By N. David Milder
Looking at retail leakage studies, I am reminded of Coleridge’s famous line: “Water, water, every where, Nor any drop to drink”. Retail leakage studies seem to be de rigueur in the downtown economic development field, but a good one, devoid of fatal errors is hard to find. As I have detailed in earlier posts, leakage analyses have serious analytical and data issues. I want to return to one of these analytical problems because I think our field lacks appropriate awareness of the muddled conceptual thinking that too often is being used to make a lot of important program, policy and investment decisions. I call this muddle the concept of the immaculate retailer.
This concept runs along these lines:
- A leakage is said to exist when the retail expenditures of a trade area’s residents exceeds the sales of trade area retailers. Those dollars that are uncaptured by trade area retailers are said to be captured by retailers located outside of the trade area. So far, all this is analytically simple, well and good.
- A next and troublesome step is to assert that one or more new retail firms can locate downtown, and their sales will be based on capturing these leaked sales. Consequently, they will not take sales away from retailers already established in the downtown. The new retailers somehow can compete immaculately. Local retailers ostensibly have nothing to fear from new merchants entering their downtowns.
My understanding of how retail markets function and how retailers behave suggests that immaculate retailing is simply impossible. I have little doubt that some merchants, large and small, may appreciate locations where the competition is sparse and/or weak, though all but monopolies and oligopolies must fight for market share whether they realize it or not. How such retailers then would parse their sales to only capture those dollars that would go to distant rivals is never specified and frankly has proven to be beyond my analytical abilities to identify. I have no idea how a merchant could feasibly, in the real world, compete against retailers outside their trade area, but not with those already located in their downtown – unless it is on the Internet. I’m willing to learn, so if you know of such a path, please let me know.
Even in situations where there is no retailer of that type, e.g., a grocery store, the new entrant will likely have to compete with a really powerful retailer located outside of its trade area. The presence of that strong competitor is probably why, for example, there was no grocery store already there. There is an asymmetry in the trade areas among individual retailers and as well as those among retail centers that reflects their relative strengths. The stronger they are, the farther they can reach. As a result, a proper market analysis cannot just look at the competition within a trade area defined by where a store’s potential residential customers are located. That store’s being located in the trade areas of strong competitors must also be identified and assessed.
There is, however, another perplexing face to the immaculate retailer muddle: that somehow, it will be relatively easy, perhaps because of their greater proximity, for new downtown retailers to win back the leaked sales. There is often an unstated assumption that the competitors located outside the trade area are weak or will not compete, that the leaked funds are like lots of coins fallen on a carpet and just waiting to be picked up. This shows itself most overtly when the question of how much of the leakage can be recaptured. Far too often the question is not overtly addressed, leaving the implicit false implication that all of it can be recaptured. When the question is addressed, some rule of thumb often is used. Most regularly 10% to 15% of the leakage is suggested as a conservative, reasonable estimate, though no research supporting that suggestion is cited. The rule’s purported general acceptance is what lends it legitimacy.
To the contrary, I would argue that no general rule can be applied, because two crucial variables are not being properly taken into consideration:
- The strength of the competitors. Too often the bulk of a leakage analysis’ focus is just on the downtown’s trade area, when its major competitors are located well beyond its borders. That is often because the location of these rivals was not taken into consideration when the trade area was defined. This results in the competitive strength of rival centers being poorly researched, and ill-considered in the analysis. By the way, I think most downtown retail market analyses do not pay sufficient attention to the competition. Indeed, most trade areas are defined by where consumers live, but techniques such as gravity models and considering the distances to competing centers need to be more frequently incorporated.
- The second and most overlooked factor, is the ability and power of the new retailer(s) that would be brought into the downtown. I’ve seen one suggestion that 40% TO 60% of a retail leakage can be recaptured. Perhaps, by a major retail raptor like Home Depot or a major specialty chain, but in smaller communities, that’s probably unlikely for independents who would be happy as lark with annual sales of about $500,000 each, even if there are more than one of them. This, too, should be considered: by definition, half of all retailers are below average.
Who the downtown can recruit matters more than the size of any leakage. My enquiries to retail site selectors indicated that few, if any, use a leakage analysis to determine where they will locate their physical stores. The retailers you want for your downtown are prepared and able to compete. Among these able retail competitors will be chains and independent operators. In almost every downtown I’ve worked in I’ve found small operators who are very savvy merchants and very able competitors.
The identification of those retailers is what we should be focused on. A proper analysis of the downtown’s various addressable market segments, that includes psychographics, should indicate which types of retailers will find their types of customers in a that district and its trade area attractive. Those retailers should be targeted for recruitment.
Major retailers, because they can use their data on their stores’ sales and costs, current customers and potential customers, can generate more reliable estimates about the potential sales revenues and operating costs at a new location and how much space they can afford to lease. The ability of a leakage analysis to address that question pales in comparison!
Leakage analyses have other analytical issues as well as some very severe data issues. The data issues could be resolved if the data providers would detail how their many needed manipulations of various types of primary data have been validated, demonstrating that they are truly measuring what they say they are measuring. For example, BLS’s surveys of consumer expenditures are national and the data can be presented at the level of multi-state regions. But when a data firm produces estimates for a downtown’s much smaller radii or drive sheds, how do we know that the necessary manipulations of the data produced the correct results? Given that such estimates can vary from firm to firm, how do we know which are the correct ones?
A retail leakage report from Esri or Claritas may be relatively easy and inexpensive to purchase. Nonetheless, one should not be misled by that fact — the correct analysis of those data will not be commensurately easy and cheap.