Where To Locate
Another issue that faced the Howards was where to put their new women’s clothing shop. Marcia Howard pondered the costs and benefits of three different locations.
First was a site in the downtown area. It was on a major street with one way traffic in a block with essentially commercial tenants (see plan A). Marcia would be replacing an antique shop which had decided not to extend its lease. Monthly rent on the property was $2000 per month, leased on an annual basis. the landlord was unwilling to lease the space for any greater period without adjusting the rent upward.
Traffic counts in the area revealed that on an average day 1400 cars traversed the street on which Marcia’s store would be located. Also significant was the foot traffic coming off the cruise ships in the summertime. No study had been done, but Marcia could not help but be aware that the volume of visitors roaming around downtown was substantial. No shops selling women’s apparel were in the immediate vicinity, although a five and ten, which had a little bit of everything was just up the street.
A second site was in North Sound Mall. The space in question was on the lower level next to a family shoe store. The site was in the middle of the mall almost directly between the two entrances on either side. Rent on the property was $5000 per month for a three year lease. After that time, rent would likely be raised based on the success of Marcia’s venture.
The mall was clearly where the action was in town. A traffic count of people entering and leaving the structure revealed that an average day would have about 4,000 people patronizing the mall area. Many of them shopped only at the supermarket, which was the mall’s largest tenant. The supermarket had its own entrance from outside, in addition to access from within the mall (see Plan B).
The mall did lease space to some competitors. A Jay Jacobs franchise sat nearly opposite to the proposed site for Marcia’s store, and a shop featuring casual wear for both men and women was located on the upper level. Both seemed to be doing reasonably good business.
The final choice was a recently developed second mall in the north end of town. Phase two had just been completed, so there were ample spaces available for lease. The principle merchant in the mall was again a supermarket, but very little was known about other potential tenants, or the ultimate traffic count the mall would generate (see Plan C).
The price was, however, favorable. Anxious to fill the mall as quickly as possible, the owner’s offered a lease on a suitable shop for $3000 per month. The initial lease was to be for three years, but its terms included the option to renew for an additional three years at the same rate. The owners also promised that no other women’s apparel shop would be permitted into the mall for the term of Marcia’s initial lease.
Question: Clearly, there were many things for Marcia to think about in making her decision, and she calls you on the phone to get some of your valuable opinions. What are some of the factors Marcia must consider in making her decision, and which site should she choose?
PLAN A – DOWNTOWN
Bookstore Vacant Dry Cleaner Video Rental Law Office Beauty Parlor
<<<<<<<<<<<<<<< “Main” Street <<<<<<<<<<<<<<< (one way)
Parking Lot Antiques Pawn Shop Five and Ten Antiques
PLAN B – NORTH SOUND
Liquor Store Dry Cleaner Greeting Cards Vacant Shoe Store Florist Door Restaurant
Door Music Store
Deli Bank Travel Agency Hardware Jay Jacobs Video Rental Jewelry
Super Fine Arts Restaurant
Market Candles Door
PLAN C – NEW MALL
Super Market Florist Video Rental Liquor Store Auto Parts
Door
Vacant Vacant Vacant Vacant Vacant
Information that support to answer the question:
Site Selection
On the extreme end of the distribution question is where to locate a retail business. The answer to this question is rooted in the types of product that will be sold. We recognize three classes of products (and services), based not on the product itself but on how people go about buying the product. The class of product influences the significance of pricing, location and the impact of competition.
The first product class is convenience goods. These are products that consumers tend to buy repeatedly, without much thought or planning, at the closest place at hand. The profile for such products is that they represent a small part of the household budget and do not, therefore, merit extensive research before purchasing them. Examples include staple foods – bread, milk, etc. – and impulse items. Impulse items can be found at the checkout stand of any supermarket. Things like magazines, batteries, candy and seasonal novelties fall into this category.
Because customers buy these products at the most convenient place, pricing is not important, within the relevant range. We would not drive across town to save 5 cents on a gallon of milk. Location, however, is critical. If the customer will buy in the most convenient place, it is imperative that such a business locates in a high traffic location in order to maximize customer exposure.
The view of competition is interesting. Logically, we would like to be the only outlet for a convenience product in a high traffic area. The reality is that such products are highly competitive and it is almost assured that there will be competitors nearby. A visit to Trosper Road, in Tumwater, reveals fast food outlets, the convenience arm of the restaurant industry, everywhere you look. Since all the competitors have the same imperative – to be where the customers are – competition is inevitable.
The second product class is shopping goods. These are goods that the consumer buys with great care, taking time to investigate prices, styles and features, in an effort to get the best deal. They tend to be bigger pieces of the budget and are purchased less often. Examples are cars, electronics and jewelry, but also most clothing and shoes.
Because the customer researches price, pricing is very important for shopping goods. If the price at one store is $50 more than at others, customers will figure it out and shop elsewhere. For this reason, pricing for shopping goods is often nearly identical from outlet to outlet. Retailers know the importance of price and will regularly “shop the competition”, that is, check the prices of competitors. Price differences lead to immediate adjustments.
Location is not as important as with convenience goods. Consumers are willing to take the time to investigate, and will travel to do so. A customer in the market for a plasma TV would likely check all of the vendors in the area, even if it meant driving across town.
The view of competition is quite different with shopping goods. There is a tendency for sellers of shopping goods to locate in the same area. This is the auto mall phenomenon. The idea is that customers will go from outlet to outlet anyway, so grouping together adds convenience. The area may also become a magnet for customers, who will gravitate to the area when they want or need the product. Although the auto mall is a common example, the same effect is visible in shopping malls for products such as clothing and jewelry. Customers shop the mall because they know they will have many choices at a single location.
The last category is specialty goods. Specialty goods are products for which, in the eyes of a limited number of customers, there is no substitute. Specialty goods are not necessarily high priced goods, although many luxury items, such as Hummers, fall into the category. Less costly items such as pipe tobacco and organic produce are also specialties.
Since the customer will accept only this product, he or she will pay whatever the price may be. Similarly, location is less important as the customer will seek out the product. Competition, if it is a true specialty, will not exist.
Which product class the retailer sells will thus influence the location decision. That decision itself involves many factors and an analysis of the relative costs and benefits associated with a given site.
Lease. The lease is the main cost factor. Commercial real estate is routinely let by the square foot to enable comparisons of different size properties. Further, leases on commercial properties often have additional costs that are not routinely found in residential rentals. The highest quality commercial properties may require additional payment for pro-rata shares of taxes, insurance, maintenance and so on.
Another factor is the length of the lease and its potential for renewal. Short leases offer flexibility but also pose a risk that rents may be raised.
Market Profile. As we learned in discussing market segmentation, where a business locates determines the customer base that it serves. Hence, we need to establish how many customers are in the market area, who they are and even when they are there. A sandwich shop in the business district may make sense, but the same shop in a residential area may not.
Synergy with Surrounding Business. Unless we have a true specialty product, we would like to think that the burden of bringing customers to our business may be eased by the efforts of neighboring business. Such synergy can take place on several levels.
Competition. Especially for shopping goods, it may be beneficial to locate near competitors. Since they sell the same products, customers visiting their stores may see and visit ours.
Complementary Products. Even if neighboring businesses don?t sell the same product, their products may complement or “go with” ours. Shoes go with dresses, for example. Customers at a shoe store may be tempted to visit a nearby dress shop.
Same Target Market. Even if the product is totally different, our neighbors may serve the same kind of customer and bring them into the area.
Parking and Access. In the real world, customers tend to drive to do their shopping. Inadequate parking will keep them away. Similarly, a location that is difficult to reach because of traffic will be an impediment.
Intangibles. This is the “everything else” category. It includes visibility of our business at the location, perceptions of public security in the area and the general physical appearance of the premises.
Seldom is a site absolutely perfect. Usually, it involves a balancing of benefits with costs to choose the best available option.
