Retail Book Chap07

CHAPTER 7: RETAIL LOCATIONS ANNOTATED OUTLINE

INSTRUCTOR NOTES

I. Types of Locations •

Store location is often the most important decision made by a retailer.

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Location is typically the prime consideration in a customer's store choice.

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Location decisions have strategic importance because they can be used to develop a sustainable competitive advantage.

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Location decisions are generally risky, They are hard to change because retailers frequently have to either make substantial investments to buy and develop real estate or commit to long-term leases with developers.

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Many types of locations are available for retail stores – each with its own strengths and weaknesses. Choosing a particular location type involves evaluating a series of trade-offs.

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These trade-offs generally concern the cost of the location versus its value to customers.

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Trade area is the geographic area encompassing most of the customers who would patronize a specific site.

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Retailers have three basic types of locations to choose from: (1) Freestanding, (2) City or Town Business District, and (3) Shopping Centers.

II. Unplanned Retail Locations •

Some retailers put their stores in unplanned locations for which there is no centralized management to determine where specific stores are and how they are operated.

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See PPT 7-3, 7-4, and 7-5 Discuss the importance of store location based on students' shopping preferences. For the following types of products, how far would they travel to reach a store: 1. Eggs and Milk 2. Socks 3. Running Shoes 4. Home Theater system

Ask students to evaluate the best location in the area around the university. What are the characteristics of the location that make it so attractive?

A detailed illustration of these trade-offs is provided in PPT 7-28 through PPT 7-31.

See PPT 7-6 and 7-7 for a review of the types of retail locations.

See PPT 7-8

A. Freestanding Sites

Have the students visited a retailer in a freestanding site? What made them travel to such a retailer?

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A freestanding site is a retail location that's not connected to other retailers, although many are located adjacent to malls.

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Retailers with large space requirements, such as warehouse clubs and hypermarkets, are often freestanding.

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Advantages of freestanding locations are greater visibility, lower rents, ample parking, no direct competition, greater convenience for customers, fewer restrictions on signs, hours, or merchandise, and ease of expansion.

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The most serious disadvantage is the lack of synergy with other stores. A retailer in a freestanding location must be a primary destination point for customers. It must offer customers something special in merchandise, price, promotion, or services to get them into the store.

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Merchandise kiosks are small, temporary selling spaces typically located in the walkways of enclosed malls, airports, train stations, or office building lobbies.

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They usually have short-term leases and are often operated seasonally.

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For mall operators, kiosks are an opportunity to generate rental income in otherwise vacant space and to offer a broad assortment of merchandise for visitors.

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See PPT 7-9

See PPT 7-10

B. City or Town Locations •

Some retailers are finding urban locations attractive, particularly in cities that are redeveloping their downtowns and surrounding urban areas.

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In general, urban areas have low occupancy costs, and locations in the central business districts often have high pedestrian traffic.

1. Central Business Districts •

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The central business district (CBD) is the traditional downtown business area in a city or town. Many central business district locations in the United State are declining in popularity due to: (1) high crime rates, urban decay, and no control over weather; and (2) lack of planning, and therefore not enough interesting retailers for consumers.

See PPT 7-11 Ask students whether they shop in the CBD of the town/city in which they live. Ask them in which city(s) do they love to shop in the CBD. Why?(PPT 7-13 illustrates several well known CBDs.) We would expect cities like San Francisco, New York, London, Paris to be mentioned as great “shopping cities.”

2. Main Street Locations •

Main Street is the CBD located in the traditional shopping areas of smaller towns, or a secondary business district in a suburb or within a larger city. Their occupancy costs are lower than that of the primary CBD. They do not draw as many people and offer smaller overall selection through fewer stores. Main Streets typically don't off the entertainment and recreational activities available in the more successful primary CBDs.

Ask students if national retailers have started to invade the “Main Street” in their neighborhoods.

See PPT 7-12 for a comparison of CBDs and Main Street locations.

3. Inner-City Locations •

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The inner city is typically a high-density urban area consisting of apartment buildings populated primarily be ethnic groups. There are about 8 million households in America's inner cities and these constitute $85 billion in annual retail buying power – far more than the entire country of Mexico. Most inner-city retailers achieve a higher

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What are the various ethical issues in retailers charging higher margins in inner cities? What are the reasons due to which retailers remain successful even though their prices may be higher in inner cities? See PPT 7-14

sales volume and often higher margins, resulting in higher profits. •

Successful operations in inner cities require: (1) senior management commitment to inner-city initiatives; (2) marketing research and real estate homework before entry; (3) use of the best, most experienced, and culturally sensitive managers; (4) integral involvement of stores, managers, and employees with the community; and, (5) customization of assortment to the specific needs of the trading area.

III. Shopping Centers •

From the 1950s through the 1980s, suburban shopping centers grew as populations shifted to the suburbs.

See PPT 7-15 and 7-16

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A shopping center is a group of retail and other commercial establishments that is planned, developed, owned, and managed as a single property.

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Most shopping centers have at least one or two major retailers, referred to as anchors.

A. Neighborhood and Community Shopping Centers (Strip Centers)

See PPT 7-17

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The primary advantages of these centers are that they offer customers convenient locations and easy parking and they entail relatively low rents for retailers.

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The primary disadvantages are that there is no protection from the weather, and they offer less assortment and entertainment options for customers than malls.

Ask students for examples of Neighborhood and Community Shopping Centers in the campus area and discuss.

B. Power centers •

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A power center is a shopping center that is dominated by several large anchors, including discount stores, off-price stores, warehouse clubs, or category specialists. Unlike traditional strip centers, power centers often include several freestanding

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See PPT 7-18 Why would a smaller retailer locate in a power center anchored by discount stores and off-price stores? What types of merchandise would likely

(unconnected) anchors and only a minimum number of specialty tenants. •

be carried by the smaller retailer?

Power centers have become popular since the 1990s because they are a natural location for larger tenants who don't want to pay the high rents of regional shopping malls. In addition, shoppers are seeking value alternatives to the stores found in shopping malls.

C. Shopping Malls • •

Shopping malls have several advantages over alternative locations. First, because of the many different types of stores, the merchandise assortments available within those stores, and the opportunity to combine shopping with entertainment, shopping malls have become the Main Street for today's shoppers.

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Second, tenant mix can be planned. Shopping mall owners control the number of different types of retailers so that customers can have a one-stop shopping experience with a well-balanced assortment of merchandise.

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Mall managers also attempt to create a complimentary tenant mix.

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Third, retailers and their customers don't have to worry about their external environment.

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Although shopping centers are an excellent site option for many retailers, they have some disadvantages.

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First, mall rents are higher than those of some strip centers, freestanding sites, and many central business districts.

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Second, some tenants may not like mall managers' control of their operations. Managers can, for instance, dictate store hours and window displays.

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See PPT 7-19 and 7-20 Ask students if they spend more/less time in shopping malls than they did 5 years ago. It will probably be less. Ask them why.

Do students notice some significant differences between one shopping mall and another? If so, what are these? [Prompt students on differences in types of stores, overall ambience and environment of the shopping mall, general levels of service through the various stores in the shopping mall, etc.]

See PPT 7-21

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Third, competition within shopping centers can be intense.

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Shopping malls are facing several challenges.

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First, there is increasing competition from other types of retail location alternatives, such as power and lifestyle centers, catalogs, and the Internet.

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Second, many of today's shoppers are looking for value alternatives to stores found in shopping malls.

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Third, many malls are getting old and are therefore less appealing to customers than they once were.

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While few new shopping malls are being built, considerable investment is being made in renovating and redeveloping existing malls.

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Renovating poorly performing malls is costly and challenging. Frequently these malls cannot be supported entirely by retailers and have to be converted into mixed use developments.

See PPT 7-22

See PPTs 7-23, 7-24, and 7-25 for a detailed overview of lifestyle centers.

D. Lifestyle Centers •

Lifestyle centers are shopping centers with an open-air configuration of upscale specialty stores, entertainment and restaurants with design ambience and amenities such as fountains and street furniture.

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Lifestyle centers are typically located near affluent neighborhoods and cater to the “lifestyles” of consumers in their trade areas.

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Due to the ease of parking, lifestyle centers are very convenient for shoppers.

E. Fashion/Specialty Centers

See PPT 7-26

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Ask students if they have been to a fashion/specialty center. What types of products

A fashion/specialty center is a shopping center that is composed mainly of upscale

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apparel shops, boutiques, and gift shops carrying selected fashions or unique merchandise of high quality and price. •

Fashion/specialty centers are similar to lifestyle centers in terms of the clientele and types of stores they attract.

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They are usually found in trade areas having high-income levels, in tourist areas, or in some central business districts. See PPT 7-27

F. Outlet Centers •

have they purchased from such centers?

Outlet centers are shopping centers that consist mostly of manufacturers’ and retailers’ stores selling their own brands. Off-price retailers such as T.J. Maxx and Burlington Coat Factory may also be present.

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Consumer demand for stores in outlet centers has diminished in recent years.

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Outlet centers are often located some distance from regional shopping centers so outlet tenants don't compete directly for department and specialty store customers.

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Outlet centers can be located in strong tourist areas.

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While there may be a downturn in outlet centers in the United States, their popularity is beginning to take off in other areas like Japan and Europe.

G. Theme / Festival Centers •

Theme/Festival centers are shopping centers that typically employ a unifying theme that is carried out by the individual shops in their architectural design, and to an extent, in their merchandise. The biggest appeal of these centers is to tourists.

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These centers typically contain tenants similar to specialty centers, except there usually are no large specialty stores or

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Ask students if they have been to an outlet center. What types of products have they purchased from such centers?

department stores. •

May be located in a place of historical interest, such as Fanieul Hall in Boston or Ghiradelli Square in San Francisco. Or, theme centers may try to replicate a historical place, such as the Old Mill Center in Mountain View, California.

H. Other Types of Shopping Centers •

Many shopping centers combine elements of these different types. For example, enclosed malls often appear next to a power center.

IV. Other Location Opportunities •

Mixed-use developments, airports, resorts, hospitals, and stores within a store are interesting, if not unusual, location alternatives for many retailers.

See PPT 7- 32

See PPT 7-33

A. Mixed-Use Developments •

Mixed-use developments (MXDs) combine several different uses in one complex, including shopping centers, office towers, hotels, residential complexes, civic centers, and convention centers.

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MXDs are popular with retailers because they bring additional shoppers to their stores. Developers like MXDs because they use space productively.

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B. Airports

See PPT 7-34

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One important high-pedestrian area that has become popular with national retail chains is airports.

Are airports good places to buy products? Why or why not?

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Sales per square foot at airport malls are often three to four times as high as at regular mall stores. However, rents are at least 20 percent higher than at malls. Also, costs can be higher – hours are longer, and since the location is often inconvenient for workers, businesses have to pay higher wages.

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The best airport locations tend to be ones where there are many layovers and international flights. See PPT 7-35

C. Resorts •

Retailers view resorts as prime location opportunities. There is a captive audience of well-to-do customers with lots of time on their hands.

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Resort retailing also attracts small unique local retailers and premium national brands. See PPT 7-36

D. Hospitals •

Hospitals are an increasingly popular alternative, since both patients and their guests often have time to shop.

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Necessities are important for patients since they can't readily leave. Gift opportunities abound.

E. Store within a Store •

Another nontraditional location for retailers is within other, larger stores. Retailers, particularly department stores, have traditionally leased space to other retailers such as sellers of fine jewelry or furs.

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Grocery stores have been experimenting with the store-within-a-store concept for

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years with service providers like banks, film processors, and video outlets. •

Necessities are important for patients since they can't readily leave. Gift opportunities abound.

V. Location and Retail Strategy •

Location type decisions need to be consistent with the shopping behavior and size of its target market and the retailer’s positioning in its target market.

A. Shopping Behavior of Consumers in Retailer’s Target Market •

A critical factor affecting the location consumers select to visit is the shopping situation in which they are involved.

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Three shopping situations are: (1) convenience shopping, (2) comparison shopping, and (3) specialty shopping.

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Ask students how the nature of the consumer’s shopping behavior will affect their preferred store location.

See PPT 7-38

1. Convenience Shopping •

PPT 7-37 illustrates the need to match the retailer’s strategy with its location type.

When consumers are engaged in convenience shopping situations, they are primarily concerned with minimizing their effort to get the product or services they want. Stores selling primarily convenience goods usually locate their stores close to where their customers are and make it easy for them to park, find what they want, and go about their other business.

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Ask students where they are most likely to purchase convenience items such as soda, gum and milk. Why do they select those particular locations?

2. Comparison Shopping •

Consumers involved in comparison shopping situations have a general idea about the type of product or service they want, but they do not have a strong preference for a brand, model or specific retailer to patronize.

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Enclosed malls or shopping districts devoted to one type of merchandise attract consumers by facilitating their comparison shopping activities.

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Category specialists offer the same benefit of comparison shopping as a collection of co-located specialty stores because consumers can see almost all of the brands and models in a particular product category.

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This ability for one-stop comparison shopping makes category killers destination stores, places where consumers will go even if it is inconvenient.

Ask students to discuss product categories they often comparison shop for. Where do they go to compare? Describe the types of retailers they patronize for comparison shopping situations.

See PPT 7-39 and 7-40

3. Specialty Shopping •

When consumers go specialty shopping, they know what they want and will not accept a substitute.

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Discuss specialty stores students have been to. Would those stores improve their business by being more conveniently located? Why or why not?

The retailer they patronize when specialty shopping becomes a destination store. Thus, consumers are willing to travel to an inconvenient location.

See PPT 7-41

B. Density of Target Market •

The density of a retailer’s target market in relation to the location is another important consideration.

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A good location has many people in the target market that may be easily drawn in. Ask students to describe examples of destination retailers they have patronized.

C. Uniqueness of Target Market •

The convenience of their locations is less important for retailers with unique, differentiated offerings than for retailers

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with an offering similar to other retailers. •

For these retailers, customers will travel to wherever the store is located, and its location will become a destination.

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III. Legal Considerations •

The legal issues that affect site decision include environmental issues, zoning, building codes, signs, and licensing requirements. See PPT 7-42 for a review of these issues.

A. Environmental Issues •

Two environmental issues have received particular attention in recent years. First is “above-ground risks” such as asbestoscontaining materials or lead pipes used in construction. The second issue is hazardous materials that have been stored in the ground. This issue may be of particular importance to a dry cleaner and an auto repair shop.

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Retailers may protect themselves against environmental hazards with protective lease clauses in their leases, and/or by purchasing environmental protection insurance policies. See PPT 7-43 for a review of other legal issues retailers must consider.

B. Zoning and Building Codes •

Zoning determines how a particular site can be used. Building codes are similar legal restrictions that can determine the type of building, signs, size and type of parking lot, etc. that can be used at a particular location.

C. Signs •

Restrictions on the use of signs can impact a particular site's desirability. Size and style may be restricted by building codes, zoning ordinances, or even the shopping center management. D. Licensing Requirements

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Licensing requirements may vary in different parts of a region. For instance, some Dallas neighborhoods are "dry," meaning no alcoholic beverages can be sold; and in other areas, only wine and beer can be sold.

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VI Summary

ANSWERS TO DISCUSSION QUESTIONS AND PROBLEMS 1.

Why is store location such an important decision for retailers? First, there are more retailers, particularly national chains like The Gap and The Limited, opening new locations. This makes the better locations more and more scarce. This problem is made more complex by a slowdown in population growth and new shopping center construction. Even if a retailer can find a suitable location, high rent, long leases, expensive decorating and leasehold improvements can make any location decision very costly.

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Pick your favorite store. Describe the advantages and disadvantages of its current location, given its target market. Students store choices will likely vary considerably. The store’s target market must be clearly defined. And then the location should give the store a competitive advantage with the target market they have defined. Store: Urban Outfitters The target market of this store can be defined as young men and women from ages 16 to 25 that live in the city or want the urban look. The best location for this store would be in a central business district. This is a traditional downtown business area in a city or a town. The store will draw off the business activity of the downtown area. There is an inflow of people from public transportation and a high level of pedestrian traffic. There are also a lot of youth living in this downtown area. Store: The Gap The primary target market segments of this store are men and women ranging from as young as 15 to 40 years old looking for value in basic clothing. The best location for this store would be in a shopping center, particularly a mall. A shopping center consists of a group of retail and other commercial establishments that is planned, developed, owned, and managed as a single property. A mall focuses on pedestrians and gains its advantage because it can have a set of stores that carry similar merchandise assortments. The target market looking for basics, can shop at the GAP and also shop at complementary stores nearby. This allows the target market to have a one stop shopping experience. Store: Nokia The target market segments of Nokia are men and women ages 18 and up looking for a cellular phone for convenience and safety. A great location for Nokia would be a kiosk. A kiosk is located in mall common areas, is stationary, and has many conveniences of a store such as telephones, electricity, and moveable shelves. Advantages of these selling spaces are the prime mall locations, the relative inexpensiveness, and the short-term leases available, which reduce owner’s risk. This is a perfect location for a Nokia store because the items are very small and require little shelf space. A customer looking to get a phone, does not need a lot of frills, but instead wants the information and the phone at a

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convenience. Also this location will appeal to their target market. As they walk down the mall they may be induced to purchase without previous planning.

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Home Depot, a rapidly growing chain of large home improvement centers, typically locates in either a power center or a freestanding site. What are the strengths of each location for a store like Home Depot? The tenant mix of a power center lends itself to attracting customers who would want to trade with Home Depot. Since power centers are designed to attract customers who are influenced by price promotions, the addition of a home improvement center fits well with the tenant mix. Home Depot will also benefit from this location due to increased traffic flow of customers who will shop at a power center. Home Depot will benefit from a free-standing location due to probable lower rent, abundant parking, lack of direct competition, and ability to design and operate the store with little or no restrictions.

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As a consultant to 7-Eleven convenience stores, American Eagle Outfitters, and Porsche of America, what would you say is the single most important factor in choosing a site for these three very different types of stores? The most important criterion that is common to all types of stores is a location that attracts the right segment of consumers. However, since the segments targeted are different and the merchandise/services offered are also different, these differences would also affect the location decision for each. For 7-Eleven, consumers who are shopping for convenience products – food as well as non food items – are the primary target. Since these consumers do not wish to travel far and are willing to pay a slightly higher price as compared to grocery stores, the best location for 7-Eleven stores are smaller, neighborhood strip centers. For American Eagle Outfitters, the CBDs, Main Street or regional and super regional shopping centers may attract their target consumers, while for Porsche of America, upscale commercial neighborhoods – typically a commercial avenue further away from downtown – may bring in their type of target customers.

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Retailers are developing shopping centers and freestanding locations in central business districts that have suffered decay. Some people have questioned the ethical and social ramifications of this process, which is known as gentrification. What are the benefits and problems associated with gentrification? The benefits of gentrification include the redevelopment of urban areas that are in a state of decay. Usually, these areas would continue to decay if it weren’t for the interested retailers. Some retail developers argue that gentrification projects have positive effects on fighting crime and drugs. Gentrification also allows retailers to develop buildings that would be financially impossible to duplicate in today’s market. These structures often have significant historical value. Finally, retail gentrification promotes the development of projects such as housing and offices. This allows whole neighborhoods to make a comeback! Gentrification may negatively impact the historical and/or cultural makeup of an area. In addition, gentrification may be so successful that neighboring properties may increase in value to the point that existing tenants may not be able to afford the higher rents and/or

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taxes. This is especially controversial in terms of displacement of lower income individuals and families. Gentrification projects are often highly speculative due to the expensive financing and high risk usually associated with projects of this kind. When financing is a problem, a project may have to be temporarily stopped or abandoned before completion, which results in further accelerating decay of empty buildings and an uncertain future for existing businesses and people.

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Staples and Office Depot both have strong multichannel strategies. How does the Internet affect their strategies for locating stores? Since both stores sell mostly standardized and easily specified office supplies, the products stocked by them can be conveniently and easily sold through the Internet. The primary target markets for both types of retail outlets are the small office/home office (SOHO) businesses. The Internet, especially e-procurement links, enables these firms to target medium and large firms as well. At the same time, Internet is also an opportunity to target customers far removed from their primary concentration area (Southeast for Office Depot and Northeast for Staples) without incurring the additional costs of each store location in markets where consumers may be sparse. While it does cost a tremendous amount of capital to set up and successfully operate an Internet site, the costs of the site are spread to a wider target market and trading area as compared to the costs of setting up individual stores in multiple locations. So the Internet enables both firms to optimize on the marketing efforts to various target markets as well as the costs of setting up new stores in locations that may not generate sufficient traffic.

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In many malls, fast-food retailers are located together in an area known as a food court. What are this arrangement’s advantages and disadvantages to the fast-food retailers? Food courts allow customers to expect to find fast-food in a specific area, thus allowing the fast-food retailer to be easily found. Since food courts usually have public seating in one area within the food court, each fast-food retailer does not have to provide separate seating room for customers. The common area charges associated with these kinds of arrangements are significantly less than if each fast-food retailer provides a separate seating area. This arrangement enables the fast-food retailers to lease a smaller amount of expensive space. Groups of potential customers, such as families, can patronize a variety of fast-food retailers at one time. Finally, food courts provide a variety of alternatives therefore creating a synergy that attracts a larger group of potential customers. In terms of disadvantages, food courts require the fast-food retailers to be located next to each other, thus making the immediate environment extremely competitive. In addition, since malls with food courts usually insist that the fast-food retailers locate within the food court, there is no opportunity to try to locate to a better position within the mall. Also, food courts tend to have limited space, therefore creating less flexibility in store design and expansion.

8.

Why would a Payless ShoeSource store locate in a neighborhood shopping center instead of a regional shopping mall?

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A Payless Shoe Source might locate in a strip shopping center because these centers offer customers convenient locations, easy parking, and relatively lower rents than regional shopping centers. This may enable Payless to offer lower prices than a store offering comparable merchandise at the mall, and may also serve to offset the opportunity cost of being located in a lower traffic location.

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How does the mall that you shop at frequently combine the shopping and entertainment experience? Answers here will vary widely. Students may describe efforts at traditional shopping centers, such as special promotions, food courts, holiday events or music/video offerings. Others may respond with entertainment features typically found at lifestyle centers, including concerts and events, more restaurants and clubs, and recreation centers.

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Consider a big city that has invested in an urban renaissance. What components of the gentrification project attract both local residents and visiting tourists to spend time shopping, eating and sightseeing in this location? Local residents will likely be attracted to the convenience of retailers located in or nearby their neighborhoods, along with the needed services, jobs, enhanced safety, visibility and choices among retailers that would accompany the gentrification project. Visiting tourists may be more attracted to the historical significance and unique entertainment elements built into the project.

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How will retail consolidation, such as Kmart merging with Sears or Federated Department Stores merging with May Department Stores, impact the anchor space in enclosed regional malls? Shopping centers rely on anchor stores to attract consumers to the center. Center developers often make special deals, such as reduced rental fees, to persuade these retailers to locate at their anchors points. Consolidation in the industry will likely lead to fewer brand names on anchor store marquees. As the large discount and department store retailers who traditionally serve in anchor positions merge, fewer retailer brands will be serving in the anchor position. This consolidation is likely to generate even greater bargaining power for the retailer in negotiating its potential anchor placement with center developers.

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Different brands of car dealerships are usually located near one another on the same street. What are the pros and cons of this strategy? “Auto Row” as it is often referred to, or similar groupings of electronics, furniture or jewelry stores provide advantages to consumers in creating a one-stop shopping area for a particular merchandise category. The close proximity between retailers offering the same type of merchandise the consumer seeks, significantly facilitates comparison shopping. These locations also provide advantage to the retailers in the form of increased consumer traffic. Cons of the strategy are the potential for intense competition and difficulty in cultivating a truly unique retail image.

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