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4 Benefits of Trade Area Analysis in Scouting a New Store Location

June 9, 2021
Elianne Marcus

To be successful in business, you need to know more than just what your customers want. You also need to know where to reach them. This has led companies to analyze geographic areas for market potential by considering things like available transportation, competitor locations, population demographics and lifestyles, and even when and where people in an area move based on location data from mobile devices.

All of this falls under the umbrella of trade area analysis. But what is that, and how exactly does it help your business get a leg up? We’ll answer those questions here by covering:

We’ll start with defining what trade area analysis is, and then get into the benefits of trade area analysis.

What is trade area analysis?

Trade area analysis is studying and understanding trade activity within a given geographical area. This includes things like what types of businesses are there (and how many), along with how many potential customers are in the area, where they are coming from (or going), and what they are buying.

For more information, see our Ultimate Guide to Trade Area Analysis.

Top 4 benefits of trade area analysis: choosing the right location

So why perform trade area analysis? Well, as we alluded to, there are many different factors that determine whether a business succeeds or fails in a given area. These include considerations like how much demand there is for their products or services, how easy they are to access, and how many competitors are nearby (and how well-established they are).

In short, trade area analysis provides vital information for making smart decisions on where businesses need to go and how they need to adapt. It doesn’t matter whether you’re part of an individual company’s management group or on a city planning committee. You need trade area analysis in order to give you these four key edges:

1. Informed site selection

Market share of 5 Whole Foods stores in Los Angeles, California

Choosing a location for a store is a critical decision for your business. It can determine not only how many customers you get, but also how much purchasing power your customers will have based on where they come from. It also affects who you’ll be in competition with. Without trade area analysis, you might as well be throwing a dart at a map while blindfolded. Let us explain.

Trade area analysis is one of the best ways to determine whether a particular site would be a good fit for a certain business. For example, you might want to set up a shop in an area with high demand for your industry’s goods or services, but is currently being underserved. Of course, you’re also going to want to make sure that the purchasing power of your potential customers outstrips your operating costs. 

Another important factor is how accessible your business will be for both local residents and out-of-towners. That includes via public transportation as well as private vehicles, so be sure to have ample parking space. Consider how vital this is for businesses essential to people’s health and wellness, such as grocery stores.

2. Competitive intelligence

Map showing service areas of competing superstore chains

While you may see business opportunities in an area, remember that other companies in the same industry as you – i.e. your competitors – may also be seeing those opportunities. In fact, they may have already beaten you to the punch.

Trade area analysis can give you an overview of where your competitors are and who they’re likely serving. That way, you can avoid spots where competitors are already meeting people’s needs and focus on sites where the population is underserved. You can also weigh the opportunities and risks of setting up shop somewhere where you may be competing with another company over the same customers.

3. Personalized marketing and advertising

Lifestyle demographics of people living in the area of specific Target stores

When selecting a trade area to do business in, it’s not enough to know just who might be buying from you. You also have to keep in mind what specifically they’ll likely want to buy. After all, a prime location doesn’t do you any good if you aren’t selling what the nearby demographics are looking for. Even worse is if you have what they want, but they have no idea that you carry it.

This is where trade area analysis comes in. By looking closely at people’s purchasing behaviors, you can get an idea of the kinds of lifestyles the people in an area have. Based on that information, you can adjust things like your store layout, inventory, and marketing accordingly.

For instance, say that your research reveals a significant portion of the population near your store location is into home improvement. You can make the section for that type of merchandise in your store bigger, or put it closer to the entrance so it’s easy to access. Or, when you send out promotional materials, you can feature construction tools in a larger section near the front or top so that they’re the first things your customers see.

4. Supply chain and inventory planning

Graph showing shopping activity trends by demographic in Anaheim, California for a 4-month period

With trade area analysis, you can delve even deeper into ways to manage your business. For instance, you may notice the days or even times of day when customers in the area are most likely to be out shopping. You can also factor in the types of products that they usually shop for on those days and/or at those times. This can help you narrow down who your prime customers will likely be, rather than assuming it will be everyone within a certain distance of your store.

Using this information can also help you plan your supply and inventory systems, even down to each individual product you carry. You can plan to have shipments come in before days and times where your stores are busy and shoppers will likely be buying specific products. You can also estimate how much of each product you should order so that you’ll have most things in stock, even when they’re in high demand.

This even applies to special dates and other holidays. During these times, demand for certain types of products may be higher than normal, or high when it’s otherwise nonexistent the rest of the year. With trade area analysis, you’ll know what to stock, how much of it to stock, and when to stock it by.

In summary, trade area analysis is important for four main reasons. First, it helps you locate your stores at sites that meet the needs and demands of nearby customers. Second, it steers you away from locations where competition from similar stores will too heavily impact your business. Third, it informs your marketing strategy, inventory, and store layout based on what your likely customers are interested in buying. And finally, it helps you plan your supply chain around what products will likely be in demand, and when.

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