RETAIL

MANAGEMENT
Trading Area Analysis
17 May 2020
Hello, Good Evening !
╺ I am Sanam Rana Magar
╺ I am Prakriti Bhattarai
╺ I am Sujeeta Vaidhya
╺ I am Passang Lhamo LamaI
╺ And I am Samjhana Shrestha

We are here for discussion and presentation on chapter “Trading Area Analysis”.

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 Trading Area:
“ A trading area is a geographical area
containing the customers of a particular
firm or a group of firms for specific
goods and services.”

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For a retailer to decide a place for store location is an important strategic decision
because of huge cost associated with it. The decision is depended on various factor for
business.

Destination It refers to a particular retail store Traditional

It refers to retail store doing the
Retailers
that the customer seeks out because
traditional way. Retailers
of its popularity.

Destination retailers generate their own Trading area analysis is carried out based
traffic and are not as dependent on the on its size, competitor locations, affinities
influence of other retailers; therefore, they with other retailers, travel time, taxes,
can thrive in inexpensive locales population, purchase power etc.

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Scope and Focus
 Four step approach to location planning
 Importance of location to retailer
 Benefits of trading area analysis
 The use of Geographic Information Systems (GIS) in trading
 Area delineation and analysis
 The size and shape of trading area
 How to determine trading areas for existing and new stores
 The major factors to consider in assessing trading areas
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Question Covered
1. What is trading-area overlap? Are there any advantages to a chain retailer’s having some overlap
among its various stores?
2. Comment on this statement: “A poor location may be such a liability that even superior retailers
cannot overcome it.” Is it always true? Give examples
3. Describe three ways in which a consumer electronics store chain could use geographic information
system (GIS) software in its trading-area analysis.
4. Where would shopper go?
5. Why is it critical for a retailer to examine a location’s economic base in its decision to open a store?

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TRADING-AREA
ANALYSIS
╺ The first step in choosing a retail store location is to describe and assess alternate trading
areas and then choose the best one.
╺ The size of a trading area typically reflects the boundaries within which it is profitable to
sell and/or deliver products. After a trading area is selected, it should be reviewed regularly.
╺ Geographic weaknesses are highlighted.
╺ The impact of the Internet is taken into account.
╺ The best number of stores for a chain to operate in a given area is calculated.

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Benefit of Trading-area Analysis
╺ Discovery of consumers demographic and socio economic characteristic
╺ Opportunity determine focus of promotional activities
╺ Opportunity to view media coverage and patterns
╺ Assessment of effect of trading area overlaps
╺ Ascertain the weather chains competitors will open nearby
╺ Discovery of ideal number of outlets, geographical weakness
╺ Review other issues of transportation

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 What is trading-area overlap? Are there any advantages to a chain retailer’s
having some overlap among its various stores?

╺ Trading-area overlap is basically when

two of the same stores are relatively
close to each other, and by doing so
they are aiming to draw in the same
customers in the population.

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Advantage for chain retailer
- Sales may increase in number
- Enhance Customer Base
- Minimize lost sales
- Valid and reliable analysis report

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The Size and Shape of Trading Areas
Each trading area has three parts:

1. The primary trading area encompasses 50 to 80 percent of a store’s customers. It is

the area closest to the store and possesses the highest density of customers to population
and the highest per capita sales. There is little overlap with other trading areas.

2. The secondary trading area contains an additional 15 to 25 percent of a store’s

customers. It is located outside the primary area, and customers are more widely dispersed.

3. The fringe trading area includes all the remaining customers, and they are the most
widely dispersed.

A store could have a primary trading area of 4 miles, a secondary trading area of 5 miles, and a
fringe trading area of 10 miles. The fringe trading area typically includes some outshoppers who
travel greater distances to patronize certain stores.
Comment on this statement: “A poor location may be such a
liability that even superior retailers cannot overcome it.” Is it
always true? Give examples

- Location choice is critical due to complex decision making, high costs, lack of flexibility once a site is chosen, and the
impact of a site on the strategy. A good location may let a retailer succeed even if its strategy mix is relatively mediocre.
- A store location typically necessitates a sizable investment and a long-term commitment
- Even a retailer that owns its building and land may also find it hard to change locations.
- A firm moving from to another locale faces three potential problems.
(1) Some loyal shoppers and employees may be lost; the greater the distance between the old and new sites, the
bigger the loss.
(2) A new site may not have the same traits as the prior one.
(3) Most store fixtures and renovations at a site cannot be transferred; their value is lost if they havenot been fully
depreciated.
 The Nature of Competition and the
Level of Saturation
An overstored trading area A saturated trading area has
An understored trading
has so many stores selling a the proper amount of stores to
area has too few stores
specific good or service that satisfy the needs of its
selling a specific good or
some retailers cannot earn an population for a specific good
service to satisfy
adequate profit. or service, and to enable
the needs of its population.
retailers to prosper.
To lessen the impact of the level of saturation, retailer must understand and analyze the competition its product and
range of competitors. They must do surveys regarding their competitors and must use census as tool for data analysis.

MEASURING TRADING-AREA SATURATION

Because any trading area can support only a given number of stores or square feet of selling space per
goods/service category, these ratios can help quantify retail store saturation:
▶ Number of persons per retail establishment
▶ Average sales per retail store

▶ Average sales per retail store category

▶ Average store sales per capita or household

▶ Average sales per square foot of selling area

▶ Average sales per employee

The saturation level in a trading area can be measured against a goal or compared with other trading areas
Geographic Information System (GIS)
Digitized Mapping

- Before, retailers often placed different color pins

on paper maps to show current and proposed locales—
and competitors’ sites—and had to collect and analyze
data

- Commercial GIS software Like Arc GIS, lets firms

quickly research the attractiveness of different
locations and access computer-generated maps.
Describe three ways in which a consumer electronics store chain could use
geographic information system (GIS) software in its trading-area analysis.
1. GIS software can be used to create
and use store location data, maps, and
models through employee desktops, in
browsers, or on mobile devices.

2. Its new system contains interactive

maps that can be used to determine
the best place to locate a new store on
the basis of demographic trends,
competitor locations and sales trend
data.

3. GIS software services that assist

international retailers that want to
expand overseas.
Delineating the Trading Area of a New Store
Different tools must be used when an area is evaluated in terms of opportunities rather than
current patronage and traffic patterns:

1. Trend Analysis : Projecting the future based on the past—can be used by examining government
and other data for predictions about population location, auto registrations, new Housing starts, mass
transportation, highways, zoning, and so.

2. Consumer surveys: Data can be gathered about the time and distance people would be willing to
travel to various retail locations, factors attracting people to a new store, addresses of those most apt
to visit a new store, and other topics.

3. Computerized trading-area analysis models:

1. Analog Model
2. Regression Model
3. Gravity Mode
Computerized trading-area models offer several benefits to retailers:

(1) They operate in an objective and systematic way.

(2) They offer insights as to how each locational attribute should be weighted.
(3) They are useful in screening a large number of locations.
(4) They can assess management performance by comparing forecasts with results.
Reilly’s Law of Retail Gravitation
- Experimental law developed by William J. Reilly in The law may be expressed algebraically as
1931.
- According to Reilly's "law," customers are willing to
travel longer distances to larger retail centers given
the higher attraction they present to customers.

- 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.
Lets u take an example :

In this case, two cities, (a) and (b), are 75 km

apart. City a's population is 250,000 and city
b has a population of 100,000. Given the
formula above, the break point or point of
indifference between the two cities is at 45.9
km from city a and 29.1 km from city b.

This rests on the assumption that there are no

intervening opportunities, and that the friction
of distance at all points along the way is of
equal intensity. It also assumes that the price
structures in both cities are the same.
Huff’s Law of shopper attraction
• The Huff Model is an established theory in spatial analysis developed by Dr. David Huff of the University of
Texas in 1963

• It is based on the principle that the probability of a given consumer visiting and purchasing at a given site is a
function of the distance to that site, its attractiveness, and the distance and attractiveness of competing sites.

The basic Huff formulation of the Gravity Model takes the following form:

Huff’s Gravity Model (Huff’s Law of Shopper Attraction)

PiJ = (SJ / TiJλ) / ∑ (SJ / TiJλ)
Where;
PiJ = Probability of consumer traveling from origin (i) to given shopping center or store (j)
SJ = sq. ft. of selling space in shopping location, expected to be devoted to particular product being sold
TiJ = travel time
λ = exponent reflecting effect of travel time on different types of shopping trips (i.e. one may travel more
for medical product) and
n = no. of shopping locations available
Where would shoppers go?

You have two purchases that you need to make in the next week or so. The first
purchase you need to make is some new socks—you just discovered the last “good” pair
you have, has a hole. Where would you go to buy these? The second purchase, you
need to have a new suit for upcoming job interviews at the Career Job Fair next month.
You know you can’t find anything here in XYZ town, so you can go to ABC, with two
shopping malls and several strip shopping centers, or you can travel about the same
distance in the other direction to DEF, again with a shopping mall and several other
shopping centers which will carry suits.

What factors would you consider for each purchase? List those factors. Now, input the
necessary information for each of the two retail gravitation models, and determine which
city would be the chosen shopping location. Write a brief description of the factors and
how they influenced the results you have.
CHARACTERISTICS OF TRADING
AREAS
Among the trading-area factors that should be
studied by most retailers are the population size
and characteristics, availability of labor,
closeness to sources of supply, promotion
facilities, economic base, competition,
availability of locations, and regulations.

For an auto repair franchisee may compare opportunities

in several locales by reviewing the number of car
registrations; bookstore retailer may be concerned with
number of schools in the areas.
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Why is it critical for a retailer to examine a location’s
economic base in its decision to open a store?

• The economic base is an area’s industrial and commercial structure—the companies and industries
that residents depend on to earn a living.

• The dominant industry (company) in an area is important because its drastic decline may have
adverse effects on a large segment of residents.

• An area with a diverse economic base, where residents work for a variety of nonrelated industries,
is more secure than an area with one major industry.
Thank you for listening to
us.
Have a good day.