What is the most important differences between a service business and a retail business?

This section provides techniques for identifying market opportunities for selected retail and service retail business categories. It examines business opportunities in terms of number of businesses the market could bear, total sales, and square feet of occupied business space. Other more qualitative and equally important market considerations are also discussed in this section. A selection of tools to measure demand and supply are presented.

• Demand & Supply Analysis
  • Step 1: Assess Demand
  • Step 2: Inventory Supply
  • Step 3: Draw Realistic Conclusions

• Supplemental Tools
  1. Gap Analysis Calculator [A Surplus-Leakage Method]
  2. Pull Factors [A Surplus-Leakage Method]
  3. Trade Region Gap Analysis [An Advanced Surplus-Leakage Method]
  4. Ohio State University Extension Retail Market Analysis

• Appendix—Using GIS to Visualize Demand and Supply

Demand & Supply Analysis

Once you have assembled sufficient information on the trade area, you’re ready to focus on a detailed analysis of business opportunities by specific category. You have learned it is imperative to fill vacancies with viable businesses and to give residents access to necessary retail goods and services. You want to support your work with data and solid analysis to help ensure the success of these businesses.

In this section we focus on those retail and service businesses that commonly have a storefronts in downtown districts. This includes traditional retail stores such as pharmacies and groceries, but also services such as auto repair and hair salons. The analysis of retail and service business opportunities involves both quantitative examination and qualitative insight following a three-step process:

• Assess demand;
• Inventory supply; and
• Draw realistic conclusions.

To help you with the quantitative aspects of this process, this section provides various tools, ranging from simple to complex, that can be used for one or multiple business categories. A quantitative demand and supply comparison is important because it helps put numbers behind your analysis and gives you some measures to support your business development activities. However, as the analysis is as much an art as a science, your study must also consider numerous qualitative factors. The following chart illustrates factors that go into an evaluation of retail and service business opportunities.

Definitions Used in this Section: NAICS: The North American Industry Classification System is used by the federal government for classifying all businesses and their related statistics. Each business is classified by a NAICS code and a specific store category.  For example, 44211 is the code for furniture stores.  Descriptions of 71 selected retail and service business categories used in this section are available here.

Demand: In market analysis, demand is the amount of a good or service required to fulfill the needs of customers in your area. This is mainly driven by the size of your trade area, the number of customers in your trade area, and their purchasing power. This is often calculated by NAICS category. Demand can be measured in square feet, number of stores, or total sales.

Supply:  In market analysis, supply is the amount of a good or service currently distributed in the marketplace. This is often organized by NAICS category and can be measured in square feet, number of stores, or total sales. The data that is available to you and the ease of collecting this information determine how you measure supply in your community.

Note: Another way to analyze the retail market is to estimate spending by product type. Data is available from the U.S. Bureau of Labor Statistics as well as private data firms that can be used with local demographic data to estimate local demand. However, it is often difficult to` estimate a comparative “supply” figure. Nevertheless, for certain categories, a demand and supply analysis by product type may be appropriate.

Return to top

Step 1: Assess Demand

In market analysis, demand is the amount of a good or service required to fulfill the needs of customers in your area. The spending potential of trade area residents typically determines most of the demand for local retail goods and services. This demand can be modeled using various quantitative measures. You must also consider other qualitative measures to more fully understand characteristics of your local market and of non-local consumers who may shop in your community.

This method for determining market potential estimates total demand for retail and services businesses in a trade area based on historic customer spending patterns. From secondary data sources like the U.S. Economic Census, you can obtain reliable data to estimate domestic sales per capita and average sales per store. You can use this information to estimate demand by store type. Market potential can express demand in total sales, number of businesses, or square feet of retail space [also known as gross leasable area, or GLA]. Tools in this section such as the  Gap Analysis Calculator [Tool 2],  Pull Factors [Tool 3], and the Trade Region Gap Analysis [Tool 4] can be used to calculate market potential and business gaps for your trade area.

“Potential sales” are estimated sales that could be achieved if all people living within a trade area only shopped within the trade area. Actual [or estimated] sales are compared to potential sales to determine a “surplus” or “leakage.” If actual sales exceed potential sales, a sales surplus exists. A surplus implies either that [a] people travel from outside the trade area to area or [b] people living within the trade area consume more than would be typically expected given their income levels. However, if actual sales are less than potential sales, the trade area suffers a sales leakage. A leakage indicates that either [a] people living within the trade area shop outside the county or [b] people living within the trade area consume less than would be expected given their income levels.

Other Local Demand Considerations

Examining local demand in terms of numbers and dollars is only part of the analysis. There are also a number of important qualitative considerations to help you gauge the depth of trade area demand and your downtown’s ability to capture it. These are discussed in other sections of the toolbox and include:

• Consumer Perceptions and Behavior. What have you learned from local research about consumer perceptions and behavior related to downtown business activities? Has a sidewalk intercept study been conducted to assess your district’s strengths and weaknesses? Has a survey been conducted to learn why some people never come downtown? Use findings from business owner surveys, consumer surveys, and focus group sessions as described earlier in the toolbox.
• Demographic and Lifestyle Characteristics. Does data on age, income, home ownership, and lifestyle segmentation indicate that local residents are more likely to purchase goods within a particular store category?  Use findings from your analysis of market demographics and lifestyles as described earlier in the toolbox.
• Economic Conditions. The overall health of the local and regional economy should be considered as it indirectly impacts local demand.  Do trends in the labor force, major employers, unemployment, street/highway traffic, and quality of life contribute to increased market demand for retail and services?  Use findings from your analysis of local and regional economic conditions as described earlier in the toolbox.

Estimating Non-Local Demand

While demand and supply analysis typically focuses on residents of the trade area, many communities also depend on non-local demand to support local businesses. These consumer segments can include:

• Tourists and visitors;
• Second homeowners; and
• In-commuters [those who travel regularly into your area to work].

Findings from business owner surveys, consumer surveys, and focus group sessions that include questions about non-local market segments can provide valuable insight regarding non-local demand. In addition, some communities conduct research specific to these market segments such as visitor intercept surveys, second-home owner geo-demographics analyses of their place of origin, and in-commuter paycheck surveys.

Return to top

Step 2: Inventory Supply

In a market analysis, supply is the amount of a good or service available for sale in the trade area. To analyze supply, a database of existing businesses must be constructed for each store category examined. The database of NAICS store categories should include all of the retail businesses within the trade area [the geographic area that was used to calculate demand].

Quantitative Measures

As noted, your database should include all current retailers in the trade area. Information on each business should include:

• Name of business;
• Address;
• Estimated sales range [if available]; and
• Estimated store size [in square feet].

There are a two ways to build your inventory of current supply—through secondary data and through a locally generated database.

The simplest method for building your inventory is to purchase a list of businesses from a national data provider. A number of national firms compile this information from Yellow Page listings, annual company reports, and other sources. Purchasing a list can be expensive depending on the number of businesses in your trade area. While some sources provide sales estimates per establishment, they typically do not include store size [square feet]—a useful method in comparing demand and supply. Further, the data may not be sufficiently accurate as there are often errors in store category coding, location, business status, etc.  You must take care to properly examine purchased lists for accuracy and fix any errors.

A second and often better option for assessing supply is to develop your own database. Certainly this is a time-intensive process, although it provides the most current and accurate information. Local databases are often compiled through walking or driving tours of downtown and/or trade areas. While collecting sales estimates will be nearly impossible using this method, it is possible, with a little practice, to estimate store size [see Estimating Store Size exhibit]. The building and business Inventory described earlier in the toolbox can be used to record this data.  Also, if your city has a GIS department it is possible they have building footprint data that could be used to estimate size.

Estimating Store Size

Example chain pharmacy in neighborhood shopping center [approximately 10,000-15,000 square feet]

Example traditional downtown street front pharmacy [approximately 1,000-2,000 square feet]

Gross leasable area [GLA] can be estimated by actually measuring a building’s street-front width and estimating its depth.  Square feet can be estimated by comparison with other stores.

Other Supply Considerations

Qualitative factors should also be part of the supply analysis. For each NAICS retail category, consider:

• Presence of a Market Niche. Are there clusters of businesses in a store category that have created a critical mass of activity and a distinct market niche for the business district? For example, a cluster of home improvement stores may not represent oversupply in the market if together they have created a destination.
• Position Relative to Other Business Districts in the Trade Area. Most communities contain multiple business districts. These may include malls, strip centers, commercial corridors, neighborhood centers, and more. The supply analysis must recognize that downtown may not be the ideal location for all store categories.
• Retail Vitality Relative to Other Downtowns. What is the retail supply in this category in other peer city downtowns? Are the selections of specialty retail in your downtown as interesting and exciting as those in other places? Use findings from your peer city comparison analysis section of the toolbox.
• Competitiveness of Existing Stores in the Trade Area. Are existing downtown stores in this category providing the merchandise and service that local shoppers demand?  Is the category already present in the district and is it thriving?  Are the stores chains or independents? Use findings from business owner surveys, consumer surveys, and focus group sections of the toolbox.
• Competitiveness of Existing Stores outside the Trade Area. Do surrounding communities with regional shopping centers and big box stores siphon business in this category out of the trade area? Use findings from business owner surveys, consumer surveys, and focus group sections of the toolbox.

Return to top

Step 3: Draw Realistic Conclusions

The final step reconciles information gathered in the first two steps in an effort to identify realistic business expansion and recruitment opportunities. For purposes of this toolbox, these opportunities are identified as specific business categories where demand exceeds supply.

Realistic expectations are important so that business development initiatives lead to achievable outcomes. The Retail and Service Business Opportunities Worksheet that follows can be used to summarize your analysis for each of the business categories being studied. Given the amount of information that must be gathered, we suggest completing this worksheet for high-prospect categories only.

Worksheet Instructions

1. Record the retail category and corresponding NAICS code.
2. Use one or more of the quantitative tools presented later in this section to help you calculate and record demand and supply. The purpose here is to determine if demand significantly exceeds supply, a signal that there may be business development opportunities. These tools, which vary in complexity, can help you measure demand and supply according to number of businesses, estimated sales, or estimated square feet.  They include:
   • Business Mix Analysis. A derivation of “threshold analysis,” this tool helps you compare the number of businesses in your downtown with other similar-sized communities.
   • Gap Analysis Calculator. This tool allows you to calculate trade area consumer spending and potential demand in terms of estimated sales, number of stores and square footage—then compare each with actual levels.
   • Pull Factors. Pull factors can be used to measure the relative strength of the local retail market and whether or not it is drawing in sales from other communities.  This tool does not necessarily represent the trade area, as it is based on political boundaries.
3. Record other considerations pertinent to the local trade area consumer. This information may come from surveys, focus groups, or demographic and lifestyle analyses. These considerations should provide additional insight on local consumer behavior and competition.
4. Record non-local consumer research findings that describe consumers who may shop in your community, but permanently reside elsewhere. They may include visitors, second homeowners, and in-commuters.
5. Based on the above, develop and record business expansion and/or recruitment recommendations. The quantitative comparison of retail demand with supply provides an initial measure of market opportunities. If there is a significant amount of unmet demand, there may be opportunities for existing businesses to expand or for the community to recruit new businesses. Business development opportunities also may exist in areas where supply is greater than demand, but special conditions offer potential. For example, some communities draw customers from outside their trade area by creating a niche market. You should also consider findings from other research on non-local consumers in making recommendations. Recommendations may center on:
   • Best location with regard to visibility, traffic, and complementary businesses, whether chain or independent;
   • Size in square feet;
   • Price points;
   • Expected market segments; or
   • Downtown enhancements needed.

     Your recommendations should highlight business categories that promote a vibrant mix in the district, complement existing businesses, and offer reasonable evidence that an expanded or recruited business will have opportunity for success.

6. Recommendations must undergo a check for reasonableness. In other words, do a reality check. It is important to step back from the analysis and ask if your recommendations are based on actual consumer behavior and business location practices. Consider the following for this business category:
   • Industry Trends. Do businesses of this type locate in downtown districts? Can they co-exist among large-format stores on the edge of town? Click on Industry Links to access trade associations for store- specific research.
   • Principle of Retail Hierarchy. Can your community support this business? Retail hierarchy ranks communities based upon the carrying capacity for certain types of businesses and the distances shoppers are willing to travel.  A downtown may be destined to only serve a minimum convenience market [gas station and grocery store].  Conversely, it might be large enough to offer a complete shopping market with retailers such as book stores, specialty foods and sporting goods. For more information, see the factsheet on Retail Hierarchy.
   • Other Successful Downtown Businesses Examples. Examples of similar businesses that are successfully operating in other downtowns may be helpful. The Innovative Downtown Business Online Clearinghouse provides examples of specific stores that have been recognized as generators of traffic to their respective downtowns.

Retail and Service Business Opportunities – Sample Completed Worksheet

Gap Analysis Calculator

NAICS Categories Analyzed

This analysis provides an estimate of demand and supply in the Downtown Study Area for 14 categories of retail and eating/drinking places.  Most of these categories are presented at the three-digit NAICS level. The categories used [see following illustration] reflect the types of businesses found in many Downtowns. Again, various categories are adjusted to exclude large format stores including home centers, supermarkets, warehouse clubs and supercenters.

Geographic Definitions

The Downtown Study Area used in this analysis represents the central area of concentrated commercial activity.  It is often defined by a Business Improvement District or Main Street District boundaries.

A Trade Area is the geographic area from which a community generates the majority of its customers. Knowing the size and shape of the Trade Area is important because it allows for measurement of the number of potential “resident” customers and their spending potential.

Market Segments

For many communities, Downtowns can capture spending from three market segments.  These segments include:

1. Residents of the Trade Area
2. Workers of all employers in the Downtown Study Area
3. Visitors including leisure and business travelers to the County

The calculation of demand for these market segments follows.

1. Trade Area Resident Demand

The demand for the subject Study Area is based on a “proportionate share” of the broader Trade Area as defined earlier. Typically, not all categories are represented by the same Trade Area as some stores pull from a larger “destination Trade Area” while others pull from a smaller “convenience Trade Area.”  The subject Study Area will compete for a share of Trade Area demand.

Consumer spending potential for each business category is calculated as in the following drugstore example: