you market to and when will help you minimise wastage and to invest your scarce capital based on a justifiable rationale.

Use spatial insight to:

• Targetspecificconsumertypes with specific messages• Selectmediaadvertising opportunities that best match customer locations• Selectmostappropriatechannel of engagement dependent on consumer type• Carryoutlocalin-store initiatives and advertising• Reducewastageassociatedwith ‘blanket’ marketing campaigns

Customer insight can also trigger tailored product and service strategies – where offers are adjusted according to the needs of local markets. This is a necessary step for any business reliant on a niche offer; however, ‘generalist’ operators can also benefit from a tailored approach. For example, where a market is characterised by an older and affluent catchment, a retailer may benefit from offering specialist brands and higher staffing levels. Alternatively, in a younger less affluent catchment, a more ‘mass-market’ offer is likely to be appropriate.

Segmenting geographical markets in accordance with dominant consumer types allows for:

• Merchandisingofstores according to local demand• Selectionofdifferentbrands/ fascias for different types of market• Employmentofspecialiststaff for particular locations• Deploymentofmarketspecific in-store promotions and initiatives

Figure 7: planning marketing activity(CopyrightExperianLtd,Navteq2009Q4.BaseduponCrownCopyrightmaterial)

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2. Market prioritisation

Byestablishingkeysuccessdriversyou have a clear set of parameters by which to rank and benchmark future market opportunities. This is a vital strategy for businesses seeking to expand their networks.

The process of prioritising markets can be carried out with varying levels of sophistication, either through the development of static market ranking tools or more complex interactive gravity models. Whatever method you choose, you must treat your primary success drivers, such as target customer segments, ideal competitive landscape, and favoured location dynamics, as relative weights by which to score opportunities.Bymanipulatingthese weights in accordance with the relative impact each variable has on your performance, you can quickly establish a prioritised market investment list (Figure 8).

3. Predicting performance

Spatial insight can be exploited to help you accurately predict the performance of future investment opportunities, or changes to your store network – this is a key reason why many businesses engage in spatial analysis.

This is a sophisticated spatial analysis activity, which typically involves the development of various analytical techniques such as regression analysis, analogue benchmarking, and gravity models. The success of any approach is predicated on a robust supply of spatial data, to ensure your market predictions reflect reality as closely as possible.

A predictive approach allows for the testing of any number of strategic ‘whatif’scenarios(Figure9).

Figure 8: using success factors to establish a prioritised market investment list(CopyrightExperianLtd)

Figure9:modellingyourcommercialenvironment(CopyrightExperianLtd,Navteq2009Q4.BaseduponCrownCopyrightmaterial)

The development of a full understanding of the ‘scope’ of your market will ensure you can put in place a solid growth strategy for your business. The generation of a market ‘hit-list’ should guide any market representation plan, be the channel of consumer engagement a physical store, on-line, catalogues, or direct mail.

Use this approach to: • Establishaprioritisednewstoreopeningplan• Identifythequantityofpotentialopportunitieswithinanewgeographicalmarket• Identifynotablegapsinanexistingstoreportfolioandtheneedforinfillstores• Justifyindividualopportunitiesforfurtherresearchandeventualinvestment• Highlightstrongmarketswithpoorstores,whereoperationalimprovementor marketing support is required

Use this approach to:• Predicttheimpactofchangestoyour‘commercialuniverse’• Separategreatopportunitiesfrommediocreorriskyinvestments• Understandhowmuchmoreyoushouldbeachievingfromexistingmarkets• Buildstrongandjustifiablecasesforyourinvestmentdecisions• Optimisenetworkcoverageandpredictthepointwherediminishingreturnswill impact your business

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D. Bringing it together:

1. Developing a market representation strategy

The insight gained from spatial analysis can inform a wide range of initiatives; however, your ultimate aim shouldbetocombinethesevariousstrategicthreadsintoyourbusiness’formalMarketRepresentationStrategy. This ‘masterplan’ will utilise spatial insight to inform how you grow your business, deal with opportunities, exploit potential, and remedy weaknesses (Figure 10).

High potential Openflagshipstores

Crown Jewels Ensure max. support

Top earnersTrial new concelts

High potentialExpand range/service

Mid potential Openstandardstores

Low potential Invest selectively

Low potential Use catalogue/on-line

Poor performers Transform, close

Market representation strategy to optimise customer opportunities

Strategy for new markets

Strategy for existing markets

Figure10:MarketRepresentationStrategyforaretailchain(CopyrightExperianLtd)

Possiblesolutionsmayrangefromopeningnewstorelocationsandclosureofweaklocations,totargetedmarketingandregional adjustment of product and service offers. Ultimately, the plan will formalise your strategic intent for every market in which you are, or expect to be represented. In essence it should demonstrate how your scarce resources will be allocated to their best possible use.

2. Tools of the trade

Geographical Information Systems (GIS)Geographical Information Systems are visualisation tools, a means to an end that puts data on to maps. However, because they facilitate spatial analysis by showing us the location of customers and catchments, they are vital to the strategic decision making process.

They will reveal the ‘shape’ of your business, allowing you to identify patterns and relationships in your customer data. Their power lies in the displaying of complex information in a way everyone can understand - they bring a business’ market to life.

Spatial insight techniquesMany spatial insight techniques are used to explore the patterns revealed by GIS, and to conduct

some of the activities discussed in this paper. These include GIS based applications such as drive-time, radii, and distance analysis; simple spreadsheet calculations; statistical analysis, and gravity modelling exercises. Increasingly, innovative formsofGeographicBusinessIntelligence(GBI)softwarearealsodeployed - these blend traditional spatial activities with cutting edge business analytics.

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E. Getting started with spatial analysis: four key considerations

1. Customer and location data

Excellent spatial insight requires excellent data. So we recommend you begin with a thorough audit of your existing assets. Your aim should be to develop as complete a picture of your existing and prospective customers as possible. If you have customer data, the task of profiling records against social and economic enrichment data should be straightforward. However, few businesses will have everything they need at their fingertips, so be prepared to source much of your data.

Figure 11: sequence of spatial interventions – what level of sophistication suits your needs?(CopyrightExperianLtd)

Consider the following:

• Doyouhaveaccesstocustomer data? If so, what form is it in? How much do you have? Can it be geographically fixed (contain addresses and/or postcodes).• Arethererestrictionsin using this data, such as customer confidentiality?• Howuptodateisyourdata?• Doesitneedtobecleanedand reformatted before use?• Arethereglaringgapsandhow easily can these be filled?• Isitfeasibletobegincollecting customer data? If so, investigate the right method for your business (surveys, transactions etc.)?• Thinkaboutyourcommercialor retail landscape, if you are to build up a full picture of market demand (socio-economics, market values etc.) and market supply (outlet locations etc.), then what will your data short- list look like?

2. Your strategic objectives

The type of spatial analysis most relevant to your business will depend on your current strategic objectives. Consider whether your focus is on:

• Developingageneralviewof your market for the first time• Enteringnewmarkets

• Developingaplantoexpand quickly• Tryingtogetmoreoutofyour existing markets• Aneedtounderstandthe drivers behind your business• Developingtheabilitytopredict performance• Renewingyourbusinessand selecting investment candidates

3. Level of intervention

You should consider the level of spatial intervention that will be most suitable to fulfil your strategic objectives. The exact triggers for spatial analysis required by two businesses will seldom be the same, but it is possible to identify broad levels of intervention and sophistication (Figure 11).

Profilecustomers,trackchanges,campaignanalysis,choosecommunication methods, identifying hot spots, identifying weak and strong nodes, consider cannibalisation, identify competitor impacts, plan product/service support.

Identify the customer, market, and location factors driving business performance.

Identify and prioritise best market opportunities, based on drivers.

Directinvestmentprocessusingmarketinsightandperformancedriversto predict future performance.

Bringinsighttogetheranddevelopaneffectiveandefficientmarketrepresentation plan.

Market base

Drivers

Prioritise

Predict

Optimise

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4. In-house or out-sourced?

It takes time to develop spatial capability, sophistication will improvestep-by-step.Developingthis capability in-house demands investment in tools, data, and qualified personnel.

You need to think carefully about the best solution for your business. You may wish to work towards in-house resource, or instead utilise trustworthy partners. Even expert in-house analysts seek the services of spatial strategy consultants to help source tools, data, and bespoke analytical solutions.Things to consider:

• Isyourintentiontoconducta one-off piece of analysis, or to set up a spatial strategy?• Whatisyourtime-linefor developing a spatial analysis strategy?• Doyouhaveexistinganalytical capabilities, or do you need to set up infrastructure?• Wouldyouprefertoutilisethird party expertise?

About the author

JamesMillerisaLeadConsultantwithinExperian’sMarketingInformation Services team. He trained as an economic geographer and has over ten years commercial experience, having worked at the heart of market strategy within both the retail(CometGroupplcandDSGi)andproperty(Cushman&Wakefield) sectors. He has a strong background in deriving actionable insight from spatial and consumer data to drive major business decisions and projects for retailers, investors, and other customer focused businesses.

5. Experian’s spatial analysis services

With a highly experienced team of account managers, consultants and analysts, and over twenty years experience in spatial analysis, Experian has an excellent reputation for helping clients develop actionable insight from market and customer data. Experian provides a full-service offer, from the provision of data to the design and delivery of complex spatial projects. Clients come from a broad range of sectors including, retail, leisure, finance, telecommunications and the public sector.

The word ‘Experian’ is a registered trademark in the EU and other countries and is owned byExperianLtdand/oritsassociatedcompanies.

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