With the high street once again in a state of flux, retailers are starting to re-evaluate their presence – namely, how big the optimal catchment size is for their stores and how best to cover the UK most effectively.
What seems like a straightforward questions at first – surely all retailers have to do is measure the existing catchment areas of the current portfolio of stores and extrapolate the data from there – is not quite as simple as it seems.
For retailers, location planning can throw up some interesting complications with no one set rule that applies across the board:
- Competition from other retailers varies significantly from location to location
- Catchments vary in size by population density and the shape of the road network
- The choice of destinations in the area influences the catchment size and shape
- Bigger and better stores have bigger catchments
- Product price, speciality and frequency of purchase influence how far people are willing to travel
- People are willing to travel varying distances or times for different types of goods. You would for example be willing to go much further for a new car than a pint of milk
- The size and quality of the destination influences the attractiveness of the destination. If you are located in a bigger and better place or a retail park with many large complementary or even competitor outlets then the catchment will be bigger
One of the most difficult challenges of all for retailers is matching your catchment size area to product demand. Catchment areas start large when customers can only buy a particular product in limited places, and get smaller as the choice of purchase destinations grows. For example, when the UK had a limited number of Ikeas or B&Q Warehouses people had to, and were prepared to, travel longer distances to find a store. But as demand increases and more stores open, catchment sizes begin to shrink simply because customers don’t have to travel as far to find a comparable price or product.
So with this in mind, what is the most effective way for retailers to plan their locations? How many town centre locations do I need to be in?
A great tool that’s easy for retailers to use is a gravity model – a very traditional model of the interaction between two population centres based on Newton’s Law of Universal Gravitation. There is, of course, much more modern iterations of this model but the principles remain the same.
Such models define overlapping catchments for shopping centres and town centres in Great Britain using the relative pulling power of the centres and their accessibility to the resident population. Using this definition, retailers can calculate the relationship between increasing the number of stores and the rising percentage of the country’s households that can potentially be reached.
Let’s take for example a retailer that only locates in town centres, only places one shop in each centre and appeals equally to all sections of the population.
If a retailer locates stores using this method, it would probably reach half the country’s population with 152 locations and 70 per cent with 355 stores located in town centres. But beyond this point, certain retailers would struggle to maintain the relationship between catchment size and demand. For many comparison goods chains – clothes retailers, electrical retailers and the like – the magic number falls at about 440 places, covering 75 per cent of the country.
To support anything more than about 450 shops, the retailers’ core offer has to have a significant convenience component. For this reason those types of retailer with more than 450 stores are often convenience stores, supermarkets, banks, betting shops, fast food outlets, filling stations coffee shops and charities.
Few non-convenience retail chains have larger numbers of outlets – exceptions to this rule include Boots, Lloyds pharmacy, Superdrug, New Look, W H Smith,Thornton’s and Clarks. These retailers have a long tail of shops based on increasingly few consumers and in some cases has resulted in past and planned reduction in numbers especially in smaller markets. In the last few years Woolworths, Peacocks, Game and now Clinton Cards have been stark failures of store numbers massively outstripping demand, with store numbers significantly in excess of the 400 mark. This can be one factor that makes them more vulnerable to structural change and stronger competition.
It is a clear fact that the additional number of households retailers will reach falls rapidly as they add more and more small shopping centres. If a retailer knows how many households are needed to support an outlet, they can easily calculate where to apply a cut off, beyond which viability for additional shops becomes questionable. For example if it takes 40,000 households to support a particular shop, retailers should stick to a maximum of around 550 shops. In reality it may well be many less as a retail offer may only appeal to a subset of the population based on age, affluence, family structure and so on.
Another issue in working out the ideal number of shops is profitability. It is a sad fact that in terms of the size and quality of a town that you get what you pay for. Larger places do reach more consumers but more often than not they also have much higher costs. This then raises another complexity where values and pitch quality need to be traded off in order to find the ideal locations.
With the above analysis it’s reasonable to say that most retail chains do not need many more than 400 to 450 outlets to cover the UK market. The UK retail market is littered with examples of chains over-expanding into increasingly smaller and more marginal locations. Retailers who have more or feel the need to open a larger number should take care unless the business relies heavily on a local convenience market.