Understanding the theory of retail development is key to sustaining the retail sector in South Africa

In recent times I have been reminded how important it is to understand the theory of retail development to ensure the long-term sustainability of the retail industry. Questions that have been posed include - should I locate my fast food restaurant together with other competitor fast food outlets in a small commercial center? Another question being - is it important to locate motor dealers within a motor hub? The answer to these questions, are very much a part of the theory of retail development.

The theory of retail development has historically been a key framework within which the retail industry has developed. Location theory is simply about understanding where economic activities occur, where retail outlets should be developed and why they should be located in a particular location. Central place theory indicates that there is a central function (eg mall) with central places (demand) in a market. Leading from this theory is the concept of spatial rationality and that is that people always use the closest facility to them. This concept is generally more applicable in the public sector and the provision of government services (eg schools).

What these theories emphasize is that within a market there is a retail network system or hierarchy of retail services. For example, one might have a large mall with many smaller and different types of malls making up the hierarchical structure of a market. These retail network systems are generally in a balanced state that allow the sustainability of the retail network in a market. In the South African context, there are many examples of the retail network system becoming imbalanced as malls increase their Gross Leasable Area (GLA), change the mix of retailers or a new mall is developed that places immense pressure on the entire retail network.

From the theory associated with retail development two key concepts have been identified. The first is the concept of “threshold” that is the minimum target population required for a retail outlet to be financially viable. The second is, the concept of “range” which defines the minimum distance or time that a person is willing to travel in order to get access to a retail outlet. It is the combination of these two concepts that is critically important in defining the optimum number and location of retail outlets in a network.

The theory of spatial interaction describes the importance of the attractiveness of sites. Attractiveness is often defined by the size of a retail outlet but there are many other factors that influence the attractiveness of a site, including the retail mix. So, major regional shopping malls tend to have a diversity of stores and as a consequence, a higher degree of attractiveness to consumers. However, other retail outlets of different sizes and types in same market also have an attractiveness potential that consumers take into consideration in deciding on where to shop.

Leading from the spatial interaction theory, Huff developed his model that included the concept of retail outlets having both primary and secondary trade areas. Other research has shown that the primary trade area, which is where 60 - 70% of a retail outlet’s customers come from, is required in order for it to be financially viable. The secondary trade on the other hand, is where 70 - 80% of a retail outlets customer come from and this is required in order for the retail outlet to be profitable.

The theory of spatial competition developed by Hoteling is that retail outlets locate in the centre of their markets so that they are as close to their markets as possible. At the same time, retail outlets of competing brands also locate in the centre of the market and as a consequence, they share the market. However, the extent to which they share the market is very dependent on the size and type of the competing retail outlets. For example, a larger shopping centre with a greater diversity of shops is likely to attract more customers than a smaller mall with less retail mix.

The locating of retail outlets from different sectors close to one another in a market is known as clustering and answers the question as to whether fast food outlets or motor dealers should be located in a commercial centre or a motor hub. The reality is that by locating in the centre of the market they have the benefit of increasing the attractiveness of the site in drawing more customers to shop at these outlets. However, the consequence is that they have to share the market but with an increase in the number of customers, there is a high likelihood that their revenue and profit margins would be better overall.

The problem that we face in South Africa is that having not used scientific approaches, the retail network system, especially in high per capita income areas, has become crowded and in many instances unstable that may in the long term have a significant impact on the retail sector and the economy as a whole.

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