Mega-retailer Target recently announced that it would be closing the doors of eleven locations by February 1, 2015. The company’s press release stated, “The decision to close a Target store is only made after careful consideration of the long-term financial performance of a particular location.”[i] Target’s team of site selection experts have certainly been doing a great job considering their $72.6 BILLION in revenue for 2014. [ii] That being said, what were the root causes behind the closing of these particular stores?
This blog post will document four key principles that may help you with your next site selection analysis:
1) Change is inevitable. As conditions change, real estate strategies must change. Market analytics are important during the initial site selection phase and beyond as markets continuously evolve.
2) Although customers may like the convenience of shopping at a location close to their home, cannibalization and competition may make closely spaced stores financially unfeasible.
3) Suburban and small town locations can be risky endeavors. A small base of customers may have tendencies like doing more of their shopping in locations near their work or in larger shopping areas in different towns, and thus these small town locations may fail to generate enough revenue to make the site viable.
4) Defining a trade area accurately requires accounting for physical, psychological, and competitive barriers. In some cases, simple rings and drive time areas may not be adequate when making million dollar decisions.
It is important to note that it is quite possible that Target’s site selection team made a good decision when each of these stores were opened, but as conditions changed, they had to change their strategy. We are not criticizing Target’s real estate decisions. (Note: Target is not a 4C client and we have only used information available in Esri’s Business Analyst software to do the following analysis.)
Excess Retail Supply for the Customer Base in Carrolton
The Target in Carrolton is one that is scheduled to be closed. Carrolton is fifteen miles north of downtown Dallas, in the middle of the Dallas-Fort Worth-Arlington metroplex. Looking at the map, this store is, in large part, neighborhood based. It’s not located in a large shopping center with many other business demand generators. The President George Bush Parkway is only several hundred feet from this site, however the nearest exit is closer to another Target as well as a Walmart.
For our research, we have identified that Target caters to middle class households comprised of families as well as singles. Trade areas were developed using a proxy customer layer based on census block points and business locations. Demographics were calculated for the trade areas and when comparing the Carrolton trade area with all of the Dallas area Targets, Carrolton finds itself in the middle of the pack when it comes to income, total population, population growth, and population age 25-65. Community Tapestry segmentation indicated similar types of consumers. The demographics for this mostly neighborhood-customer-based Target location seem OK, so what is the problem with this location?
Approximately 70% of Target stores in Dallas have a Walmart within 1 mile. No other retailer came close to providing this level of consistent competition. Most likely, the Walmart locations within the Carrolton trade area greatly affect the expected customer base. Carrolton’s trade area has about 65,000 people between the ages of 25 and 65 that could be considered potential customers, which is a relatively average value for the trade areas for Targets around Dallas. However, no other Target stores in the area are as precariously placed between several Walmart stores. A trade area with average values may not be enough in this situation.
The answer may also be in the close proximity of other Targets. Target locations in the Dallas-Fort Worth area have an average distance of 5.5 miles between stores. The closest Target to Carrolton is in Addison, TX, 3 miles southeast of the Carrolton store. In addition, it may not only be the close proximity of the stores, but the strength of these other locations that may be affecting Carrolton sales. Using Dun & Bradstreet data, we mapped the top twenty percent of Target stores nationwide based on estimated sales volume. The Carrolton location is surrounded by several of these top-performing stores. This supports a hypothesis that the Carrolton location is being affected by cannibalization. Customers in the Carrolton trade area may actually be supporting the other Target locations due to their proximity to work, entertainment destinations, or community patterns like religious gathering places or community group meeting places.
Poor Performance from a Small Customer Base in Clinton
Another pattern was a Target being located in a relatively remote community, with a marginally viable customer base. Target has done well in many parts of the country where low population densities are found in trade areas surrounding their stores. Unfortunately, this is not the case with the store in Clinton, Iowa. This Target is the only one located in Clinton, a city of about 27,000. The closest Target is 23 miles away in Davenport, IA. To make matters worse, there is a Walmart Supercenter within a 0.3-mile radius of the Clinton Target, which will reduce the customer base even further.
To find out more about the community, drive time rings were used to visualize a possible customer base. 28,600 people live within a 10-minute drive, 39,000 within 15 minutes, and 50,800 people within 20 minutes. Looking strictly at drive time areas for similar, non-clustered Targets, the numbers don’t bode well for Clinton. Isolated Targets nationwide have 21% more people within 20-minute drive time areas than Clinton’s does.
Negative population growth in Clinton is also discouraging. Trade areas for non-clustered Targets exhibit some growth, with an average growth rate of 0.62% from 2010 to 2014, but Clinton’s was -0.36%. Also, the 2014 average household income in Clinton is 10% lower than the average household income found in the trade areas for similar stores.
On top of marginal demographic characteristics, local buying tendencies and consumer preferences may be influencing this closing. Using Esri’s Community Tapestry Segmentation, the dominant segment in the trade area around Clinton is “Traditional Living.” According to Esri, this segment lives in low-density neighborhoods in the Midwest, and typically shops at discount stores such as Walmart and Kmart[i]. Although there is some difference between Walmart and Target’s offerings, consumer buying preferences in the region may be forcing Target out of Clinton. It is also possible that people in Clinton may work in Davenport and shop at the Target locations near their work location.
Trade Areas Need to Account for Physical, Psychological, and Competitive Barriers
The Target in Castleton, Indiana, is also being closed. Located adjacent to an exit on I-465, the beltway encircling Indianapolis, this Target is 11 miles north of downtown Indianapolis.
Using proxy customer data to define trade areas did not yield any clues to why this location would be closing. The population base is within one standard deviation of the mean for all Indianapolis Targets, average household income higher than a majority of trade areas in Indianapolis, and the population in Castleton is growing. Why is this store closing?
It is possible that the initial trade area did not adequately account for physical, psychological and competitive barriers. Castleton and other suburbs around the northern Indianapolis beltway are fragmented by several major highways that run through the area. To better account for neighborhood boundaries, block group boundaries were used to create new trade areas.
The numbers after this trade area readjustment begin to explain what’s really going on. Dead last in trade area population, next to last in median household income and percentage of population ages 25 to 65, the Castleton Target’s trade area is not as supportive as previously thought. It is possible that the anticipated trade area could have been twice as large when the store first opened up. Competition and additional Targets may have come in later and drastically changed the landscape, leading to the decision to close this location.
Another underestimated psychological barrier for this Target may be its proximity to a large shopping mall (across the road) while not actual being in the shopping mall. Shoppers may find it counterintuitive to park, shop at the mall, get back in the car for two minutes and have to park again to shop at this Target.
This post has only shown the tip of the iceberg when it comes to market analysis. The issues are complex, but with the right data–and more importantly, the knowledge and experience to interpret it correctly— you can set your business up for long lasting success. Please contact us to see how we can use analytics to solve the problems facing your organization.