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The Ultimate Guide to Trade Area Analysis: in Retail and Beyond

June 28, 2021
by
Briana Brown

Trade area analysis is an important practice that can forecast whether a business will succeed or fail in a given geographical area. It gives you insight into who your potential customers are, what they likely want, and where they typically come from (and when). Plus, it helps you identify who your possible competitors are and how (or if) they will impact your store’s performance.

As you might expect, many different considerations and processes go into this type of research, and we’re synthesizing them into a complete overview of trade area analysis by covering the following topics:

Let’s start with the basics by answering a fundamental question: what is trade area analysis?

What is trade area analysis?

Trade area analysis (TAA) is sizing up a geographic area to see what opportunities exist for businesses and organizations to serve that area. It can be measured in many ways: distance, transportation accessibility, consumer demographics (e.g. population, income, lifestyle), competitor influence, and more.

A walk and drive time analysis of grocery stores near Jackson, Tennessee

Trade areas are geographic areas that store locations pull in customers from. They can interchangeably be called catchment areas. Any place that attracts visitors can have them, but they are particularly used in the context of retail stores. For example, the map above shows the walking and driving time trade areas of grocery stores in Jackson, Tennessee. 

3 types of trade area analysis

Trade area analysis can be used in a number of different capacities to enable different industries and niches. These are the top use cases for performing a detailed TAA.

1. Trade area analysis in retail

Trade area analysis in retail is the most common use of the process. It can inform decisions on where to set up shops based on factors such as how many people in an area can easily get to a store, how much money they have, and what they’re looking to buy. Also important to consider are how many competitors are in the area, how likely they are to draw customers away from your store, and how well they already fill the need for the specific industry you’re trying to introduce.

Trade area analysis can inform even more granular decisions as well. Based on who your customers are and what types of goods they like to buy, you can rearrange your marketing materials – or even an entire store – to appeal to certain demographics and feature products that you think they would like.

As an example, the map below is part of a report that examines the increasing patronization of home improvement stores (specifically Home Depot and Menard’s) in Milwaukee, Wisconsin after the onset of the worldwide COVID-19 pandemic in early 2020. The report notes that while there wasn’t a significant change in what was being bought, there was a major shift in who was buying it: generally younger, higher-income urban people who were typically most active at night. So an opportunity opened up to target that demographic.

As an example, the map below is part of a report that examines the increasing patronization of home improvement stores (specifically Home Depot and Menard’s) in Milwaukee, Wisconsin after the onset of the worldwide COVID-19 pandemic in early 2020. The report notes that while there wasn’t a significant change in what was being bought, there was a major shift in who was buying it: generally younger, higher-income urban people who were typically most active at night. So an opportunity opened up to target that demographic.

2. Healthcare trade area analysis

Whether you’re running a municipal hospital or a private clinic, TAA can be helpful in planning healthcare as well. The most obvious use is in making sure that, on a regional level, all communities have adequate access to healthcare when they need it. 

But you can also look at what specific types of healthcare are available in an area and who is using them: both who they are demographically and where they’re coming from. For example, if you notice a lot of athletic and/or elderly people coming in from out of town to receive orthopedic surgery, there might be an opportunity to establish or expand a clinic to accommodate them.

Shopping activity trends by demographic in Anaheim, California over a 4-month period

3. Community planning trade area analysis

Governments can use trade area analysis for planning other services besides healthcare, too. For instance, they can use it when planning to build transportation networks so that isolated or underserved communities have better access to urban commercial centers. Or, they can convert areas with high foot traffic but low commercial value into parks or other green spaces. 

They can even use demographic data to plan community initiatives. As an example, if a lot of people in their area are environmentally-conscious, they can focus on events like neighborhood garbage clean-ups, plant exchanges, and eco-fundraisers.

Example of a trade catchment area for a store

Factors that influence retail trade analysis

There are several types of data that you’ll need to consider in order to properly conduct trade area analysis in retail management. Three key ones are as follows:

  • Demographics – People in different places have different wants, needs, lifestyles, and budgets. Knowing what your customers want to buy and how well they can afford it are two basic pieces of information for deciding whether or not your business will be successful in a certain area. 
  • Transportation Networks / Accessibility – Accessibility isn’t just about the distance that customers have to travel to get to a store. It also takes into account the availability of nearby transportation routes to get around obstacles (such as mountains, bodies of water, or other buildings), as well as how frequently they’re disrupted by things like traffic, accidents, and inclement weather.
  • Competition – You also have to keep an eye on what potential competitors are doing. If there are stores in an area that are in the same industry as you and serve the same demographics as you, it may be tough to break into the market. You may have to offer something that they don’t (like a more convenient location, or a bigger or more unique inventory), or else look for opportunities elsewhere.

Top 4 benefits of conducting trade area analysis

To better explain why trade area analysis is conducted in the first place, let’s look at some of the advantages that the information gained from it can provide to your business. There are four main ones:

  1. Informed site selection – By analyzing a trade area, you’ll gain information key to deciding where to locate your stores. For example, you can set up shop in areas that are being underserved by your industry, or where you know there are people whose demographic profiles indicate they will likely want to buy (and be able to afford) your products.
  2. Competitive intelligence – Of course, studying your potential competitors can be useful as well: where they’re located, who they’re likely selling to, what they’re selling, and how successful they are. Then you can choose whether to avoid them and look for less contested opportunities, or try to muscle in on their turf by offering attractive alternatives.
  3. Personalized marketing and advertising – If you understand customers’ lifestyles within a trade area, you can modify your marketing campaigns or even your store layouts to be more effective. For example, you can put ads for certain kinds of products front and center in flyers or e-newsletters to get them maximum exposure. You could also put sections with the products customers most want near the entrance of the store. 
  4. Supply chain and inventory planning It’s to your advantage to know not only what your customers want, but when they want it. By tracking when customers typically come to your store and what they typically buy, you can plan your supply chain and inventory around that data. That way, you can make sure you have the right products in stock for when your customers are likely showing up to buy them.

For more detailed explanations, see our post on the benefits of trade area analysis.

Trade area analysis methods & techniques

There are also several different approaches to trade area analysis, each with strengths and weaknesses. Which one you use will depend on things like what kind of business you run and what products or services you actually sell. Here are three common models:

  • Buffer trade areas – These map out a trade area around a set geographic distance(s) away from a store. Some variants, like the Huff Gravity Model, will also take into account trade areas of competitors in determining the shape of the catchment area or how likely customers in contested areas will choose one store over another.
  • Walk/drive time trade areas – These measure how much time it takes to get to stores based on distance, access to transportation routes, and any disruptions to those routes (such as traffic or construction). They are useful for convenience stores and other types of businesses where customers are expected to choose the most efficient location available to them.
  • Mobility trade areas – These use anonymized location data from mobile devices to plot out where customers at a store go throughout the day. This is useful for knowing things like approximately where they live (or at least where they’re coming to shop from), what other stores or services they’re visiting (which can give insights into their lifestyles), and even which stores they aren’t shopping at (so you know who is and isn’t competing with you).

We talk more in depth about these models in our post on trade area analysis methods, techniques, and theories.

10 trade area analysis examples & templates

So what does trade area analysis actually look like in action? We’ve already shown a few examples throughout this guide, but here are 10 more if you want to see what kinds of things TAA measures and how in-depth it can go. 

For even more samples to draw from, see our expanded list of 17 trade area analysis templates and examples. 

That’s our exhaustive rundown of trade area analysis. Remember, this critical process is best accomplished with precise and thorough location data. And there’s no better source for that than SafeGraph.

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