Study The Stats
Reprinted With The Permission From The Real Estate Finance Journal
By Richard J. Brunelli
Population figures are only a starting point—trade area penetration analysis examines a variety of factors.
One of the most common reasons retailers give for eliminating a potential new location from their expansion plans is that the site is too close to an existing store. However, retailers often overestimate the size of their stores’ trade areas—in many cases, to a significant degree.
Frequently, he primary cause of misjudging a trade area is an improper evaluation of the local population and its concomitant buying power. The most effective way to avoid this error is through proper use of trade area penetration analysis.
The first step in a penetration study for an existing store is to compile a random sample of customers’ addresses over a representative period of time. This sample can be generated by store sales personnel polling customers. If the value of the merchandise sold by a store varies significantly from season to season, the sample must be spread over a period of time that sufficiently reflects the variation.
For example, a store that does a substantial unit volume in big-ticket lawn and patio furniture in the spring and summer, but sells a lot of low-priced Christmas decorations in the fall, would have to conduct its sample over three selling seasons in order to determine its trade area accurately. In general, higher-priced merchandise will draw customers from a larger geographical area than lower-priced goods.
This map of a fictional shopping center, prepared by Howard L. Green & Associates, Inc., Troy, Mich., shows the valuable information demographic/marketing firms can give retailers and developers, such as trade area and competition.
An even more effective method is to review customer charge card receipts. Organized by locality, charge card receipts enable a retailer to calculate sales volume generated by specific areas during specific time frames.
Compile a list of all the towns represented in this sample, and discard outlying areas that generated only one or two sales. Then, get the most current population and income data available for each area in the study. Such information is available from the state sources, county planning boards, and such reference books as CACI Sourcebook of Zip Code Demographics, published annually by CACI, Inc. – Federal, Fairfax, VA. Some demographic service companies can provide the information on computer disks or tapes.
A simpler method of penetration analysis is to divide the number of sales receipts from each town in the sample by each town’s population. The resulting fractions reveal more about the sources of a store’s traffic that its actual sales volume. Next, decide what decimal value represents an acceptable level of penetration. It can be helpful to assign colors to different ranges that reflect varying degrees of penetration. When transferred to a map of the trade area, the color-coding approach provides a comprehensive graphic depiction of a store’s market penetration. However, this method provides a cursory look at a unit’s market penetration. Typically, the areas closest to a store generate the highest fractions.
An even more meaningful analysis can be conducted by totaling the dollar volume of charge card receipts from each locality and dividing that figure by the locality’s population. This approach generates a sales-per-capita figure that can be color-coded and superimposed on a map of the trade area.
After a retailer has conducted penetration analyses on a number of trade areas where it has stores in operation and has completed color-coded maps of those areas, the company can accurately determine acceptable drive time for its units—in effect, calculate “pulling power.” A retailer can also project sales volume of any given location with some degree of accuracy.
Maps can be essential to developers and retailers in determining market-entry analysis or current performance evaluation. These computer-generated maps, prepared by National Decision Systems, Encinitas, Calif., show competition (regional malls in the map below and shopping centers over 100,000 sq. ft. in the map above), major highways and roads, and potential customers that are pinpointed through patterns and colors that represent estimated median household income (from $0 to $112,000 per year). Maps can also show population density or number of households for large areas, such as the map above of Anaheim-Santa Ana-Garden Grove, Calif., or they can zero in on small areas, such as the map below of Jamboree Road and MacArthur Boulevard in Irvine, Calif. Maps can also be generated for the nation through zip codes and census tracts.
Any area within the United States can be mapped in full color in hundreds of ways. Above and at right, Donnelley Marketing Information Services, Stamford, Conn., has mapped a 1-3-and 5-mile radius from the intersection of Boylson and Exeter in Boston to plot expenditure and shopping center locations. Below, Urban Decision Systems, Inc., Westport, Conn., has mapped population change and the Asian population density in Los Angeles.
An effective method of penetration analysis is to review customer charge card receipts. Compile a list of towns represented in the sample. Then get the most current population and income data available for each in the study. Such information is available from state sources, county planning boards, and demographic service companies. CACI, Inc. – Federal, Fairfax, VA., publishes annually CACI Sourcebook of Zip Code Demographics, as well as maps of states and regions broken down by zip codes.
Now a retailer has an effective tool to evaluate prospective locations. By conducting the same kind of survey-compiling population and income figures for a new location’s estimated trade area (based on data from existing, similar locations)—a retailer can generate a preliminary sales volume projection for the location under consideration. Naturally, in evaluating a new store’s potential for success, a retailer must also take into consideration local competition and a number of other factors that may affect the site.
In conducting trade area penetration analyses for chain retailers in the Northeast, R.J. Brunelli & Co. has found that certain retailers will achieve higher sales per capita from stores located in high-income areas than from those located in low-income areas. For example, a home furnishings chain selling high-end specialty furniture might expect to realize sales per capita of $6 per year from a high-income municipality in its trade area, while a middle-income community in the same radius might generate just $1 in annual sales per capita.
Therefore, the usefulness of a penetration study may be enhanced by assigning a factor to sales-per-capita figures that relates to the varying income levels of different areas included in the study. This can be done by adding plus or minus values to the color-coded depiction.
Retailers should be wary of falling into the trap of basing expansion plans solely on an area’s population figures. The quality of the consumer base can be at least as important as the quantity in determining a new store’s chances of success in a given trade area.
By learning to properly evaluate local population, retailers can assess their stores’ trade areas. When used correctly, trade area penetration analysis may show that a chain retailer can safely expand into an adjacent market without cannibalizing sales of existing units. Demographic studies and analyses can be invaluable tools to a retailer in its expansion plans.
Richard J. Brunelli is the owner of R.J. Brunelli & Co., an Old Bridge, NJ-based real estate brokerage firm specializing in retail properties.