Tuesday, December 21, 2010

Don’t Just Describe the Market Area; Analyze the Market Area!

As you know the key step in the site selection process is to identify the perfect location.  To identify ideal or optimal sites, retailers invest significant amount of time, resources and money to research market areas.  Retailers see the value in demographics and mapping technologies; however, it is what you do with the data that is important.  Many retailers today pay close attention to understanding who their clients are, where they live, shop and work; however, far too many retailers simply use the data the wrong way.  Data is a commodity and needs to be manipulated to tell a story.
Far too often retailers determine the potential of a new site by selecting a 1-3-5 mile radius. The total population base within each ring is identified along with income levels and sometimes average age.  Competition is usually the final ingredient that composes the snap shot of the trade area.  As you can see, these types of data sources simply describe the market area and offer no value to the retailer in providing a proper market understanding.
For a retailer to truly understand the market potential of a site, you must analyze the market area.  First and foremost a trade area seldom works in rings but follows more natural boundaries.  A trade area or catchment zone is delineated by the 80/20 rule.  Where a retailer finds 80% of their prospective customers determine the reach or catchment, thus forming the trade area. In fact, Quick Service Restaurants (QSRs) measure trade areas based on time not miles.  Some retailers view a 5 minute drive-time as a more accurate means of delineating a trade area than a 3 mile radius. Once the catchment zone has been delineated, it’s the types of people that are important to identify not the number of people.   The key is to analyze those ideal clients to quantify the market opportunity that exists or “share of wallet.”  Understanding potential customers buying behaviors and how far they are willing to travel to purchase products and services, provides a better level of market understanding and store performance expectations.
-George Anderson
Based in Toronto, Ontario, George Anderson is Vice President of Market Analytics for NAI Global, and works closely with retailers and financial institutions using geodemographic analyses to identify and evaluate markets for expansion around the globe.
NAI Rio Grande Valley can assist in all your market research and analytical needs. Visit us at www.nairgv.com to learn more.