Using Market Research to Advance Economic Development Goals

Market research is critical to assessing demand to support additional commercial, industrial or retail development while informing broader efforts to strengthen a community's business and competitive environment. The first objective of market research is to identify the type of businesses your community is best positioned to attract and assess their potential demand for space. This analysis quantifies the level of real estate demand and the type and quality of space needed. A second benefit of market research is furthering your understanding of customer and business needs and their perceptions of your community. This understanding is based on the factors that will drive where customers choose to shop and where businesses decide to locate. With this improved understanding, economic development practitioners can identify steps to enhance community strengths and address weaknesses. Third, market analysis can help communities uncover new growth and development opportunities to target.

Principles for Market Analysis

Our approach to market analysis integrates supply side and demand side conditions and recognizes that different factors drive demand for development uses. While an area's income and retail spending potential drives retail demand, office and industrial real estate demand is driven by business and employment growth in the service and manufacturing sectors. Thus, different economic data and analysis is needed to properly assess demand for different economic sectors and development uses. Our approach, supported by economic theory and development experience, recognizes that successful development is based on agglomeration. Agglomeration works in two ways: (1) a critical mass of activity is needed to attract and support consumers, businesses and new development; and (2) related businesses operating in close proximity benefit from sharing information and specialized resources.

A Case Study in Retail Market Analysis

The Problem: Assessing the Market Potential for a New Supermarket in an Urban Neighborhood

Step One: The Demand Side Analysis

Market demand for a supermarket hinges on the total household spending for supermarket goods available within the market area. First, the retail market or trade area is defined; in this case, the primary trade area has a 1.5-mile radius with a secondary trade within 1.5 to 3 mile radius of the site. Second, gross consumer spending for this market area is determined and potential supermarket spending is calculated based on the share of gross income spent on grocery and general merchandise items. With 17,585 households and average household income of $35,217, the total spending potential in the primary trade area was $619 million. Supermarket spending potential was $56.8 million, based on 11.5% share of the household income spent on supermarket items and 80% of this spending being captured in the local market area. This spending level could support 113,600 to 162,300 square feet of supermarket development. 

Step Two: The Supply Side Analysis

The supply side analysis addresses how competing supermarkets effect the capacity of a new supermarket to capture the potential market demand. The competing supermarkets and their square footage were identified and their impact on supermarket sales within the target location was determined. Five stores in or near the primary trade area occupied 243,643 square feet with sales in the $85 million to $122 million range. This strong competition reduced the potential capture rate for new supermarket. Best case: a chain store could capture 17% of primary trade area market or $9.66 million in sales, which would support a 19,000 to 27,000 square foot supermarket-a size too small for a chain store. Alternative case: an independent grocer might gain a 7 10% market share or $4 million in sales, enough to support an 11,000 square-foot store.

Step Three: Enhancing the Basic Analysis

This initial analysis was refined by considering additional market factors. A first consideration was that special demographic factor, especially a concentration of ethnic minorities, might allow a grocer catering to this population to gain a larger market share. By capturing an additional 5% of supermarket spending among ethnic minorities, supermarket sales would increase by $1 million, allowing development of an additional 2,800 square feet of store space. Second, any gaps or weaknesses in competition might also allow a new supermarket to gain a larger market share. Finally, key trends in retail grocery business may also change the nature of competition. In this case, consolidation among supermarket chains was likely to cause some competing stores to the close, reducing competition and increasing the potential market share for a new grocery store.

Step Four: Completing the Feasibility Analysis

With market analysis indicating that a 14,0000 square foot independent grocery store could be viable at the development site, the next step was to complete an overall financial feasibility analysis of the project. This analysis assumed a 20,0000 square foot development anchored by the grocery store but with several additional stores. Total development costs, including land acquisition, construction and soft costs were estimated, by a professional construction management firm, at $1.9 million. Operating revenue and costs were then projected based on the prevailing retail rents in the area and operating expenses from comparable properties. This data projected annual net operating income of approximately $140,000, which allowed for $1.2 to $1.3 million in senior and junior debt financing. Thus, the project was not financially feasible without $700,000 to $800,000 in development subsidies.

Tools to Expand Understanding and Broaden Your Strategic Scope

Besides assessing the market for a specific project, additional tools can generate further insight into market opportunities and improve understanding of your community's competitive position. These tools include Customer Surveys, Business Surveys, Benchmarking Analysis, Key Informant Interviews and Focus Groups.

Customer Surveys have multiple benefits:

• Profiling consumer traits and preferences 
• Better defining your competitors and potential local sales capture rates 
• Identifying key specialties, agglomerations, and advantages 
• Obtaining customer feedback on district problems, strengths and weaknesses 
• Generating ideas and preferences for improvements and initiatives

Business Surveys provide other valuable information:

• Providing additional data on the downtown or business district's customer base 
• Identifying business growth trends and specific expansion plans 
• Determining critical resource needs to support business growth and competitiveness 
• Obtaining business feedback on local problems, strengths and weaknesses 
• Generating business ideas and preferences for improvements and initiatives

Benchmarking Analysis compares a specific development site or business district to its major competitors. This analysis helps identify the unique characteristics, strengths and weaknesses that can be incorporated into revitalization or development plans. For example, unique retail or business niches can be identified by comparing the distribution of businesses in your district to other competing areas.

Key Informant Interviews and Focus Groups provide critical feedback and more detailed market intelligence on the preferences and perceptions of key customer segments or stakeholders. This information can uncover hidden assets or potential problems and heighten understanding of key competitors. These formats also provide a way to test market plans, projects, and new marketing ideas.

Putting It All Together: The Revitalization Agenda

A better informed and more strategic revitalization plan will result from integrating the findings across these multiple tools, such as:

• Important agglomerations, niches and strengths to build on 
• Business expansion and recruitment opportunities to fill market gaps 
• Critical problems and weaknesses to address 
• Activities and projects with the greatest potential for support 
• Ways to strengthen existing customer loyalty and tap new customers 
• More effective ways to market your business district

Learn more about our Market Analysis and Feasibility Study experience  

Learn more about funding sources for Market Analysis and Feasibility Studies.