Chapter 8 Retail Site Location Mc GrawHillIrwin Retailing

Chapter 8 Retail Site Location Mc. Graw-Hill/Irwin Retailing Management, 6/e Copyright © 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved.

2 Retailing Strategy Human Resource Management Chapter 9 Retail Market and Financial Strategy Chapter 5, 6 Retail Locations Chapter 7 Site Locations Chapter 8 Information and Distribution Systems Chapter 10 Customer Relationship Management Chapter 11

3 Location Chapters • Chapter 7 – General Description of the Location Types – Advantages and Disadvantages of Different Location • Chapter 8 – Considerations in Selecting Area for Locating Store – Issues in Evaluating Specific Sites

Factors Affecting the Demand for a Region or Trade Area 4

5 Economic Conditions It is important to examine an area’s level and growth of population and employment

6 Competition Some retailers are going urban: Lack of competition High level of disposable income Large, untapped labor force The Mc. Graw-Hill Companies, Inc. /John Flournoy, photographer

7 Strategic Fit Ann Taylor – High income, dual career families Hot Topic – teen, pop culture, grunge Royalty-Free/CORBIS Mc. Donald’s – families with kids REI – outdoor enthusiasts The Mc. Graw-Hill Companies, Inc. /John Flournoy, photographer

8 Operating Costs • Varies across areas • Affected by proximity of area considered vs. other areas where retailer operates • Local and state legal environment has effect Nick Koudis/Getty Images

9 How Many Stores to Open in an Area? Economies of Scale One promotional costs for all stores Justifies cost of distribution center Increases sales per store Target needs of regional market Management has control of market vs. Cannabilization open stores as long as profits increase

10 Evaluating a Site When evaluating and selecting a specific site, retailers consider: Stockbyte/Punchstock Images • The characteristic of the site • The characteristic of the trading area • The estimated potential sales that can be generated

11 Site Characteristics

12 Traffic Flow and Accessibility When traffic is greater, more customers shop Good for convenience retailers Not necessary for destination retailers Too much can impede access to store Accessibility to store is as important as traffic flow Photo. Link/Getty Images

Convenience of Going to Site Accessibility • Road pattern and condition • Natural and artificial barriers • Visibility • Traffic flow • Parking • Congestion • Ingress/egress ©Mc. Graw-Hill Companies/Jill Braaten, photographer 13

14 What Should Retailers Consider for Parking? Observe shopping center at various times Employee parking availability Shoppers that use cars Parking by non-shoppers Typical length of a shopping trip The Mc. Graw-Hill Companies, Inc. /Andrew Resek, photographer

15 Adjacent Tenants • What other retailers would Radio Shack want to be located near? – Wal-Mart, Supermarket, Best Buy? • In an enclosed mall, what retailers would Abercrombie & Fitch want to be located near? – American Eagle Outfitter, Ann Taylor, Body Shop, Electronic Boutique • Principle of Cumulative Attractiveness

16 Grouping Retailers in an Enclosed Mall

17 Cost and Restrictions • Costs – Rent – Common Area Maintenance Fee/Insurance – Advertising Fee • Restrictions – Signage – Tenant MIx – Operating hours

18 Steps in Evaluating Sales Potential of a Site • Define Trade Area – Drive Time vs. Geographic Distance – Primary, Secondary, Tertiary • Estimate Sales Potential – Huff Model – Analog Approach – Regression Analysis

19 Zones in a Trade Area

20 Trade Area Primary zone - 60 to 65 percent of its customers Secondary zone - 20 percent of a store’s sales Tertiary zone - customers who occasionally shop at the store or shopping center U. S. Geological Survey, ESIC

21 Factors Defining Trade Areas • Accessibility • Natural & Physical Barriers • Type of Shopping Area • Type of Store • Competition • Parasite Stores

22 Measuring Trade Areas Customer Spotting Use Census Data Geodemographic Information Systems Information on Competition – Yellow Pages

23 Customer Spotting Purpose: to spot, or locate, the residences of customers for a store or shopping center. How to obtain data: • credit card or checks • customer loyalty programs • manually as part of the checkout process • automobile license plates

24 Census Data of the U. S. Only once in 10 years. Ryan Mc. Vay/Getty Images Each household in the country is counted to determine the number of persons per household, household relationships, sex, race, age and marital status.

25 Geographic Information System (GIS) GIS – a system of hardware and software used to store, retrieve, map and analyze geographic data along with the operating personnel and the data that goes into the system. • coordinate system (latitude and longitude) • spacial features (rivers and roads) • some firms offer services combine GIS with updated census data, consumer spending patterns and lifestyles

26 GIS Map for a Store Trading Area in an MSA

27 Data from GIS on Retail Expenditures in Trade Area

28 Metro Renters Young – 20’s Well educated Professional Large cities Median income $50, 000 Spend on themselves Surf Internet

29 Geodemographic Profile • What is the geodemographic profile for your neighborhood? • http: //www. esribis. com/reports/ziplookup. html

30 Location of Target Customers in Shopping Center Trade Area

31 Indices for Assessing Sales Potential • Market Potential Index (MPI) – Number of Households Purchasing a Product or Service in a Trade Area • Spending Potential Index (SPI) – Average Amount Spent on a Product or Service by a Household in a Trade Area

32 Sources for Measuring Competition The Internet - lists current locations and future sites. Yellow Pages Other Sources: Directories published by trade associations, chambers of commerce, Chain Store Guide, International Council of Shopping Centers, Urban Land Institute, local newspaper advertising departments, municipal and county governments, specialized trade magazines, list brokers Photo. Disc/Getty Images

33 Methods for Estimating Demand Huff’s Model Analog Approach Regression Analysis Royalty-Free/CORBIS

34 Huff’s Gravity Model Based on the premise that the probability that a given customer will shop in a particular store or shopping center becomes larger as the size of store or center grows and distance or travel time from customer shrinks

35 Huff’s Gravity Model P ij= S j / Tij Σ S j / Tij λ λ

36 Huff’s Gravity Model PRC POH = = = 10, 000/5 2 10, 000/52 + 5, 000/52 10, 000/152 + 5, 000/52 = . 889 . 182 . 889 x $3 million +. 182 x $5 million = $4, 910, 000

37 Application of Huff Gravity Model

38 Regression Analysis and Analog Approach MRA = Factors affecting the sales of existing stores in a chain will have the same impact on the stores located at new sites being considered. Analog Approach = retailer describes the site and trade area characteristics for its most successful stores and attempts to find a similar site.

39 Regression Model for Estimating Store Sales • Stores sales = 275 x number of households in trade area (15 minute drive time) • + 1, 800, 000 x percent of household in trade with children under 15 • + 2, 000 x % of households in trade area in Tapestry segment “aspiring young ” • + 8 x shopping center square feet • + 250, 000 if visible from street • + 300, 000 if Wal-Mart in center

40 Edward Beiner Optical Analog Approach • Do a comp analysis • Define present trade area • Analyze trade area characteristics • Match characteristics of present area with potential sites

41 Competitive Analysis of Potential Locations

42 Competitive Analysis for Edward Beiner Optical

43 Trade Area for Edward Beiner Optical

44 Potential Locations for Edward Beiner Optical

45 Types of Leases Percentage Fixed - Rate Percentage leases – lease based on a % of sales. Retailers also typically pay a maintenance fee based on a percentage of their square footage of leased space. Most malls use some form of percentage lease.

46 Variations of Percentage Leases Percentage lease with specified maximum percentage of sales up to a maximum amount. Rewards retailer performance by allowing retailer to hold rent constant above a certain level of sales Percentage lease with specified minimum retailer must pay a minimum rent no matter how low sales are. Sliding scale - percentage of sales as rent decreases as sales go up.

47 Fixed Rate Leases - used by community and neighborhood centers. -Retailer pays a fixed amount per month over the life of the lease. -Not as popular as percentage leases Graduated Lease - a variation of the fixed rate lease -Rent increases by a fixed amount over a specified period of time.

48 Prohibited Use Clause Limits the landlord from leasing to certain tenants. Some tenants take up parking spaces and don’t bring in shoppers: bowling alley, skating rink, meeting hall, dentist, or real estate office. Some tenants could harm the shopping center’s wholesome image: bars, pool halls, game parlors, off-track betting establishments, massage parlors and pornography retailers.

49 Exclusive Use Clause Prohibits the landlord from leasing to retailers selling competing merchandise Specify no outparcels Specify if certain retailer leaves center, they can terminate lease. Escape Clause Allows the retailer to terminate its lease if sales don’t reach a certain level after a specified number of years, or if a specific co-tenant in the center terminates its lease.