Market Area Analysis

Geographers apply central place theory to create market area studies that assist service providers with opening and expanding their facilities (see Sustainability & Our Environment feature). And in a severe economic downturn, market area analysis helps determine where to close facilities.

Profitability of a Location

The best location for a factory is typically described as a large region, such as auto alley. For service providers, the optimal location is much more precise: One corner of an intersection can be profitable and another corner of the same intersection unprofitable.

Major U.S. consumer services, such as supermarkets and department stores, employ geographers to determine the best location to build new stores. Geographers use the two components of central place theory—range and threshold—to determine whether a location would be profitable, and conversely where it would not be profitable. Here’s how:

1. Define the market area. The first step in forecasting sales for a proposed new consumer service is to define the market or trade area where the store would derive most of its sales. The market area of a department store is often defined as the ZIP codes where two-thirds to three-fourths of the customers live.

2. Estimate the range. Based on the ZIP codes of credit-card customers, geographers can estimate the range for the service. The range is around 15 minutes for a store like Family Dollar and 30 minutes for a store like Target.

3. Estimate the threshold. The threshold varies for each service. The threshold is around 25,000 for a store like Family Dollar and 100,000 for a store like Target. People are counted only if they have sufficient income to shop regularly at the store.

4. Predict the market share. The proposed new consumer service will have to share customers with competitors. Geographers typically predict market share through the so-called analog method. The geographer identifies one or more existing stores in locations judged to be comparable to the location of the proposed store. The geographer then applies the market share of the comparable stores to the proposed new store.

Retailers in Dayton, Ohio

Compared with Target, Family Dollar has a lower threshold and lower range. Target stores are more likely to be located in higher income areas than are Family Dollar stores.

Family Dollar Has a Relatively Low Threshold and Range

Target Has a Relatively High Threshold and Range

Pause & Reflect 12.2.3

In Figure 12-13, why is the number of Target stores in the Dayton area lower than that of the Family Dollar stores?

Gravity Model

Geographers have adapted the gravity model from physics. In retailing geography, the gravity model measures the level of interaction between a person and a service. The gravity model predicts that the optimal location of a service is directly related to the number of people in the area and inversely related to the distance people must travel to access it. The best location will be the one that minimizes the distances that all potential customers must travel to reach the service.

According to the gravity model, consumer behavior reflects two patterns:

1. The greater the number of people living in a particular place, the greater the number of potential customers for a service. A neighborhood that contains 100 families will generate more customers than an individual house containing only 1 family.

2. The farther people are from a particular service, the less likely they are to use it. People who live 1 kilometer from a store are more likely to patronize it than people who live 10 kilometers away.

At some point, interaction between a person and a service does not occur because the distance between them is too great. Nutritionists are especially concerned with people who live relatively far from sources of healthy food. An area that has limited access to affordable and nutritious food is known as a food desert.

Sustainability & Our Environment

Identifying Food Deserts

The U.S. Department of Agriculture (USDA) Economic Research Service has mapped the distribution of food deserts across the United States. To do so, it applied market area analysis, including the gravity model.

U.S Food Deserts

The USDA divided the country into a grid of squares measuring 0.5 kilometers per side and measured the distance from the geographic center of each square to the nearest grocery store. A square was considered to be part of a food desert if the square contained primarily low-income residences and the distance from the center of the square to the nearest grocery store was greater than 1 mile in an urban area and greater than 10 miles in a rural area. The USDA reported that 23.5 percent of Americans lived in a food desert in 2010.

Living 1 mile from a grocery store would not constitute a food desert for people with cars. However, a low-income resident in an urban area may not own a car and may not live near a bus or subway.

The USDA’s Food Access web page allows detailed identification of food deserts. For example, the graph below shows food deserts in Dayton, Ohio. Are Dayton’s food deserts in high-income areas?

Food Deserts in Dayton, Ohio