BASIC CONCEPTS

The problems you will work in phase three relate to Part Three—“Market Selection and Location Analysis” of Retailing (2007) by Dunne and Lusch. The new concepts you need to be familiar with concern the trade area of a retail store. Previously we discussed market coverage. In this phase we learn about the determinants of market coverage. An understanding of the following terms is necessary:

trade area is the geographic area from which a retailer draws its customers.

trade radius is the number of miles from the store from which customers are attracted. This concept assumes that a store's trade area is represented by a circle surrounding the store. The trade radius would be the radius of that circle.

population density is the number of people or households per square mile within the store’s trade area. In this simulation we use households as the measure of population density.

If one combines the concept of market coverage, which we introduced in phase two, with the preceding concepts, one can obtain the following relationship.

market coverage = (22/7) * (trade radius squared) * (population or household density)

To understand the preceding you need to recall that the formula for the area of a circle is pi times the square of the radius of the circle. Where pi is the mathematical constant of 22/7 or 3.142857. Recall that we are assuming that the trade area is circular. If we take pi times the radius squared we get the number of square miles in a circle or the number of square miles in the trade area. If we then multiply this by the population or household density we obtain the total number of people or households in the trade area, or what we refer to as market coverage. The spreadsheet model you will be working with in the phase three exercises is as follows:

SAMPLE SPREADSHEET PHASE THREE

PHASE THREE

EXERCISE SEVEN-A

Evaluating a New Location for The House

Currently The House is located on the Town Square and draws customers from a three-mile radius that encompasses the entire community. Fred and Anne are considering opening a second store at the edge of town across the street from the Wal*Mart Discount Department Store. The Wal*Mart attracts people from the local community and the surrounding five smaller towns which are within a 15-mile radius of the Wal*Mart. The population density within this 15-mile trade area averages 24.6 households per square mile. The building Fred and Anne are considering leasing is 4,500 square feet. Hours of operation would be 10:00 a.m. to 8:00 p.m., Monday-Saturday. They expect monthly fixed operating costs (which include rent) to be $14,600 and variable operating costs to be 12.4% of sales. They expect that the average transaction size will be $47.24. This is considerably lower than their main store because they believe that most customers will be attracted to shop at the store while they are making a trip to Wal*Mart. Thus, they believe most purchases will be fill-in purchases and not as a result of a destination visit to the store to purchase specific merchandise. The gross margin percent is expected to be the same as for the main store of The House. Virtually all of the visits will be due to intercepting traffic from the Wal*Mart across the street. They estimate that the Wal*Mart has a 90% penetration level and an average shopping frequency of 14. Fred and Anne estimate that their penetration the first year will be 36% and the average shopping frequency will be 2.5 times per year. In the second year they expect the penetration to rise to 42% and average shopping frequency to rise to 3.0 times per year. For both years they estimate closure will be 65%. Approximately $88,000 will need to be invested in leasehold improvements and fixtures and $164,000 in inventory. They will also plan to have $48,000 in cash available when they start business for unexpected expenses