Selecting the right location for a new shop is probably the single most important factor in the profitability of a consumer service. Central place theory helps to explain how the most profitable location can be identified. Central place theory was first proposed in the 1930s by German geographer Walter Christaller, based on his studies of southern Germany. August Lösch in Germany and Brian Berry and others in the United States further developed the concept during the 1950s.

Market Area of a Service

A central place is a market center for the exchange of goods and services by people attracted from the surrounding area. The central place is so called because it is centrally located to maximize accessibility. Businesses in central places compete against each other to serve as markets for goods and services for the surrounding region. According to central place theory, this competition creates a regular pattern of settlements.

The area surrounding a service from which customers are attracted is the market area, or hinterland. A market area is a good example of a nodal region—a region with a core where the characteristic is most intense (Figure 12-4). To establish the market area, a circle is drawn around the node of service on a map. The territory inside the circle is its market area.

Market Area, Range, and Threshold

The market area is the area of the hexagon, the range is the radius, and the threshold is a sufficient number of people inside the area to support the services. Below explains why a market area is best depicted with a hexagon instead of a circle or square.

Because most people prefer to get services from the nearest location, consumers near the center of the circle obtain services from local establishments. The closer to the periphery of the circle, the greater the percentage of consumers who will choose to obtain services from other nodes. People on the circumference of the market-area circle are equally likely to use the service or go elsewhere.

The United States can be divided into market areas based on the hinterlands surrounding the largest urban settlements. Studies conducted by geographers Alasdair Rae and Garrett Nelson use U.S. Census data for travel from home to work to identify what they call megaregions. A generation earlier, C. A. Doxiadis, Brian Berry, and the U.S. Department of Commerce allocated the 48 contiguous states to 171 functional regions centered around commuting hubs, which they called “daily urban systems.”

U.S. Megaregions

Regions were identified on the basis of commuting patterns.

Pause & Reflect 12.2.1

Do you or someone you know live in a megaregion? How far are you from the city at the center of your megaregion?

Range of a Service

Each service has a distinctive market area. To determine the extent of a market area, geographers need two pieces of information about a service: its range and its threshold. How far are you willing to travel for a pizza? To see a doctor for a serious illness? To watch a ball game? The range is the maximum distance people are willing to travel to use a service. The range is the radius of the circle (or hexagon) drawn to delineate a service’s market area.

People are willing to go only a short distance for everyday consumer services, such as groceries and pharmacies. But they will travel longer distances for other services, such as a concert or professional ball game. Thus a convenience store has a small range, whereas a stadium has a large range. In a large urban settlement, for example, the range of a fast-food franchise such as McDonald’s is roughly 5 kilometers (3 miles), the range of a casual dining chain such as Steak’ n Shake is roughly 8 kilometers (5 miles), and the range of a stadium is more than 100 kilometers (60 miles).

As a rule, people tend to go to the nearest available service. For example, someone in the mood for a McDonald’s hamburger is likely to go to the nearest McDonald’s. Therefore, the range of a service must be determined from the radius of a circle that is irregularly shaped rather than perfectly round. The irregularly shaped circle takes in the territory for which the proposed site is closer than competitors’ sites.

The range must be modified further because most people think of distance in terms of time rather than in terms of a linear measure such as kilometers or miles. If you ask people how far they are willing to travel to a restaurant or a baseball game, they are more likely to answer in minutes or hours than in distance. If the range of a good or service is expressed in travel time, then the irregularly shaped circle must be drawn to acknowledge that travel time varies with road conditions. “One hour” may translate into traveling 100 kilometers (60 miles) while driving on an expressway but only 50 kilometers (30 miles) while driving city streets.

Threshold of a Service

The second piece of geographic information needed to compute a market area is the threshold, which is the minimum number of people needed to support the service. Every enterprise has a minimum number of customers required to generate enough sales to make a profit. So once the range has been determined, a service provider must determine whether a location is suitable by counting the potential customers inside the irregularly shaped circle. Census data help to estimate the potential population within the circle.

How potential consumers inside the range are counted depends on the product. Convenience stores and fast-food restaurants appeal to nearly everyone, whereas other goods and services appeal primarily to certain consumer groups.

For example:

• Movie theaters attract younger people; chiropractors attract older folks.

• Poorer people are drawn to thrift stores; wealthier ones might frequent upscale department stores.

• Amusement parks attract families with children; nightclubs appeal to singles.

Developers of shopping malls, department stores, and large supermarkets may count only higher-income people, perhaps those whose annual incomes exceed $50,000. Even though the stores may attract individuals of all incomes, higher-income people are likely to spend more and purchase items that carry higher profit margins for the retailer. A large retailer has many locations to choose from when deciding to build new stores. A suitable site is one with the potential for generating enough sales to justify using the company’s scarce capital to build it.

The Geometry of Market Areas

To represent market areas in central place theory, geographers draw hexagons around settlements . Hexagons represent a compromise between circles and squares. Like squares, hexagons nest without gaps.

Why Geographers Use Hexagons to Delineate Market Areas

1. THE PROBLEM WITH CIRCLES Circles are equidistant from center to edge, but they overlap or leave gaps. An arrangement of circles that leaves gaps indicates that people living in the gaps are outside the market area of any service, which is obviously not true. Overlapping circles are also unsatisfactory, for one service or another will be closer, and people will tend to patronize it.

2. THE PROBLEM WITH SQUARES Squares nest together without gaps, but their sides are not equidistant from the center. If the market area is a circle, the radius—the distance from the center to the edge—can be measured because every point around a circle is the same distance from the center. But in a square, the distance from the center varies among points along a square.

3. THE HEXAGON COMPROMISE Geographers use hexagons to depict the market area of a service because hexagons offer a compromise between the geometric properties of circles and squares. Like squares, hexagons nest without gaps. Although all points along the hexagon are not the same distance from the center, the variation is less than with a square.