Spatial delineation of market areas: a proposed approach

2014-03-31In business sectors such as consumer staple goods, the location of a retail store is central to a consumer’s decision to purchase items at a given location. As such, customers of some retail segments (e.g. groceries) could be considered spatial entities, with behavior directly tied to their location relative to the location of a retail store. A “trade area” represents the geographical space from which a business draws customers and “market area” refers to the larger geographic region in which several businesses compete. Market areas are usually defined by an arbitrary spatial extent, such as a political boundary or radius around a given point, which injects arbitrariness into any market share calculations. In the staple goods retail sector, travel time and physical location are critical to consumer store preference. Therefore, the accurate delineation of a store’s geographical trade area and surrounding market is needed for precise performance measurement and market share calculation. A framework is proposed for defining retail market areas based on degrees of spatial separation between a store and surrounding customers and competitors. Four degrees of customer separation are proposed, classifying customers based on their consideration of, and/or preference for, a specific store location. The result is a less arbitrary definition of a market. This approach was modeled for the grocery sector of Worcester, Massachusetts and the resulting market share calculations were compared and implications of using one method over another are discussed