The retail site selection process has changed significantly over the last three decades. What was once considered an art is now a blend of art and science.
Whether you are new to the retail site selection process, or simply wish to refine your current technique, these insights can help you make the right real estate investments.
Related: How to Choose the Right Site Selection Services
What is Retail Site Selection?
Retail site selection is the strategic process of determining the optimal location for a retail store. It answers the critical question: which site is the best location for my next retail store? This process involves analyzing various factors known to influence store performance, such as customer potential, foot traffic, competition, and market demand. Key steps include conducting market research, identifying target customers, evaluating potential sites, and forecasting sales.
Ultimately, the goal of retail site selection is to maximize profitability by choosing a location that aligns with your brand’s objectives and reaches your target customer base. By selecting the right site, retailers can increase visibility, attract more customers, and ensure long-term business success.
Three Important Steps in the Retail Site Selection Process
While there are exceptions, retail site selection typically follows a methodical process of identifying markets, then trade areas, and finally specific sites for retail store locations.
1. Identify and Prioritize the Specific Markets You Want to Enter
Before you can begin to examine specific sites, you need to identify and prioritize the markets where you want to look.
There are two fundamental ways to identify markets. You can look purely at macroeconomic factors such as population growth, employment rates (both overall and for retail specifically, an indicator of the local retail industry's health), overall retail GLA, consumer spending, and other indicators of economic strength to identify markets with sufficient demand and acceptable levels of competition.
The alternative is to take a “bottoms up” approach by identifying all potential trade areas within a geography that meet your desired criteria and then rolling them up to the market level. In this approach, markets with the highest counts of good potential trade areas are likely to present your best opportunities.
The advantage of the bottoms-up technique is that it helps to streamline later steps in the retail site selection process, but it does require access to statistical modeling and computing technology capable of running the site selection algorithm on every possible combination of trade areas to identify the best groupings.
Regardless of the approach that you use, it’s important to consider these questions when evaluating potential markets:
Which markets have the right types of consumers for your business?
Median income levels and other demographic factors are important, but don’t fully capture the lifestyle nuances that explain why two people with the same demographics can have very different shopping behavior. Instead, you need to consider both demographic and psychographic factors to ensure a location is near the right types of consumers.
What demographic and psychographic factors do you need to consider?
Key demographics to consider include:
- Age
- Income levels
- Population density
Important psychographics to consider include:
- Lifestyle preferences and behaviors
- Values and attitudes
- Purchasing habits
These factors help identify areas where your business can thrive by matching your offerings to the local population's needs and desires.
Where is there the right balance of competitive presence?
Having some competitive presence in a market is okay, as long as there is sufficient demand to support both brands. Avoid markets that are already saturated by competitors.
Where do you have the potential to build multiple units?
To develop and maintain a pipeline of potential new retail store locations, focus on markets with the capacity for multiple units. This approach maximizes economies of scale in marketing and operations, making your market entry more cost-effective and sustainable.
Can your existing supply chain structure be extended to support this market at an acceptable cost?
Some markets are simply too far from your existing supply chain structure to support profitably. You may need to move toward those markets gradually.
2. Within Each Market, Identify the Trade Areas That Offer the Best Growth Potential
Once you’ve identified the market you want to enter, the next step in the retail site selection process is identifying the trade areas that offer the best opportunities. Historically, trade areas were defined in mileage rings, but this didn’t reflect the way consumers think. Consumers care about how long it takes to travel to a store, so identifying trade areas based on drive-times yields the most accurate view.
When evaluating trade areas, you are looking for ones that meet criteria such as the following:
- Performance estimates, either in terms of a forecast or an index score, meet your minimum threshold
- Cannibalization estimates or trade area overlap percentages fall below your acceptable maximum
- The trade area has high concentrations of the right types of consumers (high likelihood to become customers)
- Competition in the trade area is at an acceptable level
If you are entering a new market farther away from your existing markets, pick your best trade area to concentrate on first. A successful first location provides both the brand recognition and cash flow needed to fuel additional locations. If you are entering an adjacent market, consider approaching the market gradually to build brand recognition organically.
3. Within Each Trade Area, Identify the Optimal Site
Once you identify trade areas, give the list to your site selection team or brokerage network to begin hunting for sites. If you’ve already invested the time in conducting quantitative analysis to verify the market and trade area, then qualitative factors become particularly important in this stage.
What variables are considered in retail site selection?
Site characteristics to consider include, but aren’t limited to, the following:
- Right mix of cotenants or other area draw factors
- Steady traffic volumes and correct traffic flow direction (particularly for convenience-oriented businesses that take advantage of specific dayparts)
- Good visibility and ease of access
- Real estate type is a match if considering an existing building, or zoning requirements will allow new construction
- Site financials (cost of construction, cost of rent) meet your financial objectives
What role does foot traffic play in retail site selection?
High foot traffic increases the potential for walk-in customers, directly impacting sales and revenue. Analyzing foot traffic patterns at the shopping center where you are considering a site helps businesses identify prime locations where consumer visibility is maximized.
How is data used in retail site selection?
Data is at the heart of the retail site selection process. For instance, demographic and psychographic data, combined with a brand’s own customer data, are essential in developing customer profiles and personas, which reveal who the ideal customer is and their potential value to the brand. More importantly, these profiles guide the identification of areas where similar consumers are concentrated.
Customer profiles, in addition to other trade area characteristics—such as cotenants, area draw, and competition—are vital inputs into Buxton's site score models.
Related: The Complete Guide to Retail Site Selection Software
The Role of Retail Site Selection Models
The retail site selection process involves many steps and many different types of analysis. Quantitative analysis, such as site selection modeling, is used by most retailers today in their site selection process. While retail site selection models are valuable tools, it’s important to understand that they come with both benefits and limitations.
Benefits of Retail Site Selection Models
One of the primary benefits of using a retail site selection model is the ability to quickly estimate performance potential. Using a site selection model, you can identify sites that meet minimum criteria and improve the efficiency of searching for sites. It can also alert you to potentially expensive mistakes so you know where NOT to invest.
Another advantage of site selection models is that they allow retailers to validate information received from the brokerage community. Brokers play an important role in the real estate process, but at the end of the day, they are paid to make transactions rather than to select the absolute best site for your brand.
Finally, retailers who are skilled at interpreting their site selection models know that models shouldn’t just be used to understand whether or not a site will be successful, but rather to understand what it will take to be successful in that trade area. For example, the overall site score may be positive but the underlying competition score may be quite high. A savvy site selector will understand that competition is a risk factor for that site that will need to be proactively managed.
Limitations of Retail Site Selection Models
While retail site selection models offer many benefits, they also have limitations to be aware of and manage.
Site selection models are limited by what can be quantified well, so it’s impossible to completely evaluate all performance drivers. Instead, the models compensate by looking at proxies. For example, foot traffic is a common performance driver, but it can be difficult to measure completely. Cotenants and the size of the shopping center are often used as proxies instead, based on the assumption that being next to a typically high-traffic cotenant or in a large shopping center will attract more foot traffic.
Ultimately, site selection models enhance the fundamentals of good site selection but can’t replace them. Just as you would conduct an in-person interview with a job candidate who “looks good on paper,” you should still validate a site that scores well based on a model. For example, a model might give a high score to a site located next to a highway (based on the assumption that the highway will provide both good accessibility and visibility), but if the closest available site next to the highway actually has poor visibility or accessibility, then it likely won’t live up to the full potential indicated by the model.
The bottom line is that local market knowledge is key. Data can tell you what has happened, what is happening, and what is likely to happen in the future. Local insight can complete the picture by informing or confirming hypotheses on why those things happen.
Want to Streamline Your Retail Site Selection Process?
Since 1994, Buxton has helped retailers in all stages of growth to streamline their site selection processes through site selection modeling and market analysis. Watch our brief video to learn how we can help you to identify the best potential sites.
