Retail Site Selection:  How Retailers Choose Your Community

July 2005

By:  Katie Bullard

AngelouEconomics

Major retailers are continuously looking for new opportunities to relocate in existing markets or expand into new markets due to relentless pressure from increased competition, evolving shopping patterns, and more sophisticated customer demands. These firms are always searching for improved and additional real estate. Communities seeking to expand their tax base with additional retail development need to understand retailers’ approach to the site selection process.

Although specific criteria vary from retailer to retailer depending on the target customer, there are fundamental similarities in retail site analysis. A retail site’s viability is evaluated through four primary drivers:

DRIVER #1: DEMAND
The building block of retail sales is the demand within any given store’s primary trade area. A retail trade area is the geographic area from which a retail unit generates its sales. The primary trade area is the area that can be expected to generate 60-70% of total sales. Primary trade areas are not consistent five or ten-mile rings around a site. They can vary greatly in size and are determined by assessing numerous factors, including household density, travel patterns, natural boundaries (mountains or rivers), social and economic demographics, and the scope of the retail center itself.

For instance, an expansive, regional lifestyle center on the outskirts of a major city, like Short Pump Town Center in Richmond would be expected to have a much larger geographic trade area than a stand-alone retail unit in Manhattan. However, after factoring density and spending power, sales from the two sites may be expected to be equal. As the first factor in determining the viability of a location, most retailers have minimum requirements for trade areas, whether those are minimum household counts, population counts, or calculated spending potential.

Destination retailers like Bass Pro Shops, Cabela’s, or IKEA attract customers from a much wider area than a convenience retailer, like Circuit City or Staples. Although they may locate on the outskirts of a market, their trade area encompasses the whole market.

Within a trade area, demand is further refined through demographics. Most retailers have target customers that regularly shop at their stores. For example, Kohl’s looks for a high percentage of females within the 25-54 age group that have a home and family. Lowe’s and Home Depot are more interested in household counts and home ownership rates. The more closely the demographic characteristics within a trade area match these customer targets, the higher the anticipated demand.

DRIVER #2: SUPPLY
Retail supply refers to the number of nearby competitors, the amount of space they occupy, and their potential impact on the relocating company. Within trade areas of the same size, a retail unit may be viable in an area that has only one small competitor, but not viable with two or three large competitors.

Often, supply is driven, not only by the number and size of competitors, but the degree to which the competitor affects sales. For example, Kmart and Wal-Mart are both major competitors of Target, but Wal-Mart’s negative sales impact on Target is much greater than Kmart’s. As the next piece of the site analysis, most retailers will quantify and weigh the competitive intensity of each competitor.

Over the past several years, lack of supply has become the major issue in retail expansion. In fact, retail construction has grown more than twice as fast as the population rate over the past 15 years. As existing markets face their saturation point, retailers have been forced to reach out to previously underserved markets for expansion opportunities and to find those locations before competitors.

DRIVER #3: SITE
Once criteria for demand and supply have been met, a retailer considers many aspects of the proposed site itself, including the size of center, existing and future retail shopping patterns, co-tenants, highway access, visibility, and traffic counts. Many retailers choose to co-locate with other companies that have similar storing strategies and customer targets. For example, sporting goods retailers that target male customers 18-54 may locate with office supply and electronics retailers. These retail synergies will often drive traffic, sales, and ultimately profitability.

DRIVER #4: FACILITY
Facility refers to the actual format of the retail unit itself. Most retailers have a standard prototype that has proven to work well within typical markets and sites. Lowe’s standard prototype is 115,000 square feet, a Wal-Mart Super Center is 185,000 square feet, and a standard Best Buy is 45,000 square feet.

However, in response to the supply problem, retailers are seeking to expand into underserved markets, and their solution has been to adapt the standard retail format. Lower demand in these smaller trade areas means lower sales projections, so costs can only be supported if the store’s footprint is smaller. For example, Best Buy has introduced a 20,000 square feet prototype that is less than 50% the size of its standard 45,000 square feet store and is targeted at markets with populations of less than 100,000.

Lowe’s, Home Depot, Circuit City, and Wal-Mart have also introduced similar, smaller formats. Industry analyst David Campbell, of Davenport and Company, notes that Lowe’s smaller format aimed at rural communities “ will open up another 150 to 300 new markets for them.”

In some cases, these formats are also used in urban settings, where space and cost constraints have limited retail expansion. Today's revitalization of downtowns has enticed people to move closer to work and back to the city. Developers and retailers are realizing the potential of urban in-fill locations. According to the U.S. Department of Commerce, inner cities will account for about 40% of the total increase in U.S. purchasing power between 2000 and 2045, from $1.3 trillion to $4.3 trillion.

WHAT THIS MEANS FOR YOUR COMMUNITY
Retailers are adapting their site selection techniques to expand into markets that have not previously captured their attention. Demand and supply will continue to be the key market factors in evaluating a location, but retailers have become more flexible with their site and facility response to these drivers.

The economic viability of a retail unit in a small or urban market faces more hurdles than those in typical suburban markets: smaller trade areas, lower sales, or higher costs. Incentives offered to retail developers, including low-interest loans, infrastructure upgrades, or tax incentives, will lessen these burdens and make your community more attractive for additional development.