Geography 207William B. Beyers

Geography 207William B. Beyers

Research Problem 2426 Smith

Autumn 2004543-5871

Due: November 22

Retail Market Potential Analysis

Objectives: The objective of this research problem is to estimate demand for a proposed new food store and determine its economic feasibility. This is a very common problem faced by retail consultants, and by chains interested in expanding their number of outlets. We have made this problem simpler than is typically the case in reality, where an investment decision over the economic life of a store would need to be evaluated (e.g. looking at say a 10-year projection of demand/revenues and costs). Nonetheless, the basic geographic principles underlying the more complex problem are the same as those for this simplified model. Figure 1 shows the location of the proposed food store, located at Stone Way and N. 40th St (currently a closed Safeway that is now a storage facility is located there).

Model: This assignment uses a model which is a version of a demand potential model, similar to the demand cone described in the textbook for a central place. Essentially, you are determining the feasibility of the proposed store based on an estimate of demand. Demand for the store is a function of:

(1) the share of personal income spent on this good/service

(2) a market area

(3) leakage's from this market area

(4) external demand in this market area

(5) an expected market share

(6) a facility size with a standard of reference for profitability

Let us take up each of these variables, and consider values for them which may be used in this assignment.

1. Share of personal income: What percentage of personal income do people in the market area spend on food? The data in Table 1 provide some of this information for the U.S., State of Washington and the Seattle-Tacoma-Everett CMSA. As indicated in the data, Seattle residents spend on average 5.6% of their personal income on food items. Base your estimate of food expenditures on these numbers.

2. Market area: How large of a market area will your store service? Which census tracts will your store draw customers from? Select the regions you wish from Figure 1 and enter them as instructed below.

Table 1

Composition of Retail Sales in the Seattle area, Washington State & U.S.

Seattle / Washington / US / LQ-WA / LQ-US
Motor vehicle & parts dealers / 8.3% / 8.4% / 9.3% / 0.98 / 0.89
Furniture & home furnishings stores / 1.1% / 1.0% / 1.0% / 1.08 / 1.04
Electronics & appliance stores / 1.1% / 1.0% / 1.0% / 1.16 / 1.15
Building Material & garden equipment & supplies stores / 3.1% / 3.6% / 3.3% / 0.85 / 0.95
Food & beverage stores / 5.6% / 6.3% / 5.8% / 0.89 / 0.97
Health & personal care stores / 1.3% / 1.4% / 1.7% / 0.95 / 0.76
Gasoline Stations / 2.1% / 2.5% / 2.9% / 0.83 / 0.73
Clothing & clothing accessories stores / 1.8% / 1.7% / 2.0% / 1.08 / 0.92
Sporting goods, hobby, book
& music stores / 1.2% / 1.1% / 0.9% / 1.07 / 1.33
General merchandise stores / 4.5% / 5.0% / 4.8% / 0.91 / 0.95
Miscellaneous store retailers / 1.2% / 1.3% / 1.1% / 0.93 / 1.04
Nonstore retailers / 2.0% / 1.8% / 1.8% / 1.14 / 1.12
Total Retail / 33.3% / 34.9% / 35.5%
Nonretail Outlays / 66.7% / 65.1% / 64.5%

Source: U.S. Census of Retail Trade, 1997; 1997 U.S. Local Area Personal Income

3. Leakage's from market area: Not all consumers living in the areas you have selected will shop there. Some will shop in other market areas. For example, those working in downtown will probably buy some foodstuffs from the Pike Place Market. So, while most demand for groceries is quite localized, it is not totally localized. Select some percentage which you think is reasonable for your selection of census tracts. Note: the larger the number of Census tracts you decide to include the smaller the likely external percentage of spending. Suggestion: make this value no larger than 25% if you only pick 3-6 nearby tracts, or up to 10% if you pick all tracts for which data are provided.

4. External Demand: Consumers will no doubt come into the market area you have selected from outside to shop at the potential store. If it is just a common food store this is likely to be a small percentage, but if it is a destination store like the Queen Anne Thriftway it might be somewhat larger (probably not above 25%).

5. Expected Market Share. There are many food stores in the Census tracts included in the problem. It is probably safe to assume that there is one food store per Census tract. If we just considered the four adjacent to the *'d location on Figure 1, it would be optimistic for a new seller to think that he could get more than, say 1/4 of the market, if his/her store size and qualities were equivalent to the existing competitors. As the number of Census tracts increases, the number of competitors increases, and so the expected market share would decrease. You need to consider a market share which is "realistic."

6. Facility Size and sales productivity Ultimately, the viability of the proposed store is a function of its profitability per square foot of retail space. Let us assume that a threshold value of $275 per square foot is a break even point. Let us also assume that the decision maker involved in the location of this store is considering 30,000 square foot facility. You may change these figures, but you should justify the changes in the write-up.

Assignment

1. Go the class website.

Click on Market.doc and Resprob2.xls

Open these files and save them to a disc or your computing environment.

`2. Get the applications open on a computer.

Using Microsoft Word and Excel, open the files related to this program. If you have problems accessing computers with this software, please let us know.

3. Program Operation

The spreadsheet program is very simple, with the locations where you can put in data highlighted on the screen in yellow. It is programmed to produce results driven by the data inputs you select (e.g. the entries in the yellow fields).

Census Tracts The attached map of north Seattle shows census tracts in the vicinity of the proposed new store, which is identified by a *. (This is Stone Way and N. 40th St.) Almost every census tract currently has a food store, so there is lots of potential competition. You need to decide which of these census tracts should be included in your analysis. Essentially, you will need to decide:

(1) which tracts to include

(2) some parameters governing demand at the hypothetical store site.

(leakage, market share, etc.).

You may include all of the census tracts, or just some of them. You choose.

Table 2 shows the number of households, income per household, and an estimate of distance from each Census tract to the proposed store site (this is a ranked-scaled distance....given the local neighborhood character of this problem). These data combined with the information you provide on market characteristics will ultimately determine the feasibility of the proposed new store.

Given the potential store location, decide which census tracts you want to include in the evaluation of potential demand, enter these data from Table 2 into the blank spreadsheet program.

Table 2 Census Tract Data, 1997

Census Tract Number / Number of Households / Mean Income per Household / Distance to Store Site
27 / 2166 / 74801 / 3
28 / 1986 / 56073 / 3
34 / 1471 / 59794 / 3
35 / 1654 / 70201 / 2
36 / 2620 / 52072 / 3
46 / 1373 / 66090 / 2
48 / 2057 / 60286 / 2
49 / 3151 / 46322 / 1
50 / 1450 / 53326 / 1
51 / 1561 / 64683 / 1
52 / 2363 / 43428 / 2
54 / 2123 / 54352 / 1
60 / 2402 / 70840 / 1
67 / 3095 / 67153 / 2

Source: PSRC website, file hhinc97.xls

Ancillary information now must be entered, which influences these demand estimates.

1. Food expenditures %. This is the share of personal consumption expenditures spent on food: enter 5.6 (DO NOT ENTER A % SIGN) or some other number if you can justify the difference.

2. Leakage's percentage: this will decrease potential local demand by the % you put in (DO NOT ENTER A % SIGN).

3. External demand percentage: this augments potential local demand by the % you put in (DO NOT ENTER A % SIGN)

4. Distance decay exponent: this is a factor influencing the level of demand as distance (travel cost) increases. The larger the number the more impact it will have on demand. Suggestion, pick a value greater than 1.5, but less than 2.5).

5. Capture percentage: This is your estimate of the market share you think this facility should get, given your estimates of the "position" of this new store in the market. Guideline: if you pick only three or four Census tracts in which you think their is little competition, then maybe 1/3 - 1/4 of the total demand is "optimistic." But, if you think 10 Census tracts is the market area, and most of them have a competing store, then only 1/10th of the demand may be optimistic. The value you pick for this variable will have a big impact on the "bottom line." (You can experiment with different values in the yellow-highlighted cells to see the impact of changes in parameters).

6. Size of store. Stores in the categories being evaluated here range from mega-stores like Larry's in Bellevue or Kirkland with 100,000 square feet plus to more modest stores with ca. 20,000-25,000 square feet. Earlier it was suggested that a 30,000 square foot store be evaluated, but you could select another size if you want.

Printing your results. Please print out your results on a computer somewhere—at home, at your apartment or fraternity or sorority, -- or on a computer in labs like up in geography on the 4th floor of Smith. Use them to develop your interpretation, as discussed below.

Alternative Estimates You can change the input values in the yellow highlighted fields if you want to set up another configuration, and print this alternative estimate. You may want to play around with a variety of estimates, in order to evaluate the sensitivity of the model to different demand and market condition assumptions. Recall, that the bottom line on feasibility is selling at least $275/square foot per year.

III. Results and Assignment.

Once you have developed your spreadsheet(s), please write up a short interpretive report (ca. 3 pages+). Given that this is an assignment essentially evaluating the feasibility of the scenario you construct, you could phrase this as a consultants report. Please include results of your spreadsheet run(s) at CSSCR or wherever you have printed them; writing up your results in a word processing environment. Please save your word processing file, so that after we read your write-up if it needs to be edited you can do so with minimal effort. The PC’s in CSSCR are configured so that you can use Microsoft Word to do your write-ups. You would need to take a floppy disc with you to save your write-ups in case you need to rewrite the assignment.

Assignment Due: November 22. The maximum number of points will be 35; resubmissions will be entertained for those who do not get a full score on their first submission.

Assignment Summary

• Use the Spreadsheet program to estimate the feasibility of a new food store located at the corner of Stone Way and 40th.

• Feasibility is a function of demand, and you will be estimating demand by providing parameters to the model. For example: what percentage of local area residents will shop for food outside the selected market area (leakage)? And, what percentage of residents outside the market area will shop at the store (external demand)?

• What you will do:

1) Conceptualize your store: what kind of store do you envision? A standard grocery store with nothing special? Or, a gourmet frozen vegetarian food store that will attract people from all over the city?

2) Select the market area (census tracts) your store will serve, and enter the demographic data into the spreadsheet for the selected census tracts.

3) Estimate parameters to determine demand. These ultimately will be related to the type of store you envision (item #1). Enter these values into the spreadsheet program too.

4) Interpret your results. The program calculates a bottom line feasibility by determining the demand per square foot. Is your store feasible? Perhaps you will want to run a series of models changing the demand parameters until you achieve a feasible store. Or, maybe, you can gradually increase the market area until the store breaks even. By running more than one scenario, you have the ability to compare results in your write up, and comparisons make for much more interesting reports.

5) Write up your results. Submit a written report (approx. 3 pages) describing your store, the demand parameters, and the ultimate feasibility. Perhaps you will want to imagine that I am your client and you have been hired to make a recommendation to me. What will you recommend? If my idea of the store is not feasible, and you suggest a feasible alternative? Be creative and have fun with this assignment.

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