Selecting a Trade Area

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In the last article, we looked at how retailers estimate their trade area. In this article, we look at how retailers choose their trade areas.The bottom line of any trade-area that a retailer looks at is the profits he is going to make establishing his store in that area.

From the purely revenue side, a retailer wants a catchment filled with the right kind of customers who will walk into his store and buy his stuff. Note the emphasis on “right”. One may open a luxury-mall in an overpopulated but not very affluent catchment and invite a lot of curious traffic but might convert only a small fraction of those footfalls to sales.

Knowing one’s target customers:

Hence, a retailer must know the profile of his own target customers and the demographics of the catchments under consideration. One must begin by looking at the history of engagements with its customers. To gain the maximum insight, he must apply analytics to segment the customers and understand his most valuable segments. Or, if the retailer is still new, he can test the market for his format’s proposition using market research (via self or agencies) and decide who the target customer is going to be.

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Ascertaining a catchment’s demographics:

To collect the population data for a catchment, one might refer to many sources like census, land records and various third parties who usually aggregate this data at some level like block or zip codes before selling it. This data is more often than not readily available. For example at http://www.zipskinny.com/ one can look into demographic attributes like education, marital status, income and occupation across US by zip codes.

Once, we know how many of our target customers are there in the catchment, the next question to ask is what keeps them from coming to us. There are two aspects to this, one completion, and the other, convenience.

Assessing Competition:

One needs to obviously know the number, size, and quality of the local competition before opening a store. In fact, one must go beyond and anticipate the future competition that an area might see and be prepared for that. For example, a store opening in a new locality of a Town B city might refer to similar localities in the same town or other like-towns and refer to the history of trade development out there. This is what separates the men from the boys who rush in whenever trade opportunities open, only to collapse in a heap a few years hence. The men know what they are getting into and stocked their ammunition accordingly.

One positive aspect of future competition is that the more the competition, the more the likelihood that the catchment start attracting customers from further away. Think about shopping districts, where people come from long distances since they have more choice in range, price and other services. This is something that we once overlooked while preparing for a dreaded competitor opening a store right next to ours, only to realize that our footfalls had actually increased since more people had started coming from the outer rings of the catchment!

Assessing convenience to customer:

Convenience for the customer to shop at your store covers a whole gamut like barriers, road conditions, traffic, safety, availability of parking lots and general appearance of the area. I once visited one of our convenience store in a small Punjab town which was losing its immediate catchment to a faraway competition. Speaking to these customers, we found that what drove them to that competitor was the fact that while our store was in a standalone plot only a stone’s throw from their colony, but approached by a rather spooky bush-covered broken winding road, the competitor was in a clean, well-lit stretch speckled with other shops and comforted with the presence of a police station right opposite the store.

And that brings us to the most vital element when closing a site. Go down there and speak to the people you want to sell to. Aerial views and GIS-software layers are very useful but can be deceptive.

And that covers the revenue side of the trade area. What about costs? One must consider them too to know the net profit one makes from a catchment. The costs to the retailer are the operating costs of serving the store. There might be other costs like rents to local associations and unions that we’ll club with the rent for the present.

Operational and Logistics costs:

Traffic, road conditions and approachability again are again important in determining delivery convenience. One important aspect that the retailer should consider is how the structure of the site lends to easing his daily tasks of receiving deliveries (number, size and condition of lifts and receiving stages), filling his shelves (aisle widths) and stocking them (size and location of backrooms). A neighborhood store, receiving only small deliveries daily, overlooked the fact that it’s backroom was a small door in a narrow lane behind the store and this led to such delays and inconveniences in receiving even those small deliveries that the turnaround time of the delivery trucks was greatly impacted and the suppliers raised the costs of their servicing that store. A retailer should only finalize a site after he’s walked the site with an operations team member.

Lastly, in a hub-and-spoke model a retailer would ideally want all his catchments at the spoke ends of a central DC to economize his costs and delivery times.

To sum up, a retailer should consider the following when selecting a site

  • Traffic of relevant shoppers
  • Competition intensity
  • Convenience and approachability for customers
  • Convenience of servicing and running that store for retailer

In the last article, we looked at how retailers estimate their trade area. In this article, we look at how retailers choose their trade areas.

The bottom line of any trade-area that a retailer looks at is the profits he is going to make establishing his store in that area.

From the purely revenue side, a retailer wants a catchment filled with the right kind of customers who will walk into his store and buy his stuff. Note the emphasis on “right”. One may open a luxury-mall in an overpopulated but not very affluent catchment and invite a lot of curious traffic but might convert only a small fraction of those footfalls to sales.

Knowing one’s target customers:

Hence, a retailer must know the profile of his own target customers and the demographics of the catchments under consideration. One must begin by looking at the history of engagements with its customers. To gain the maximum insight, he must apply analytics to segment the customers and understand his most valuable segments. Or, if the retailer is still new, he can test the market for his format’s proposition using market research (via self or agencies) and decide who the target customer is going to be.

Ascertaining a catchment’s demographics:

To collect the population data for a catchment, one might refer to many sources like census, land records and various third parties who usually aggregate this data at some level like block or zip codes before selling it. This data is more often than not readily available. For example at http://www.zipskinny.com/ one can look into demographic attributes like education, marital status, income and occupation across US by zip codes.

Once, we know how many of our target customers are there in the catchment, the next question to ask is what keeps them from coming to us. There are two aspects to this, one completion, and the other, convenience.

Assessing Competition:

One needs to obviously know the number, size, and quality of the local competition before opening a store. In fact, one must go beyond and anticipate the future competition that an area might see and be prepared for that. For example, a store opening in a new locality of a Town B city might refer to similar localities in the same town or other like-towns and refer to the history of trade development out there. This is what separates the men from the boys who rush in whenever trade opportunities open, only to collapse in a heap a few years hence. The men know what they are getting into and stocked their ammunition accordingly.

One positive aspect of future competition is that the more the competition, the more the likelihood that the catchment start attracting customers from further away. Think about shopping districts, where people come from long distances since they have more choice in range, price and other services. This is something that we once overlooked while preparing for a dreaded competitor opening a store right next to ours, only to realize that our footfalls had actually increased since more people had started coming from the outer rings of the catchment!

Assessing convenience to customer:

Convenience for the customer to shop at your store covers a whole gamut like barriers, road conditions, traffic, safety, availability of parking lots and general appearance of the area. I once visited one of our convenience store in a small Punjab town which was losing its immediate catchment to a faraway competition. Speaking to these customers, we found that what drove them to that competitor was the fact that while our store was in a standalone plot only a stone’s throw from their colony, but approached by a rather spooky bush-covered broken winding road, the competitor was in a clean, well-lit stretch speckled with other shops and comforted with the presence of a police station right opposite the store.

And that brings us to the most vital element when closing a site. Go down there and speak to the people you want to sell to. Aerial views and GIS-software layers are very useful but can be deceptive.

And that covers the revenue side of the trade area. What about costs? One must consider them too to know the net profit one makes from a catchment. The costs to the retailer are the operating costs of serving the store. There might be other costs like rents to local associations and unions that we’ll club with the rent for the present.

Operational and Logistics costs:

Traffic, road conditions and approachability again are again important in determining delivery convenience. One important aspect that the retailer should consider is how the structure of the site lends to easing his daily tasks of receiving deliveries (number, size and condition of lifts and receiving stages), filling his shelves (aisle widths) and stocking them (size and location of backrooms). A neighborhood store, receiving only small deliveries daily, overlooked the fact that it’s backroom was a small door in a narrow lane behind the store and this led to such delays and inconveniences in receiving even those small deliveries that the turnaround time of the delivery trucks was greatly impacted and the suppliers raised the costs of their servicing that store. A retailer should only finalize a site after he’s walked the site with an operations team member.

Lastly, in a hub-and-spoke model a retailer would ideally want all his catchments at the spoke ends of a central DC to economize his costs and delivery times.

To sum up, a retailer should consider the following when selecting a site:

  • Traffic of relevant shoppers
  • Competition intensity
  • Convenience and approachability for customers
  • Convenience of servicing and running that store for retailer
Image courtesy of Stuart Miles at FreeDigitalPhotos.net
Image courtesy of Stuart Miles at FreeDigitalPhotos.net

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