Store Site Selection

Site Selection for new stores

When a retailer starts off with the first store opening, there will not be much confusion about the potential location for the store site. The same situation may continue perhaps for the initial few stores. But when the number of stores owned by a retailer increases, or the number of franchisees increases, locating the right site for the new store (fully-owned or franchisee-owned) becomes a crucial decision for the top management of a retail firm. Reilly’s law of retail gravitation states that the attraction of a consumer to a given retailer is directly proportional to the quality of retailer and inversely proportional to the distance to the retailer. Though the basic premise is very true, in the current competitive landscape, there are many more factors (apart from the distance) that decide the attractiveness of a store. This post is intended to describe about the common factors that a retailer should consider while selecting a site for new store. As had been mentioned in the other posts, software products are readily available for this business problem as well. Especially there are many GIS (Geographical Information Systems) products in the market that help the management team to take decisions about this. But what works for one firm may not work for another. The reasons are quite obvious. Different retailers have different concepts and strategies. The reason for setting up a new store may be to increase revenues or to mitigate risk or to annihilate competition. The profit margins expected by different retailers may be different. The quantity of market share targeted by different firms will be different.

Let us try to understand more about Site Selection.

One of the elementary techniques in scientific site selection is to find sites that are more like existing sites. I.e. To determine locations that are similar to other existing store sites in terms of demographics and consumer purchase pattern. The demographic variables could be consumer age distribution, income levels and population density etc., A GIS tool loaded with adequate information can do such analysis by processing the demographic data for a particular radius around existing store sites. This can be compared with the results of similar analysis run against the proposed new store site.

Another scientific technique that is quite popular is to find the attributes that are linked to high sales revenue and look for sites that have those attributes. For example, we can find out the attributes that are highly positively correlated with increased sales. The attributes could be high education of surrounding population, adjacency to office locations, floor space of the store etc. Certain attributes such as the distance of the store from a market zone or adjacency to competitor’s store could be highly negatively correlated with increased sales. Proposed site locations can also be scored on these attributes and the final selection can be made based on those sites that scored well in all the attributes. The following figure shows a sample visual representation of the same. Here, a GIS tool highlights those locations which scored well in red and those that scored poor in blue. This also indicates the competitor’s site locations in circles.

In few other cases, the management preselects the area based on the fast growing nature or the locations which are developing fast in terms of economy or residential or commercial real estate etc. For doing such a pre-selection as well, GIS tools provide accurate data especially when there are many such locations which on the outset look similar.

As we can observe, the GIS tools used for such analysis are highly dependent on the data loaded onto them.

• Demographic data can be obtained from government statistical institutes, population census data etc. Agencies like Code-1 plus in US can also provide such information. Other syndicate agencies like Nielsen can provide information on customer buying pattern, sales trend etc.
• The company’s own database will have past sales information and the location of their existing stores. Information about the location of competitors’ stores and the location of business establishments such as schools, hospitals, movie theatres, parks, tourist attractions etc should also be loaded into the GIS tool.
• More importantly, the data about the customers’ origin should be known. Ie. Place from where customers come to the stores. Such data can be obtained from surveys, feedback forms, customer data from a retailer’s database etc.

All these are used by GIS products to do the required analysis and present the data in graphical formats that help the senior management to take decisions.

However, site selection becomes all the more complicated nowadays because of many reasons.

• For instance, when a company wants to set up a store in a market where the firm already has existing stores, not only should competition be considered, but cannibalization of existing store sales becomes a problem as well.
• Another reason for why site selection is complex is as follows. A certain number of residents located out of a market zone could be the customers of stores located in that market zone. Similarly, residents near a boundary of a market zone may be the customers of the stores in adjacent market zone.
• Also, many of the demographic data are highly dynamic. Age profile of customers, Average household size, average income level, consumers’ sophistication in terms of mobility – all change year after year.

Retailers should be well aware of these factors and make effective use of GIS products to take wise decisions about Store Site Selection. State of the art products are available now, which can provide such information as sales trend, customer demographic variations and the results of the analysis outlined above – all in 3-D format and in appealing GUI. Such tools have high potential to store and analyse volumes of information on various parameters in spatial (related to space/geography) and temporal (those that change with time) dimensions and propose suggestions about site selection. This information will be highly useful for managers to take appropriate decisions with respect to selecting the right location for the next store.

I hope that this post gave a basic understanding about how the problem of Site Selection is generally approached.