Huff's model of trading area analysis

Retail Marketing

Lecture 4 Retail Location

NBS 7030B

Retail Marketing & Management

Professor Ratula Chakraborty

Director MSc Programmes

R.Chakraborty@uea.ac.uk

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Lecture Outline

Choosing a Store Location

Retail Location Theories

Trading Area Analysis

Location Selection

End of the Grocery Superstore Space Race

Purpose: to outline the process for selecting a store location and undertake trading area analysis taking account of demographic, socio-economic and competitive local market conditions

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1. Choosing a Store Location

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“Location, location, location”: Having the right

store locations is essential for retail success

Different types of store locations

Solus or freestanding site

Standalone store to benefit from spatial monopoly or operational efficiency, e.g. supermarket, DIY or furniture superstore

Unplanned shopping district

High Street, town centre or neighbourhood district suiting comparison shopping stores (e.g. clothes) or local convenience stores

Planned shopping centre

Shopping mall or retail park suitable for everything under one roof

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Choosing a Store Location (cont.)

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Freestanding Sites for Standalone Stores

Advantages

No competition

Low rental costs

Flexibility

Good for grocery stores or other destination stores

Better visibility

Adaptable facilities

Easy parking

Disadvantages

Difficulty attracting customers

Travel distance

Lack of variety for customers

High advertising expenses

No cost or security sharing

Restrictive planning policy

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Choosing a Store Location (cont.)

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Unplanned Shopping Districts

Advantages

Agglomeration benefits from combined attraction

Transportation links

Pedestrian traffic

Choice of primary and secondary locations

Flexible store sizes

Disadvantages

Competition

Security/vandalism

Under-investment in amenities

No single site manager

Affected by weather

Competition from more attractive planned centres

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Choosing a Store Location (cont.)

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Planned Shopping Centres

Advantages

Well-rounded assortments

Strong population pull

One-stop, family shopping

Agglomeration benefits

Cost and security sharing

Transportation access

Pedestrian traffic

Disadvantages

Limited flexibility

Higher rent

Restricted offerings

Competition

Too many malls

Domination by anchor stores

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Choosing a Store Location (cont.)

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population size and traits

competition

transportation access

parking availability

nature of nearby stores

property costs

length of rental agreement

legal/planning restrictions

Key criteria to take into account

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Choosing a Store Location (cont.)

4 Step Procedure

Step 1: Evaluate alternative geographic (trading)

areas in terms of residents and existing retailers

Step 2: Determine whether to locate as an

isolated store or in a designated shopping area

Step 3: Select the location type

Step 4: Analyse alternative sites contained in the

specific retail location type

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2. Location Theories

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Why are shopping goods found in city centres and convenience goods in neighbourhood locations?

Consumer willingness to travel – Central Place Theorem (Crystaller; Losch)

Why are High Streets more expensive than side streets?

Competition for prime locations – Bid rent (or land-use) theory

Why do competing retailers cluster together?

Principle of minimum differentiation (Hotelling)

Agglomeration benefits and parasite stores feeding off destination stores

What determines the geographic market size (i.e. trading area)?

Reilly’s Law of Retail Gravitation

Huff’s Law of Shopper Attraction

Consumers will travel further where high value, infrequently purchased items – shopping goods are at farther distances whilst conve gds are nearby...as in low value frequently purchased

Competition for space for prime location, more desirable so rent goes up....

Why don’t they go their own ways? Two theories...hotelling theory ...it ends up they locate back to back as competition pulls them to the middle....you have big market on either side....so incentive to stay in the middle

Agglomeration benefits.....works at two levels – either revenue synergies or cost benefits....why jewellers locate near each other...gretare overall net effct, so greater the cluster – th emore benefit – equilibrium choice of - locating with rather than away...inspite of more price competition.

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Location Theories (cont.)

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Hotelling’s Principle of Minimum Differentiation

Why do competitors open their stores next to one another rather than away from each other?

Hotelling (1929) explains tendency for similar retailers to cluster together due to competitive pressure to maintain territories

Example: two ice cream vendors on a beach

Where should each vendor locate its stall?

“Socially optimal solution” involves rivals agreeing to locate apart and then serve the market in a manner that minimises travel/hassle for consumers

But, competition results in a “Nash Equilibrium” of back-to-back locations

TED-Ed explanation (4 min): https :// www.youtube.com/watch?v=jILgxeNBK_8

This is a principle which shows how store location competition and the fear of competitors encroaching on each other’s territory forces retailers to locate next to each other rather than away from each other, which is what consumers would prefer when it would mean they would be served by a “local” retailer (i.e. a retailer closer to where they live or work so travel distance for them) rather than a group of retailers further away (which involves consumers travelling much further).

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Location Theories (cont.)

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Reilly’s Law of Retail Gravitation

A traditional means of trading-area delineation—establishes a point of indifference between two cities or communities so that the trading-area of each can be determined

Limitations of Reilly’s Law:

Distance is only measured by major thoroughfares; some people will travel shorter distances along minor roads

Travel time does not reflect distance travelled; many people are more concerned with time travelled than with distance

Actual distance may not correspond with perceptions of distance

This is about towns – what’s the

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Location Theories (cont.)

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Huff’s Law of Shopper Attraction

Used as a mean’s to overcome the limitations of Reilly’s law

Predicts a store’s trade area based on relative attraction compared to other stores in the area

Delineates trading areas on the basis of product assortment at various shopping locations, travel times from the shopper’s home to alternative locations, and the sensitivity of the kind of shopping to travel time

More attractive stores are those that are closer to consumers and larger than rival stores

Trade areas for shopping goods tend to be larger than for convenience goods (due to consumer willingness to travel)

Focussed on pure retailing...stores trade areas

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3. Trading Area Analysis

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A trading-area is a geographic area containing the customers of a particular firm or group of firms for specific goods or services

Trading area analysis allows for trading-areas to be delineated for existing and new stores taking account of three key factors:

Population characteristics

Economic base characteristics

Competition and level of market saturation

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Trading Area Analysis (cont.)

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Assessment of effects of

trading area overlap

Ascertain whether chain’s

competitors will open nearby

Discovery of ideal number of

outlets, geographic limitations

Review of other issues

(e.g. transportation links)

Discovery of consumer

demographics and

socioeconomic traits

Opportunity to determine

focus of promotional

activities

Opportunity to view media

coverage patterns

Benefits of Trading Area Analysis

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Trading Area Analysis (cont.)

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Store Type and Extent of Trading Areas

Largest

TRADING AREAS

Smallest

Department stores

Supermarkets

Clothing stores

Gift stores

Convenience stores

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Trading Area Analysis (cont.)

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Destination vs. Parasite Stores

Destination stores have a better assortment, promotion, and image

They generate trading-areas much larger than competitors

Anchor stores: department stores in shopping malls

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 area for other reasons

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Trading Area Analysis (cont.)

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The Size and Shape of Trading Areas

Primary trading-area

50-80% of a store’s customers

Secondary trading-area

15-25% of a store’s customers

Fringe trading-area

all remaining customers

??? Explain

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Trading Area Analysis (cont.)

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Delineating Trading Areas of Current and Proposed Stores

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Trading Area Analysis (cont.)

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Revenue impact on an existing supermarket arising from a new supermarket opening

Source: Competition Commission, The Supply of Groceries in the UK, April 2008

Revenue impact is generally greater (i) the closer the stores in terms of drive times for consumers and (ii) the size of the new store

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Trading Area Analysis (cont.)

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Store density and saturation levels tend to be high in urban areas

Example: Consumer choice over the number of large supermarkets in their locality

Source: Competition Commission, The Supply of Groceries in the UK, April 2008

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Trading Area Analysis (cont.)

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…whereas store density and saturation levels tend to be lower in rural areas

Source: Competition Commission, The Supply of Groceries in the UK, April 2008

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Trading Area Analysis (cont.)

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Geographic Information Systems (GIS)

Digitised mapping with key location-specific data used to graphically depict trading-area characteristics such as:

population demographics

data on customer purchases

listings of current, proposed, and competitor locations

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Trading Area Analysis (cont.)

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Example: Using Geographic Information System (GIS) Software to examine store traffic and shopper travel distances

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4. Location Selection

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Choose type of store location based on:

Type of product to be sold (bulky or lightweight, frequently or infrequently purchased, luxury or essential, unique or common)

Meeting size requirements (consider size restrictions and suitability – e.g. length of shop window front and floor space)

Matching consumer needs (suitable for comparative shopping, convenience, or accessibility)

Cost (consider whether a primary location is required or a cheaper secondary location would suffice)

Evaluate different trading areas based on following five factors ...

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Location Selection (cont.)

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Evaluating Trading Areas: Chief Factors #1

Total size and density

Age distribution

Average educational level

Percentage of residents owning homes

Total disposable income

Per-capita disposable income

Occupation distribution

Trends and projections

Population Size and Characteristics

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Location Selection (cont.)

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Evaluating Trading Areas: Chief Factors #2

Management

Management trainees

Shop assistants

Clerical

Availability of Labour

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Location Selection (cont.)

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Evaluating Trading Areas: Chief Factors #3

Delivery costs

Timeliness for stock replenishment

Number of manufacturers

Number of wholesalers

Availability of product lines

Reliability of product lines

Closeness to Sources of Supply

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Location Selection (cont.)

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Evaluating Trading Areas: Chief Factors #4

Vitality of the local economy

Extent of retail diversity

Economic growth prospects

Freedom from economic and seasonal fluctuations

Availability of credit and financial facilities

Economic Base

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Location Selection (cont.)

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Evaluating Trading Areas: Chief Factors #5

Number and size of existing competition

Evaluation of competitor strengths and weaknesses

Short- and long-run outlook

Level of saturation

Competitive Situation

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Location Selection (cont.)

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Location/Site Selection Checklist

Key aspects to check in comparing different locations for site choice

Coursework possibilities...

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Location Selection (cont.)

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...and finally...

choose a retail location and store format appropriate to the size of the served market!

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Questions for Discussion #1

What is your favourite “destination” store? How far would you be prepared to travel to this store?

For which types of retailers are expensive primary locations essential for retail success? For which types of retailers will cheaper secondary locations suffice?

Why do some retailers prefer to cluster together and others do not? Give examples.

For which types of retailers do planning regulations have a particularly strong bearing on store-location decisions?

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Case Study: End of Superstore Space Race?

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Space race to build out-of-town superstores for over 20 years

Is the space race about to end?

Why?

Move away from bulk shopping

Move to top-up shopping

Growth of convenience stores

Growth of discounters

Growth of Internet retailers

Non-food shopping moves online

Rise of “Dark Stores”:

http:// www.bbc.co.uk/news/business-25774679 (3 min)

Total pipeline

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Steady growth of planned new stores: 2002-2013

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Growing pipeline of new stores

Increasing number with planning consent

Steady number under construction

Total pipeline (H1, H2)

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Decline of new stores 2014 onwards

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Decline in proposals

Decline in construction

Increase in number of abandoned schemes

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Big 4 slow to build new stores

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Only a third of submitted projects by the Big 4 were built between 2010 and 2015

Tesco put forward the most plans but had the lowest completion ratio

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…but discounters grow rapidly with new stores

Aldi and Lidl have doubled their market share in the past five years with new stores

Aldi is investing £600m to double store numbers: https:// www.youtube.com/watch?v=6yvFhuqj7Ng (1 min)

Lidl also enhancing quality in its new stores: https:// vimeo.com/150659035 (2 mins)

Projected sales of leading UK grocery retailers (£m)

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Questions for Discussion #2

Why has the space race for large-format grocery stores and hypermarkets in the UK come to a halt?

Is over-saturation of superstores and hypermarkets likely to become a similar problem in other countries?

Which is the biggest threat to large-format grocery stores? Is it discounters, convenience stores or internet retailing?

What added services or features could retailers adopt to ensure that grocery superstores or hypermarkets remain viable?

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References

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Key readings

Varley, R. and Rafiq, M., Principles of Retail Management, 2nd edition, 2014 – Chapter 9 (Location).

Berman, B. and Evans, J.R., Retail Management: A Strategic Approach, 11th edition, 2010.

Competition Commission, The Supply of Groceries in the UK, April 2008 (http:// webarchive.nationalarchives.gov.uk/20140402141250/www.competition-commission.org.uk/our-work/directory-of-all-inquiries/groceries-market-investigation-and-remittal/final-report-and-appendices-glossary-inquiry ).

News articles

“Supermarkets abandon more schemes as pressure mounts on Sainsbury's, Morrisons, Asda and Tesco,” City A.M., 8/3/2016 - http :// www.cityam.com/236266/supermarkets-abandon-more-schemes-as-pressure-mounts-on-sainsburys-morrisons-asda-and-tesco

“Just 32 per cent of planned supermarket construction from the ‘big four’ ever gets completed,” Balfour ABI press release, 15/7/2015 - http :// www.barbour-abi.com/wp-content/uploads/2015/07/Construction-of-stores-from-the-big-four-supermarkets.pdf?96f007

“Big Four supermarkets shelve plans for new stores,” Telegraph, 7/11/2016 - http://www.telegraph.co.uk/business/2016/11/07/big-four-supermarkets-shelve-plans-for-new-stores /

Thank You!