A critical element in determining a retailer’s success is the ability to assess and acquire a good location. To achieve this objective, the retailer is expected to identify, evaluate and select trading areas to segment his consumer markets further. After identifying and evaluating local markets, the retailer must then segment them into trading areas. A “retail trading area” is the area from which a store attracts its customers or obtains its business. After this, the terminal point in location decision is that of selection of proper site.
Before the trading area identification process, it is essential to know the dimensions to describe a retail trading area. These trading areas dimensions are – area size, area shape and area structure.
The Trading Area Size
Trading areas range in size from a few square meters to’ a radius of many kilometers. The size of the trading area is a function of the cumulative effects of several operational and environmental factors. The two major operational factors are type and size. The type of operation stands for the kind of goods and services offered. Those retailers who offer the specialty and shopping goods are to draw consumers from a wider geographic area than those retailers who are offering convenience goods because the consumers are willing to exert greater effort and to travel greater distances to buy specialty and shopping goods than to buy convenience goods. The second operational factor is directly related to the retailer’s trading area size namely, size of the store. That is, the larger the retail store and the greater its selection of merchandise, the larger its trading area will be. Because of their physical size and wide range of merchandise.
The size of trading area is also determined by environmental factors. There can be at least three such environmental factors.
- A retailer locates near other retailers because, he is in the cluster, the area of clustered retail units will be pretty large all put together and will have larger share in business than had he located in an isolated area. Thus, a retailer who locates in a regional shopping mall shares more potential customers from a larger area than a retailer that locates either in a small neighborhood shopping center or an isolated free-standing location.
- The size of a retail trading area also depends on location, size and the activity of competing stores. For example, one large departmental store might locate next to another large departmental store to facilitate consumer’s comparative shopping and thus draw from a larger geographic area. Consumers strongly believing in this reasoning that by going to the geographic site of two similar stores, they will find what they are looking for.
- The transportation network strongly influences a retailer’s ability to attract consumers from an area. The effect of traffic-networks on the size of a retailer’s trading area becomes apparent when one considers that the stores located on major thoroughfares usually have larger trading area than those located on secondary streets and roads. Thus, the number of traffic lanes, the number of intersections and nature of intersections, the speed limit and the presence of or absence of barriers to un-congested movement, all affect the size of the area from which a retailer can attract the customers.
The Trading Area Shape
The trading areas are likely to assume many possible different shapes. The exact trading area shape is dependent on three distinct factors namely, transportation networks, barriers-physical, social and political and location of competitors.
- Transportation Networks. The shape of a trading area depends largely on the makeup of the transportation network near which a retailer is located. A store located along the major route should expect an elongated trading-area shape because of the ease of movement along a major astery such as an interstate highway and lack of physical barriers such as traffic lights, traffic signs and high speed limits in case of underdeveloped nations and low speed limits in developed nations. It goes without saying that where two major arteries intersect, the shape of trading area tends to be elongated along both major routes.
- Barriers – Physical, Social and Political. Though the major transportation arteries extend a retailer’s trading area, some physical, social and political barriers reduce these extensions. Physical barriers are lakes, rivers, mountain sides, ocean, deserts, land formations, limited access high ways and rail-road tracks. Social barriers are high-crime area, ethnic neighborhood where people confine to their own ethnic neighborhood The political barrier are city limits, state boundaries and country borders that have tax implications-local, sales, customer tariffs. All these greatly influence the shape of trading area.
- Location of Competitors. A retailer trading area affects the shape where the competitors locate their stores. The trading area is sharply cut by the competitor location, size and type of operation.
The Trading Area Structure
The final dimension of retail trading area is its structure. Trading area structure is the comparative ability of a retailer or a cluster of retailers to attract customers from various distances or from various customer regions. Three such possible trading area structures namely general, composite and proportional.
- General Trading Areas. General trading areas is one which provides maximum of retailer’s business. Therefore, general trading area includes any and all customers who do or might buy any product. Thus, a customer who might-purchase only a tooth paste is included along with customers who buy perfumes, toiletries, dresses, shoes handbags and several other products.
- Composite Trading Areas. A composite trading area is a set of trading areas, each of which is structured according to the type of goods the retailer sells. Thus a retail unit might be dealing in convenience, shopping and specialty goods. It might so happen that a retailer might draw larger trading for specialty goods than for convenience and shopping. The composite area boundary lines are dependent up on consumer’s willingness and expert in shopping effort.
- Proportional Trading Areas. A proportional trading area is based on the distance customers are from the store, unlike composite trading area which is base on the types of products the retailer carries and the degree of consumer willingness to search for the products. The far-off customers are less likely patronize the store than the nearby customers. These two categories together call the retailers as the “distance decay function”- that is, the number customers attracted to a given store decreases as their distance from the store increases.
Based on this distance factor, experts have conceived three distance zones namely, primary, secondary and fringe – together constituting proportion to the total trading area.
- The primary trading zones. It is the area around which a retailer can expect to attract nearly 50 per cent to 70 per cent of his total business. In other words, primary trading zone includes the areas closest to the store, the area in which retailer has the competitive advantage and the area from which the retailer produces highest per capita sales.
- The secondary trading zones. Secondary trading zone is one which surrounds the primary zone and generally represent 20 per cent to 30 per cent of retailer’s total business. In this case, the customer give second or third choice to a retail outlet.
- The fringe trading zones. A fringe trading zone is one from which the retailer draws occasionally 5 per cent to 10 per cent of total business. These customers are either in the close vicinity of the store or because they are extremely loyal to store for one reason or the other.