Choosing a location is a huge decision, especially for small and medium-sized businesses. Though rent is often lower in the suburbs, a study by Tieshan Li, a marketing professor for Concordia University, shows that businesses may want to think twice before creating a store location in a suburban neighborhood.
Big-box retailers like Wal-Mart and Target are a mainstay in suburban areas that have a growing base of consumers. But Li’s study, published in the Canadian Journal of Administrative Sciences, indicates that profits are higher for retailers that are located further from areas of market expansion.
Li says that the lower profits are attributed to the high costs associated with moving locations. If the moving costs are equal to or close to the potential increase in customers, it could impact profits.
Another factor to consider is the demographic switch between urban and suburban areas. He explained that cities are popular locations for students and professionals, groups that retailers work to bring in. Changing to a new demographic in the suburbs could hurt profits, Li said.
Using theoretical models of a pair of similar retailers in close proximity to one another, Li studied the impact of expanding into new geographic markets.
He examined elements like how consumer groups growing in different directions could impact the retailer and the potential changes to the bottom line that could occur if people started moving to one suburb instead of another.
The study shows that areas where expansion is symmetrical, expanding at the same pace in all directions, have no change in profits for the retailers located there.
However, asymmetrical market expansion, when consumer growth is happening more on a particular side, makes it less profitable to follow the growing customer base. Staying in one area and capitalizing on existing customers could be a better move, according to the study.
Analyzing the market is important, as better locations can lead to higher profits. Buying instead of renting can make a big difference.
Try to select the right location the first time instead of trying to follow the changing markets.
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