Transcript Understanding Your Trade Area: Implications for Retail

Understanding Retail Trade
Analysis
by
Al Myles, Economist and Extension
Professor
Department of Agriculture
Economics
Mississippi State University
November 8, 2007
Retail Trade Analysis
-
Is a way to identify market trends within a local
community, including the degree of surplus or
leakage of dollars within specific retail sectors.
Why Retail Trade?
Retail trade is one of the most important indicators of economic
activity in a community or county because local citizens spend a
large part of their incomes on goods and services.
The measures of retail trade and spending reflect consumers’
preference for the retail mix in the area and show how well the
economy is doing overall.
Since retail is one of the major economic forces in the country,
local officials often want to know how they compare with their
competitors.
Purpose of Retail Promotions
Keeping Local Dollars at Home
Indicators of Retail Activity
Sales Tax Collections
Market Capture
Gap Analysis (Potential sales-Actual Sales)
Pull factors
Sales leakage
Introduction
-Defining a town’s trade area is an important first step
in developing a strong retail sector.
-This is the foundation of retail market analysis. It helps
existing businesses to identify ways to expand their own
market.
-Increasing retail sales is one way an area can:
capture dollars
increase income
improve employment multipliers of its local
industries.
Defining the Trade Area
-Whatever the reasons for existing retail sales, city and
county leaders can help local businesses improve these
trends.
-To determine the potential for increasing retail sales,
one should establish the trade area.
A trade area is the geographic region from which
a town draws the majority of its retail customers.
This can be done in several ways:
1. Conducting a traffic flow study,
2. Using a retail gravity model,
3. Using a zip code method, and
4. Using commuting data to define the trade area
boundaries.
Of these methods, COMMUTING and RETAIL
GRAVITY approaches present the least amount of
work to implement.
Traffic Flow….
Is the random canvassing of parking lots at major
locations in town at different times on different days
and over several weeks.
The locations might include
The downtown area,
 Major shopping destinations such as
shopping malls and centers, Wal-Mart
Super Center, Home Depot, Krogers’, and
 Other popular establishments in
town.
One should combined the results of vehicle license
plates from the different locations to obtain a composite
count of vehicles from surrounding counties and
compare them to regional commuting data.
Results from a traffic study will usually reveal
the major towns and counties that comprise the local
trade area or market.
To determine the major communities in the local
market one should:
1. Rank order the number of cars from various
counties in the region, and
2. Select the top five or six localities based on the
highest frequency and/or maximum percentage
(10% or more) of license plates in the area.
Commuting…
Commuting time to work by local residents is another
way of delineating a community’s retail trade area.
Converting commuting time to work into spatial
distances or miles and plotting these data on a map,
provide a visual picture of the geographic size of its
trade area.
Figure 1. Trade Area: Major Commuting Counties
Figure 1. Trade Area: Immediate Commuting Counties
Reily’s Law…
Another easy way of defining the retail trade area is to
use a gravity model. In retail trade analysis, the most
popular method is “Reily’s Law of Retail
Gravitation.”
Reily’s law is a rule-of-thumb used to ESTIMATE the
distance customers will travel to PURCHASE goods
and SERVICES after comparing price, quality, and
style.
The law assumes that people desire to shop in larger
towns, but their desire declines the farther the distance
and time they must travel to get there. Thus, LARGER
TOWNS DRAW CUSTOMERS FROM FARTHER
DISTANCES THAN SMALLER TOWNS.
The maximum distance a customer will travel to shop in
a smaller town can be calculated using the following
formula.
Population and Travel Distances in Community A’s Trade Area.
County
Total Population
Distance
Trade Area Distance
(from Community A to County Seat)
Community A
Community B
Community C
Community D
Community E
Community F
22,000
1,543
23,799
2,145
7,169
8,489
27
23
27
33
17
5.65
11.27
6.42
11.99
6.51
Figure 1. Picture of Community’s Trade Area
N
Community F
6.51 miles
6.42 miles
W
Community D
Community A
Community C
11.27 miles
5.65 miles
11.99 miles
Community B
Community E
S
E
Estimating Total Market Size
Once the physical boundaries of the trade area have
been identified, one should estimate the total market
size.
The total market consists of populations in the host
community plus population from surrounding towns in
the trade area.
Additional customers can be derived using the
formula:
3.14 X (Average Retail Trade Miles)2 X Average County
Population Density
Example:
Community A’s population = 22,000
Average trade area retail miles = 8.46
Average trade area population density per square mile = 51.45
Number of new customers = (3.14 x ((8.46)^2) x 51.45) =11,563
Total retail customer base = 33,372 (22,000 + 11,563)
In using this approach, there are a few caveats:
1.
Areas with large populations and densities per square mile
can distort the actual situation in retail trade analysis.
2.
Reily’s Law is less accurate when involving larger towns.
Using Information About
Market Size
After defining the trade area, one can ESTIMATE the
local sales potential and COMPARE them to actual
sales in the area. The following formula can be used to
estimate potential retail sales.
By comparing POTENTIAL with ACTUAL retail
sales, one can determine whether the city has room for
retail growth.
One should compare retail sales over SEVERAL
YEARS to determine the LONG-TERM health of retail
sectors in the city.
Determining Retail Power
Trade Area Capture (TAC)
Information about the trade area can help one to
estimate the ability of Community A’s merchants to
capture the retail business of people in the area.
Trade Area Capture (TAC)
is an estimate of the number of people who shop in the
local area during a certain period.
Pull Factors…
Knowledge of the trade area is the first step in retail
market analysis.
Knowing the trade area, one can determine the size and
pulling power of local merchants in the market using a
concept call pull factors.
Pull factors are ratios that estimate the proportion
of local sales that occurs in a town.
The most common method of calculating pull factors is
as follows:
Pull Factor (PF) = Trade Area Capture
City Population
PF
Value
Interpretation
>
1
Retailers drawing customers from outside trade
area
<
1
Retailers losing customers from outside trade
area
=
1
Retailers maintaining customers in trade area
What Is Happening Locally?
Table 1. Oktibbeha County With and Without Federal Funds
Economic Strength Index
Year
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
Average
With
4.02
3.95
3.94
3.88
3.88
3.90
4.00
4.06
4.12
4.18
4.19
4.16
4.02
Without
3.77
3.69
3.68
3.63
3.62
3.65
3.70
3.74
3.83
3.87
3.86
3.86
3.75
Median State Index
3.57
3.56
3.57
3.57
3.58
3.56
3.55
3.56
3.55
3.55
3.57
3.52
Rank
24
27
26
28
28
28
25
26
26
24
24
23
Trade Area Capture
County
Clay
21,751
Lowndes
98,344
Oktibbeha
51,136
Region
Total
173,153
Current
Population2002
TAC to
Population
Projected
Population 2019
Ratio
21,979
61,586
42,902
22,840
65370
51200
98.96
159.69
119.19
126,467
139,410
136.92
Figure 1. Trade Capture
180,000
160,000
140,000
120,000
100,000
80,000
60,000
40,000
20,000
0
Series1
Clay
Low ndes
Oktibbeha
Region Total
21,751
98,344
51,136
173,153
Market Population
Figure 2. TAC and 2002 Population
Region Total
Oktibbeha
Low ndes
Clay
0
50,000
100,000
150,000
200,000
Clay
Low ndes
Oktibbeha
Region Total
Series2
21,979
61,586
42,902
126,467
Series1
21,751
98,344
51,136
173,153
Figure 3. TAC, 2002 Population, and Projected 2019 Population
200,000
150,000
100,000
50,000
0
Clay
Low ndes
Oktibbeha
Region Total
Series1
21,751
98,344
51,136
173,153
Series2
21,979
61,586
42,902
126,467
Series3
22,840
65370
51200
139,410
Figure 4. Market Capture Above Population
180.00
159.69
160.00
136.92
140.00
119.19
Percent
120.00
98.96
100.00
80.00
60.00
40.00
20.00
Clay
Low ndes
Oktibbeha
Region Total
Figure 5. County Retail Sales
$600,000,000
$500,000,000
$400,000,000
$300,000,000
$200,000,000
$100,000,000
$-
98
99
00
01
02
03
04
05
06
Series1 $363 $375 $398 $408 $435 $426 $447 $455 $529
Figure 6. Starkville Retail Sales
$400,000,000
$350,000,000
$300,000,000
$250,000,000
$200,000,000
$150,000,000
$100,000,000
$50,000,000
$-
98
99
00
01
02
03
04
05
06
Series1 $251, $272, $292, $300, $306, $302, $320, $328, $374,
Figure 7. Oktibbeha County Per Capita Sales Ratio
$9,000
$8,000
$7,000
$6,000
$5,000
$4,000
$3,000
$2,000
$1,000
$-
98
Series2 $5,967
99
00
01
02
03
04
05
06
$6,419
$6,799
$7,027
$7,203
$7,101
$7,447
$7,539
$8,499
Table 1. Weighted Average Retail Trade Pull Factors in Mississippi, 1981-2006
Pull Factor
County Type
1981
1991
2001
2006
0.96
0.95
1.12
1.27
Adjacent to Metro County
0.78
0.71
0.70
0.60
Not Adjacent
to Metro
County
Trade Center County
1.06
0.96
1.17
1.28
Non-Trade Center
County
0.80
0.74
0.82
0.77
Adjacent to Metro County
0.68
0.60
1.04
0.63
Not Adjacent to Metro County
0.68
0.62
0.57
0.33
Metropolitan (Metro) County
Non-Metro County
Rural County
Summary
This presentation shows how a few simple techniques
can be used to determine the geographic size of a town’s
trade area.
A trade area will often extend beyond its own
geographic borders.
Questions?