SRM/U5 Topic 3 Trade Area Analysis
A trading area is a contiguous area from which a retailer gets customers for the merchandise he is selling. A trade area may be a town, city, district, state, and country or even beyond the country’s boundaries. The trade area may be divided into few layers (zones) depending upon the size and operations of the store, its location, merchandise offered and services offered.
Since most of the retail sales especially in big cities take place at stores, the selection of the store location and analyzing trade area becomes essential.
Retailers emphasize on trade area analysis because of the following reasons:
(i) A detailed analysis of trade area provides the retailer a picture about demographic and socio-cultural aspects of consumers. For a new store, the analysis of trade area becomes necessary to understand the prevailing opportunities and threats (if any) that may be a success path for new entrant.
(ii) It helps in identifying the consumer demographics and socio-economic characteristics.
(iii) It helps in assessing in advance the effects of trade area overlapping.
(iv) It helps in highlighting geographic weaknesses. For example, trading area analysis reveals that people from trans-river hesitate to come to city shopping areas due to pickpockets and thieves in evening. Further, comprehensive study reveals the fact that this is because of improper lighting arrangements and absence of police personnel. Therefore, shopping center could exert political pressure to make the area well lit and crossing safer.
(v) It provides opportunity to understand and review the media coverage patterns.
(vi) It helps in locating better site location by understanding the existing trade areas around the potential locations.
(vii) It helps in understanding customers profile in terms of gender, age, income level, consumption pattern, standard of living, local requirements etc.
Issues Covered Under Trade Area Analysis:
Trade area analysis is known as one of the most critical elements in retail strategic planning process.
Selecting store location is a long term and non-repetitive decision that involves following issues:
(i) Mapping of existing customers with regard to the present stores.
(ii) It covers calculating the estimate time taken by nearby customers to various existing stores.
(iii) Determination of all possible variables that may have impact on your store and trading areas.
(iv) To develop strategies to forecast trade areas around all possible available sites.
(v) To use the collected data to analyze market potential, developing customer service levels and ultimately making decisions about site location.
The Size and Shape of Trading Areas:
Generally, a trading area may be divided into primary, secondary and tertiary zones. The primary zone is the first layer of any trading area that provides 60-65% of its customers. It is close to the store and includes nearby colonies and residential areas. The secondary zone comes after primary zone but before the tertiary zone. It is the geographical area that contains around 20% of the total customers of the respective store in terms of customer sales and merchandise demanded.
The tertiary zone commonly known as outermost circle contains the remaining 10- 15% customers, who occasionally visit the store and shop. These are the customers who travel a long way to reach the store because their nearby stores are not able to fulfill the local demand. Further, there are some forces of attraction that lure the customers from tertiary zone such as wide merchandise assortment, lower pricing policy, payment options and high-level customer service.
Whatever the continent, country may be, each trading area may be studied under three zones:
Factors to be considered while analyzing trade area:
- Total size and density (demand and supply) of the population.
- Per capita disposable income.
- Education level.
- Family system (joint / nuclear).
- Occupation (job / professional / own business).
- Standard of living.
- Age group distribution.
- Number of residents owning homes.
- Number of manufactures, suppliers, wholesalers available.
- Size of competition.