Editor's note: This is the first of a two-part series. The next installment, "How a Community Determines Its Trade Area," will be published in next month's Buxton Report.

by Bill Shelton, EDcD

Many communities underestimate their retail potential by using political boundaries to delineate their retail trade area.

When recruiting retailers to their area, these communities mistakenly provide demographic information based only on the city, or sometimes the county. This is a common oversight that occurs for several reasons, including:

• Local leaders are conditioned to think in terms of city limits and county boundaries
• Most government statistics are collected and reported by political jurisdictions
• Community leaders do not understand the importance of trade area analysis to retailers in their location decision process

In reality, political boundaries have little, if any, influence on trade areas. By providing the correct information about the actual trade area, which often stretches beyond city and county lines, the community has a better chance of attracting the right retailers/restaurants for the consumer mix.

Because the site for the new store is the most significant strategic decision to be made, retailers carefully and even painstakingly select new store locations. To determine this location, retailers evaluate a number of criteria, with potential volume (sales) at the top of the list. To estimate volume, the retailer must determine the size, character and buying habits of the population that surrounds a particular location. And they must determine how long it will take customers to get to the store. In other words, they must understand the trade area.

Trade areas as defined by retailers do not follow political boundaries, and they do not form concentric or circular patterns. On a map, a well-researched trade area is usually an odd-shape polygon that is influenced by many factors including drive times, population densities and the location of competitors.

For the retailer, the trade area may have three segments:

• The primary trade area is the area closest to the store with the highest density of sales and the highest per capita sales. The primary trade area normally encompasses 70 to 75 percent of the store's customers.
• The secondary trade area contains an additional 15 to 20 percent of the store's customers. It is outside the primary trade area and the customers are more widely dispersed.
• The tertiary or fringe trade area includes all the remaining customers.

Retailers can precisely map their trade areas, because they have customer data gathered through analysis of credit cards, checks and in-store surveys. Since communities can't access this confidential information, community leaders are forced to make assumptions about what constitutes a given retailer's trade area. Fortunately, retailers do not expect the community to provide a precise trade area map.

Understanding the retailer's process, allows the community to develop a map that approximates the true trade area. Knowing how retailers view trade areas helps community leaders to more accurately describe their city's trade area and to effectively present a more realistic analysis of their retail potential.