Principles of Retailing: Retail Strategy and Planning - Store Location Analysis, Site Selection Trade Area Analysis Huffs Gravity Model

What This Is

Store Location Analysis (SLA) is the process of evaluating potential store locations to determine their feasibility and potential for success. This involves analyzing the trade area, customer demographics, competition, and other factors to identify the most suitable location for a retail store. For example, Amazon's aggressive expansion into new markets involves thorough SLA to ensure that each new location meets their growth and profitability targets.

Key Frameworks & Metrics

• Huff's Gravity Model: A mathematical model that estimates the potential sales of a store based on the distance between the store and potential customers, as well as the number of potential customers in the area. Practical use: Helps retailers determine the optimal location for a new store.
• Trade Area Analysis: The process of identifying and analyzing the geographic area surrounding a potential store location. Practical use: Helps retailers understand the demographics, shopping habits, and competition in the area.
• Site Selection Criteria: A set of criteria used to evaluate potential store locations, including factors such as accessibility, visibility, and foot traffic. Practical use: Helps retailers identify the most suitable locations for their stores.
• Customer Lifetime Value (CLV): The total value of a customer to a retailer over their lifetime. Practical use: Helps retailers determine the potential revenue and profitability of a store location.
• Basket Size: The average amount spent by customers in a store. Practical use: Helps retailers determine the potential revenue of a store location.
• Conversion Rate: The percentage of customers who make a purchase in a store. Practical use: Helps retailers determine the potential sales of a store location.
• Inventory Turnover: The number of times inventory is sold and replaced within a given period. Practical use: Helps retailers determine the potential profitability of a store location.
• GMROI (Gross Margin Return on Inventory Investment): Gross margin divided by average inventory cost – measures inventory profitability. Practical use: Helps retailers determine the potential profitability of a store location.
• CAC (Customer Acquisition Cost): The cost of acquiring a new customer. Practical use: Helps retailers determine the potential profitability of a store location.

Step-by-Step Process

1. Conduct Trade Area Analysis: Identify and analyze the geographic area surrounding the potential store location.
2. Evaluate Site Selection Criteria: Assess the potential store location based on accessibility, visibility, and foot traffic.
3. Analyze Customer Demographics: Understand the demographics, shopping habits, and competition in the area.
4. Estimate Potential Sales: Use models such as Huff's Gravity Model to estimate the potential sales of the store.
5. Determine Store Size and Layout: Based on the estimated potential sales, determine the optimal store size and layout.
6. Evaluate Financial Projections: Assess the potential financial performance of the store, including revenue, expenses, and profitability.

Common Mistakes

• Mistake: Ignoring the importance of trade area analysis in store location selection.
• Correction: Trade area analysis is crucial in understanding the demographics, shopping habits, and competition in the area, which can significantly impact store performance.
• Mistake: Treating all channels separately in store location analysis.
• Correction: Retailers should consider the omnichannel experience and how it will impact store performance, including online sales, in-store sales, and customer loyalty.
• Mistake: Over-reliance on discounts and promotions in store location analysis.
• Correction: While discounts and promotions can be effective in driving sales, they should not be the primary consideration in store location analysis. Retailers should focus on creating a compelling store experience and offering value to customers.

Retail Strategy Tips

• When evaluating store locations, consider the potential for omnichannel growth and how it will impact store performance.
• Ensure that store locations are easily accessible and visible to customers.
• Conduct thorough trade area analysis to understand the demographics, shopping habits, and competition in the area.

Quick Practice Scenario

A department store has high footfall but low conversion. Which metric would you analyze first and why?

Answer: Conversion Rate. This is because a high footfall but low conversion rate indicates that customers are not making purchases, which can be due to a variety of factors, including poor store layout, inadequate product offerings, or ineffective marketing.

Last-Minute Cram Sheet

• Trade Area Analysis: The process of identifying and analyzing the geographic area surrounding a potential store location.
• Huff's Gravity Model: A mathematical model that estimates the potential sales of a store based on the distance between the store and potential customers, as well as the number of potential customers in the area.
• Site Selection Criteria: A set of criteria used to evaluate potential store locations, including factors such as accessibility, visibility, and foot traffic.
• Customer Lifetime Value (CLV): The total value of a customer to a retailer over their lifetime.
• Basket Size: The average amount spent by customers in a store.
• Conversion Rate: The percentage of customers who make a purchase in a store.
• Inventory Turnover: The number of times inventory is sold and replaced within a given period.
• GMROI (Gross Margin Return on Inventory Investment): Gross margin divided by average inventory cost – measures inventory profitability.
• CAC (Customer Acquisition Cost): The cost of acquiring a new customer.
• Omnichannel is not just being present on all channels – it's about a seamless integrated experience across channels.
• Trade area analysis is crucial in understanding the demographics, shopping habits, and competition in the area.
• Retailers should consider the potential for omnichannel growth and how it will impact store performance.