Choosing new store locations

23Feb10

When I visited Trader Joe’s over the weekend, the cashier asked for my zipcode. That’s a common question in many retailers, but unheard of at this one. I asked him why they were collecting that info, and he said they’re trying to figure out where customers live in order to choose the locations for their next few stores.

I don’t know how they plan to crunch these numbers, but it’s interesting to look at a few options for making sense of the data. In the most simplistic approach, you would add up the raw number of shoppers in each zipcode, and put new stores in the areas with the most shoppers. But that’s a mistake, since it doesn’t take into account the number of lost customers who never shop there in the first place.

For instance, almost nobody in my area shops at Trader Joe’s. It’s too far away, and most people are fairly lazy about their shopping habits. Almost every grocery bag I see is from the two closest grocery stores. However, a ton of these people would shop at Trader Joe’s if it was close by. But if those people don’t make the trek there today and never get their zipcode counted, how is the corporate office going to know that a new store should be placed there?

The solution is to look at those zipcodes that account for relatively few customers, but where the total residential population is large. If you’re only capturing say 1% of the people who live in an area because the existing stores are too far away, then adding a new store in that area should be a very profitable endeavor. As another data point, you can look at the average monthly spend from customers in those relatively distant areas. All else equal, if customers from a certain area tend to make big purchases or come to the store more often than the typical shopper, that area should be even more attractive for a new location.

Determining where to open new stores is a complicated task, and I’m sure many more factors come into play besides the ones I’ve mentioned here. But regardless of the process you use to select new locations, try to keep an open mind and don’t place too much emphasis on where your existing customers are coming from. After all, you want to attract new customers that wouldn’t shop with you otherwise, rather than just shifting around the customers you have today.



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