Factors Affecting Retail Location Decisions – Macro and Micro Factors

Even though non store retailing is growing, most of the retailers are still selling from retail store space. Some of these retailers are very small single-store operators, and some are huge superstore discounters. Each location selected resulted from an effort to satisfy the needs of the particular market each was designed to serve. Whether it was the customer’s need for convenience, their desire to do comparison shopping, the extent of the purchasing power in a market area, of the transportation facilities available, many factors together led to the development of different kinds of retail locations. There is an old saying that the value of real estate is determined by three things: location, location, and location. A wall street journal study looked at the largest store as measured by gross sales of the twenty largest brands. Not surprisingly, in nearly every case, a unique location was a major factor.

Retail stores should be located where market opportunities are best. After a country, region city or trade area, and neighborhood have been identified as satisfactory, a specific site must be chosen that will best serve the desired target market. Site selection can be the difference between success and failure. A through study of customers and their shopping behavior should be made before a location is chosen. The finest store in the world will not live up to it potential if it is located where customers cannot or will not travel to shop. The primary role of the retail store or center is to attract the shopper to the location. Alternatively, retailers must take the store to where the people are, either at home or in crowds. Examples of taking the store to where the crowds are include airport location, theme parks and vending machines.

Every retail store strives for its competitive advantage. For some stores, it is price. For others, it is promotional expertise of the special services that are offered. Despite any differences among the various stores that may competing for the shopper’s penny location offers a unique asset for all stores because once a site is selected, it cannot be occupied by another store. This advantage, however, points to the importance of location analysis and site selection. Once a facility is built, purchased, or leased, the ability to relocate may be restricted for a number of years. In short, location and site selection is one of the most important decisions made by a retail owner.

There are many factors, need to be considered in the retail location analysis. The key ones include:

Macro Factors Affecting Retail Location Decisions (Country and Regional Analysis)

There is a need to recognize that country analysis will be an increasingly important aspect of the location strategy as merchants look for growth opportunities. After the decision is made as to what country or countries are to be considered, a regional analysis will need to be done. Most countries are not completely homogeneous and need to be broken down into regions in order for a retailer to better understand the market characteristics. Regions may differ in many characteristics such as population demographics and density, climate, cultures, and distribution infrastructure. The importance of examining countries and regions by their macro characteristics can be illustrated by the importance of today’s distribution infrastructure to the concept of flow-through replenishment. This concept is based on having information on consumer demand that allows the flow of goods to be regulated by actual needs in the retail stores. Consumer demand is acquired at the point of sale terminal when the UPC bar code is scanned for each product sold. Computers maintain continuous records of product flow. Daily or weekly reorders go directly. To manufactures so that exact quantity replacement can be shipped to each individual store or routed to the retailers central distribution center. If this is a part of the firm’s competitive advantage, the country or region must have the transportation, computer, and warehousing infrastructure necessary to support the strategy.

1. Demographic Characteristics

Demography is the study of population characteristics that are used to describe consumers. Retailers can obtain information about the consumer’s age, gender, income, education, family characteristics, occupation, and many other items. These demographic variables may be used to select market segments, which become the target markets for the retailer. Demographics aid retailers in identifying and targeting potential customers in certain geographic locations. Retailers are able to track many consumer trends by analyzing changes in demographics. Demographics provide retailers with information to help locate and describe customers. Linking demographics to behavioral and lifestyle characteristics helps retailers find out exactly who their consumers are. Retailers who target certain specific demographics characteristics should make sure that those characteristics exist in enough abundance to justify locations in new countries or regions.

2. Economic Characteristics

Businesses operate in an economic environment and base many decisions on economic analysis. Economic factors such as a country’s gross domestic product, current interest rates, employment rates, and general economic conditions affect how retailers in general perform financially. For example, employment rates can affect the quantity and quality of the labor pool available for retailers as well as influence the ability of customers to buy. Normally, growth in a country’s gross domestic product indicates growth in retail sales and disposable income. Retailers want to locate in countries or regions that have steadily growing gross national products. As interest rate rise, the cost of carrying inventory on credit rises for retailers and the cost of purchasing durable goods rises for consumers. Countries that have projected significant increases in interest rates should be evaluated very carefully by retailers. Retailers will also be affected by a rise in employment rates ; this lowers the supply of available workers to staff and support retail locations.

3. Cultural Characteristics

Cultural characteristics impact how consumers shop and what goods they purchased. The values, standards, and language that a person is exposed to while growing up are indicates of future consumption behavior. Consumers want to feel comfortable in the environment in which they shop. To accomplish this, retailers must understand the culture and language of their customers. In a bilingual area, a retailer may need to hire employees who are capable of speaking both of the languages spoken by the customers. Some retailers have found it useful to market to the cultural heritage of their consumers, while other retailers seek to market cross-culturally. Normally larger cultures are made of many distinct subcultures. Retailers need to be aware of the different aspects of culture that will affect the location decision. For example, greeting cards sold in the United States normally have verses on the inside, while greeting cards sold in Europe normally do not.

4. Demand

The demand for a retailer’s goods and services will influence where the retailer will locate its stores. Not only must consumers want to purchase the goods, but they must have the ability or money to do so as well. Demand characteristics are a function of the population and the buying power of the population that the retailer is targeting. Population and income statistics are available for most countries and regions with developed economics. In developing countries the income data may be little more than an informed guess. These statistics allow the comparisons of population and a basic determination of who will be able to purchase the goods carried in the store. This is of utmost importance for retailers, whether they carry higher-priced goods such as durables, furniture, jewellery, and electronics or lower-priced goods-such as basic apparels or toys.

5. Competition

Levels of competitions vary by nation and region. In some areas, retailers will face much stiffer competition than in other areas. Normally, the more industrialized a nation is, the higher the level of competition that exists between its borders. One of the environmental influences on the success or failure of a retail establishment is how the retailer is able to handle the competitive advantages of its competition. A retailer must be knowledgeable concerning both direct and indirect competitors in the marketplace, what goods and services they provide, and their image in the mind of the consumer population. Sometimes a retailer may decide to go head to head with a competitor when the reasons are not entirely clear.

6. Infrastructure

Infrastructure characteristics deal with the basic framework that allows business to operate. Retailers require some form of channel to deliver the goods and services to their door. Depending on what type of transportation is involved, distribution relies heavily on the existing infrastructure of highways, roads, bridges, river ways, and railways. Legal infrastructures such as laws, regulations and court rulings and technical infrastructures  such as level of computerization, communication systems, and electrical power availability also influence store location decisions. Distributions play a key role in the location decision especially for countries and regions. There is a significant variance in quantity and quality of infrastructures across countries. A retailer whose operation depends on reliable computerization and communications would not need to even consider a country or a region that did not meet those criteria. The legal environment is a part of the overall infrastructure a firm must consider. For example, many countries require non-native businesses to have a native partner before establishing retail locations. The legal requirements a retailer operates under in one country will not be the same for another country or region and may be different from state to state within the United States.

In conclusion, the demographic, demand, competition, cultural, infrastructure and economic characteristics are important in analyzing a country or region.

Micro Factors Affecting Retail Location Decisions (Trade Area Analysis)

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.

1. Demographic Factors

We have said that perhaps no variables are more important to the retail manager than the demographic dimensions of a market. Whether the retail trade area is the central city, a growing suburb, or a quiet rural area, you must understand the people who live and work there. Once the basic characteristics are identified and a judgement is made as to how far one of the customers would travel for the goods, the total market has been determined. Factors, such as current population, potential population, population density, age, income, gender, occupation, race, proportion of home ownership, average home value, and proportion of single versus multifamily dwellings are important considerations. Where consumers live, their commuting patterns, and whether their numbers are increasing or decreasing are but a few of the dynamic characteristics of the trade area population that the retailer must consider. It may be quite helpful to construct maps that display where certain types of customers reside.

As you learned, market segmentation is the process of grouping individuals according to characteristics that help define their needs. Each of these groups of similar individuals is called a market segment. No matter how many different segments you may find within any given retail market, you may choose to satisfy only one or just a few of them. Each segment that a retailer attempts to satisfy is a target market.

2. Economic Factors

Economic characteristics have a significant impact on country and region selection. The impact on trade area is even greater. The local unemployment rate will effect the local labor pool and the amount of money that consumers have to purchase products. The most important economic characteristics for the retailer
are per capita income and employment rates.

3. Subculture

Subculture have more of an impact on market and trade area selection than on country or region selection. One must normally be at the market or trade level in order to accurately gauge the location and characteristics of a subculture. An ethnic subculture creates market segments for goods ranging from food and cosmetics to clothing and entertainment. At the same time religion, language, and family structure create both opportunities and problems.

4. Demand

The economy of an area under consideration for location should provide a general indicator of the long –range retail opportunities present within an area. The number, type, trends, and stability of industries that might affect business in the market area need to considered. Employment rates, total retail sales, segment retail sales, household income, and household expenditures all provide information from which the economic stability of the area can be ascertained. The buying power index (BPI) indicates the relative ability of consumers to make purchases. The BPI for most metropolitan statistical areas (MSAs) in U.S. is published yearly by Sales and Marketing Management in their survey of buying power. The BPI for potential markets can be directly compared to help make a choice of market area.

5. Market Potential

Once the retail trade area has been identified and the relative segmenting variables applied, certain quantitative factors must be considered to decide if the area is suitable. These factors include the retail market potential of a retail trade area and the retail ales potential. Retail market potential is the total dollar sale that can be obtained by all stores selling a particular retail product, product line, or group of services within the retail trade area if everything was maximized. Therefore, retail sales potential is a part of retail market potential. A retail sales forecast is the specific estimate of sales volume that a retailer expects. Because the retailer is new in the area or because of the entry of a new competitor, the sales forecast may be less than the estimate of retail sales potential. There are two major determinants of the market potential for a trade area: the number of potential customers within the area and the amount of money consumers spend for the product or product line in question. For example, a retailer can estimate the market potential by multiplying the number of potential consumers in the trade area by the average amount they spend for the product. Generally, market potential figures are based on yearly estimates. Suppose, for example, that 50,000 potential customers reside in the trade area. If it is known that each potential customer spends approximately $79 per year on gifts, the retail market potential for gift sales in that retail trade area would be $3,900,000. Population statistics are commonly used in arriving at market potential and are expressed on a per capita, a per household, or a per family basis. The other factor is per capita expenditure.

A retail trade area may have little relationship to these political boundaries. The merchant may be able to get a more detailed breakdown of population by checking with :

  • The local chamber of commerce for any detailed studies it any have made.
  • The local newspaper for circulation statistics
  • The local post office for the number of box holders on delivery routes
  • The local public utilities office for information on the number of residential electric or gas meters
  • The city planning office, fire department, and police department for information on the number of residents within a specific retail trade area.

Regardless of the sources used, however, the merchant will probably find it necessary to adjust population information for a retail trade area by using the data collected in combination with individual judgement about the area. In addition to population information, the retailer must collect data on the number of dollars being spent by consumers for the product or product line in question.

6. Sales Potential

You learned that the retail sales potential for a firm is the estimated dollar sales that a retailer expects to obtain in a particular retail trade area over a given period. An accurate appraisal of sales is important, because it will dictate the amount of inventory that will be purchased, the number of employees that will be needed, the dollars that can be spent for expenses, and the amount to debt capital the business can comfortably afford. To arrive at such a figure, one must consider.

  • The competitive strengths in the market
  • The amount of business that can be drawn from substitute products
  • Management’s own expertise

To assess the competitive strengths in the market, the retailer can start with an assessment of the total market potential. If the retailer assumes that the business will obtain at least average amount of sales being realized by the competitive business in the trade area, an estimate of the sales potential can be made. If there are five business (the new retail establishment makes six), each business might be expected to have one-sixth of the business available in the trade area. Although this approach may not seem as sound as that used in measuring market potential, it does provide an analysis of competitive strength, and the figure derived is usually conservative. This approach can be useful in particular situations.

7. Index of Retail Saturation

Competition exists when more than one store compete for the same market segment or target market. In some situations, a firm might like to be only one of its type in a given market area. This is particularly the case for specialty or convenience goods. On other occasions, however, good strong competition will enhance the overall business potential of a given area because it will draw shoppers from a greater distance to compare prices or stores. This is particularly the case with goods for which people often make shopping comparisons. Maps may be developed to show retail locations of competitors by relative size and merchandise mix.

8. Infrastructure

We have talked about how the infrastructure including roads and highways, distribution warehouses, communications facilities, and labour pool must be adequate for a country or region. The same is even more true for trade area analysis. The legal infrastructure can also impact the trade area selected for your store. State and local laws vary concerning advertising, zoning, and sign restrictions for retailers.