Evaluation of Retail Trade Area

Evaluation of Retail Trade Area:
To begin the evaluation of retail opportunities, the market analysis

study should be done to understand demand and supply of major
categories to determine market potential. Demand refers to the
amount of retail space (in square feet) that could be supported by
consumers residing in the trade area, based on estimates of their
spending potential.
Supply refers to the actual square feet of retail space, sometimes

called Gross Leasable Area (GLA), that currently exists in the trade
area. A comparison of demand and supply by store type can help
identify gaps (demand exceeds supply).
After considering other more qualitative market factors including

how and where local residents/people shop, conclusions can be
drawn regarding potential business categories worthy of business
expansion or recruitment efforts.
A flowchart describing this method is presented below:

Estimating Retail Demand:
Estimating Retail Supply:

To analyze supply, a database of existing businesses needs to be
constructed for each of the store categories under investigation. The
database for each store category should include all of the retail
businesses within the trade area used to calculate demand. The
database should include a list of the names and addresses of all the
current retailers in the primary trade area.
For each retail store, include a reasonable estimate of store size in

square feet. For general merchandise stores, include the approxi-
mate number of square feet devoted to that product line. While
calculations of retail space in a market area are often based on
observation and rough estimates, they do provide a reasonable and
important “ballpark” figure for this analysis.
Square feet of store space is often called gross leasable area (GLA).
It can be estimated by actual measurement of a building’s street-
front width and estimate of its depth.
Other Market Considerations:

Examining quantitative aspects of demand and supply is only part
of the analysis. There are also a number of qualitative
considerations that require local knowledge and insight about the
market. The previously calculated differences in retail space
demand and supply need to be analyzed in context of other market
factors.
The following provide additional considerations that add
to the analysis of each category.
1. Survey and Focus Group Findings:
What have we learned from local research about consumer
behaviour and perceptions of the downtown? We must use findings
from “Study of Consumer Attitudes”.
2. Trade Area Demographic and Lifestyle Findings:
Does lifestyle segmentation data indicate that local residents are
more likely to purchase goods within this store category? Use
findings from “Study Customer Demographics and
Lifestyles”.
3. Analysis of Non-Local Market Segments:
Is there significant market potential from non-resident customer
segments such as tourists and commuters?
4. Retail Mix Analysis:

How many businesses in the category are located in the downtown
areas of comparison communities?
5. Competitiveness of Existing Stores in Trade Area:

Are existing stores/markets/malls in this category providing the
merchandise and service local shoppers demand?
6. Competitiveness of Existing Stores Outside of the Trade

Area:
Do surrounding communities with regional shopping centers and
big box stores siphon business in this category out of the trade area?
7. Consumer Behaviour and Trends in Store Category:

Are purchases driven by convenience or comparison-shopping? Do
stores of this type locate in downtown districts anymore?
8. Drawing Conclusions:
The quantitative comparison or retail space demand and supply by
store type provide an initial measure of market opportunities (i.e.
demand greater than supply). However, demand and supply must
be analyzed in combination with many other market considerations.
If there appears to be a significant amount of unmet demand, there

may be opportunity for an existing business to expand or a new
business to be recruited. Business development opportunities may
also exist in areas where supply is greater than demand, especially
in those communities that are successful in drawing customers from
outside their trade area because of a special product niche they have
created.
Analyzing Trade Area:

A trade area is simply the geographic area that generates the
majority of the customers for a community, business district or
downtown. Knowing the boundaries of the trade area defines the
number of potential customers that may patronage your downtown.
Furthermore, knowing the trade area allows for demographic and

lifestyle information to be gathered from a variety of public and
private sources. This information provides insight into the people in
the trade area and eventually will allow consumer demand for
products and services to be calculated.
Therefore, defining the trade area is an important step in market

analysis. A trade area often extends beyond the municipal
boundaries of a community. Defining this extent is important, but it
is also necessary to recognize how a trade area can vary.
Methods of Trade Area Definition:

1. Reilly’s Law of Gravitation:
Reilly’s Law of Retail Gravitation is a theoretical means of trade
area definition. It is based on the premise that that people are
attracted to larger places to do their shopping, but the time and
distance they must travel influence their willingness to shop in a
given city.
In other words, people are more likely to travel shorter distances

when possible. Additionally, customers are more likely to shop in
larger communities, as they provide a greater opportunity for goods
and services.
Reilly’s Law provides a mathematical formula that can be used to

calculate hard numbers relating the distance people will travel.
However, a simple map and commonsense can be combined to use
the concepts behind Reilly’s Law and generate general trade area
boundaries.
. Pin code Tabulation:

Another simple method for trade area definition is to tabulate the
number of customers by their pin codes. As later explained, pin
code data can be collected using a variety of methods and sources.
However, regardless of how the data is obtained, there are

a number of advantages to the pin code tabulation
method:
i. Collecting information from customers allows the trade area to be
based on real business data, instead of created from a theoretical
basis.
ii. Comparing the trade area maps of different businesses can

identify opportunities to increase market size and penetration. For
instance, the trade areas for businesses that primarily sell
convenience items can be compared with each other to identify
differences. These differences could indicate potential market
expansion opportunities for some of the businesses. The same can
be done for comparising shopping businesses.
iii. Trade areas for different market segments can be compared.

Businesses serving residents can be compared to the origins of
employees at a major employer. Furthermore, pin codes are ideal
for tracking the origins of non-local tourists.

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Evaluation of Retail Trade Area:

To begin the evaluation of retail opportunities, the market analysis

Supply refers to the actual square feet of retail space, sometimes

After considering other more qualitative market factors including

A flowchart describing this method is presented below:

Estimating Retail Supply:

For each retail store, include a reasonable estimate of store size in

Other Market Considerations:

4. Retail Mix Analysis:

5. Competitiveness of Existing Stores in Trade Area:

6. Competitiveness of Existing Stores Outside of the Trade

7. Consumer Behaviour and Trends in Store Category:

If there appears to be a significant amount of unmet demand, there

Analyzing Trade Area:

Furthermore, knowing the trade area allows for demographic and

Therefore, defining the trade area is an important step in market

Methods of Trade Area Definition:

In other words, people are more likely to travel shorter distances

Reilly’s Law provides a mathematical formula that can be used to

. Pin code Tabulation:

However, regardless of how the data is obtained, there are

ii. Comparing the trade area maps of different businesses can

iii. Trade areas for different market segments can be compared.

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