Understanding How Retailers Define Retail Trade Areas

Posted by Sam Lowder on Mar 16, 2018 4:57:00 AM

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If your town is large enough to have an economic development council, that council is probably tasked with analyzing your market in order to attract businesses and retailers to the community. To do this effectively, one of the very first steps you should take is to define your town’s trade area.

As you probably know by now, a retail trade area is a geographic region that a store, restaurant or business draws from. Its size depends on both the variety of goods and services available and other retail stores that exist already in the area. Companies use this information to analyze a potential market and determine whether it offers them sufficient potential to open a store. Retailers and restaurant chains want to know where their customers will come from, and they use this information to select good sites, assess their competitors and create their marketing.

Avoid This Mistake

When working with smaller community clients that are trying to attract retail, one of the biggest misunderstandings we hear is exactly what a trade area means. Here is something very important to remember:

A chain’s trade area is different depending on the type of retailer they are as well as traffic patterns, physical barriers and other factors.

A common mistake of communities engaging in a data-driven economic development effort for the first time is assuming that shoppers stay within municipal boundaries. Your community leaders might see a demarcation between your town and the town over, but shoppers do not. They choose where to shop based on what is available and convenient.

Reality Check: Retailers Define Trade Areas Differently Than You Do

There are several components of the trade area you need to understand.

First, understand that no trade area is a perfect circle, but there is an area that the largest retailer in your community might expect to draw customers from. This is defined as the primary trade area, which probably provides more than half of a store’s business. Then there is a secondary trade area, which might be a little further out, and probably accounts for another 20% of a retailer’s business. Together, these areas comprise the main trade area. In a larger population center, there is also a fringe trade area—on the outskirts of a town or municipality, for example.

That said, there are several other factors that retailers consider when further defining trade areas:

Geographic barriers 

Let’s assume a town has a large lake in the middle with a one-lane road around the lake from one side to the other (no bridge). Obviously, a shopping district on the west side of the lake would appeal to shoppers on that side of the lake but might be less appealing to those on the other side who would have a much further drive. Those residents might have easier access to another area on the east side of the lake accessible by highway.

Psychological barriers 

In certain towns, it’s not uncommon for residents to perceive a barrier between one part of town and another. The phrase “the wrong side of the railroad tracks” puts this into perspective. If there is a section of town that is known for being a little “seedier,” even if it is technically within a trade area, it might get excluded from certain retailers’ trade area lines.

Tourists or other non-locals

When a retailer is considering a location that draws customers who do not live in the immediate area, it’s important to factor this into their trade area analysis. Examples include tourists or people who commute to an area and work (and shop) there during the daytime.

Conveniences

Some retailers want to take into account people who might shop in an area because it is close to some other spot that they visit frequently, like their children’s school or the town post office (if a rural town).

Comparisons

Similarly, retailers that sell things like appliances, furniture, and larger specialty “tools” like riding lawnmowers know that customers are more willing to travel further to shop for bigger purchases. Those retailers will run a comparison shopping trade area that covers a larger geographic area than a convenience shopping trade area does.

And of course, when retailers determine a trade area’s boundaries and then proceed to analyze the trade area to understand its retail potential, they’ll think about things like recent population trends, projected population trends, per capita income, spending patterns and lifestyle habits of consumers in the trade area, transportation networks, drive times between retail/restaurants and the trade area, and retail sales trends.

Do Your Homework Before You Approach Retailers (or Expect Them to Come to You)

When setting out to attract retail to your community, it’s essential that you think like a retailer! Correctly assessing retail trade areas for your town (and specific sites within it) is an important part of that recruitment process.

If you’re not sure how to get a good handle on the information that retailers are using to evaluate your community against others, call us. We’ll help you get a thorough understanding of your trade area so you can focus on your community’s strengths. Armed with that information, you’ll be prepared to address the questions of any companies looking at locating their next site in your community, and you’ll be much more successful at recruiting restaurants and retailers effectively.

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Topics: Smart Retail Growth, Retail Trade Area, Retail Industry, Market Potential