cwswsammfis EN LGCAfiNG AN
EH-DEPEREEE. T SUWR MARKET AN?) THE
SOURCES. OF CAPETAL AVA!LABLE FOR. THE
ENDEPENQERT GP‘ERATGR

Thesis fat the Dogma of M. A.
I‘s/HCZ'flIG-Al‘lE STATE UNIVERSITY
David R. Shelby
1960

 

 
  
     

  

LIBRARY

Michigan State
University

 

 

CONSIDERATIONS IN LOCATING AN INDEPENDENT
SUPER MARKET AND THE SOURCES OF CAPITAL

AVAILABLE FOR THE INDEPENDENT OPERATOR

by

David R. Shelby

A THESIS

Submitted to the School of Business and Public Service of
Michigan State University of Agriculture and Applied
Science in partial fulfillment of the requirements
for the degree of
MASTER OF ARTS
Department of Marketing and Transportation Administration

Curriculum in Food Distribution

1960

ACKNOWLEDGMENTS

The writer wishes to express his sincere appreciation
to Dr. E. A. Brand, Director of the Food Distribution
Curriculum, for his interest, supervision, and helpful
suggestions in the preparation of this thesis.

The writer is indebted to the various contributors,
too numerous to mention. However, special recognition is
due to Mr. Gordon Cook, Sr. of Operation, Inc., Mr. Albert
Schmidt of Schmidt Super Markets, Mrs. Marie Kiefer of

National Association of Retail Grocers, Mr. Ned Fleming of

The Fleming Company, Inc., Mr. Swanson of Grand Rapids

Wholesale Grocery Co., and Mr. Jack Brewer of Jewel Tea

Company, for their cooperation in making available their
resources for much of the material needed in this study.

The many college professors, classmates, and associates
with whom the writer has discussed the subject have been of
invaluable aid in formulating many of the ideas expressed
in the thesis. These persons are not reSponsible, of course,

for any opinions or factual errors included herein.

CHAPTER

II.

III.

IV.

TABLE OF CONTENTS

INTRODUCTION. . . . . .

Purpose . .
Need for the Study.

Sources of Data. . . .
Limitations . . . . . .

PRELIMINARY CONSIDERATIONS

Selecting the Town.
Competition .
Population . .
Other Important Factors .

RETAIL TRADING AREA OF A SUPER MARKET

Determining the Trading Area
Three boundaries . . . . .
Rural trade . . '

Aerial photography. .

Selecting an Area Within the Town.
Competition . . . . . .
Population . .

Buying Power of the Trading Area .
Indices for buying power.

Potential Food Volume of the Area.

Summary

CONSIDERATIONS IN SELECTING THE SITE.

Introduction. . . .
Traffic Flow. . . . . .
Accessibility . . . . .
Parking Facilities. . .

Negative Factors to be Avoided.
Estimated Volume of Business
Evaluation of Competition .

Analyzing competitor's cash register.

tapes. . . . . .
Personal interview method . .
Counting the number of check outs.
Number of store employees .
Square footage of the store.
Number of customers
State sales tax. . . . .

PAGE

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14

15

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25

25
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35

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CHAPTER

Estimating the Prospective Sales for
the New Operation. . . . . . .
Rule of thumb method . . .
Estimates by other experienced people
Highway location . . . . .
Summary . . . .

V. FINANCING THE SUPER MARKET .
Determining the Amount of Capital Needed

Land and building . . . . .
Equipment. . . . . . . .
Inventory. . . . . . . . . .
Parking lot . . . . . .
Cash . .

Sources and Types of Capital

Sale of stock
Issuances of bonds or debentures

Insurance companies as debenture

lenders
Inveestment bankers and debenture
money. . .

Loan from private investors. .
Loan from a financial institution.
Financing through wholesaler .
Sale and leaseback agreement
Working with the banker .

Choosing a bank.

Stay close to home.

VI. SUMMARY AND CONCLUSIONS

Summary . . . .
Conclusions .

BIBLIOGRAPHY. . . . . . . . .

iv

PAGE

TABLE

II.
III.

IV.
V.
VI.
VII.
VIII.
IX.

LIST OF TABLES

Check List for Guidance in Selecting a Site.

Pedestrian Traffic at Site

Ratio of Parking Space to Sales Space of
Store. . . . . . . . . .

Site Information.
Super Market Report.

Retail Food Survey
Food Store Operating Statement

Summary of the Requirements

The Line Up

PAGE
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36
39
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52
58
59
69

CHAPTER I

INTRODUCTION

Purpose
The purpose of this study is to present some methods

and procedures the independent operator can follow in

locating and financing a super market. This thesis also
provides some sources of information which offer data and
help in locating and financing the operator’s new market.

In the site analysis section of the study, the general
procedure of determining the trading area, the site within
the area, population characteristics, area buying power,
competitor’s volume, and prospective operator's volume have
been explained with various methods of determining each
factor.

The purpose of this study is not to describe the one
ideal procedure which should be used by the independent
operators when selecting a location, but rather to set forth
a general procedure which may be altered to fit individual
needs.

The section on finance in this thesis presents the
sources from which the independent operator may secure
capital for the new store. This section also provides
some suggestions to the independent on how to approach and

secure capital through these financial sources.

 

Need_for the Study

There is a need for the independent operator to have
procedures and methods to follow in locating a super market.
He must perform studies to determine a satisfactory location
for his market. Being able to select a good store site is
vital to the existence of the independent operator, because
he cannot afford the ”trial and error" method.

Financing the new market is a prevailing problem with
the independent operator and there is a need to discover

the capital sources and furnish the independent with the

necessary financial assistance.

Sources of Data

The data for this thesis was secured through personal
interviews with executives of wholesale and retail food
distributors. To this information has been added secondary

data from periodicals, personal correspondences, theses,

speeches, convention proceedings, government bulletins, and

textbooks.

Limitations"

The dynamic nature of the food business makes it im-
possible to present one ideal procedure in locating a super
market, for every situation is different in some ways. The
scope of the study covers some suggested sources where the

independent can.secure capital for the financing of his

location and also offers some suggestions in securing this

capital.

 

CHAPTER II

PRELIMINARY CONSIDERATIONS

Selecting the Town

Generally, large companies use maps with the trading
areas delineated on them and indicate their stores with

pins. This makes it easy to ascertain how well the company

is represented in various areas; it also shows prospective
areas for store location where the company is not represented.
The head of the real estate department calls upon his field

real estate men to supply him with details on territory

being considered for new store location. Any additional

data is compiled in the central offices.
The average small independent is rarely in a position
to choose a town on the same basis the large company does.

He has neither the staff nor the capital to study the merits

of possible new store locations. He usually does the natural

thing, that is seek a location in his home town where he is
known and liked and where he is an active participant in

church, civic, and social affairs. Climate and health

factors can play a vital role in the choice of a town.
The small operator, in contemplating the location of
a store, may feel there is little purpose to making a

thorough evaluation of the town and its characteristics;

 

nevertheless, he should evalute the town to the best of his
ability and limited resources before deciding to open a
store. Valuable assistance is available to the small
operator who wishes to make a scientific selection of a town
in which to locate but who cannot afford the expense of
having a complete analysis made. Wholesalers and manu-
facturer—wholesalers offer assistance in advising the small
operator on store location.

This assistance varies, from advice given in the

office of one of the executives, to carefully prepared

printed location aids and forms on which to record

factual information. Such material is then oriented

and analyzed by a consultant who works closely with

the prospective retailer until a final selection of

the site is made.1

Some assistance is free, but there is a charge for the most

complete service.

Competition

 

The amount and quality of competition is one of the
most important factors to consider in selecting a town. It
may be unwise to locate in a section when too many good
super markets are located there. Conditions may be favorable
for a new store if the present stores are not fully meeting
the needs of the people. Very few large chains stay out of

town because of competition if they can get the right

 

lHelen G. Canoyer, Selecting a Store Location, Market
Division, Office of Domestic CommerEe,‘Economic Services
No. 56 (Washington, D. C.: U. S. Department of Commerce,
1946), p. 3.

 

 

location at the right price, but they will study the com-
petition they are to meet.

The competition, the number of retailers in the super
market business, and their actual or estimated sales, must
be evaluated. In examining the extent of competition, con-
sideration must be given to other types of retail business
which handle some of the super market line. For example,
if the super market operator plans to include a health and
beauty aids‘display in his establishment, he should consider
the competition from variety stores, drug stores, department
stores, et cetera. All of these take a portion of the
health and beauty aid business. Delicatessen shops, fruit
stands, dairy stores, meat and fish stores, and others com-
pete for that consumer food dollar and rate some consider-
ation from the operator in locating a prospective super
market. '

Even though there may be a sufficient number of super
markets in a community, a new outlet may be located there,
planning to attract trade from the stores already situated
in the community.

The best way to obtain information about the com-

petition is to visit the competing stores.

Population
The size of a city in terms of population is important
in choosing a store location and federal census figures

covering population can furnish answers to the population

question. There are certain facts regarding population
that should be examined carefully. What is the population
trend? Is it increasing or decreasing? What proportion of
the population of the trading area shops in the community
and what is the population of the trading area? What
transportation facilities lead into the community? What
is the proximity to the nearest large town? Are there any
topographical conditions that might influence customer
traffic to and from the community? What is the nature of
the population? What nationalities are represented? What
is the leading religion? Is the community residential or
industrial? The small business operator may be interested
in a breakdown of the population by race, age, occupation,
and income. This could have a bearing on the sales volume.
Answers to these questions will inform the small
businessman on the possible trends of population and the
general characteristics of the prospective customers. The
answers may be found in source material, such as the
official census publication, chamber of commerce or board

of trade, and independent observation and study.

Other Important Factors
Questions in addition to those concerning population

and competition must be asked and answered before choosing

 

2Preston Robinson and Norris B. Brisco, Store Organi —
ation and Operation (New York: Prentice-Hall Book Company,

 

 

 

h'whr

I:

the proper town. They are:

1. Is the town predominantly industrial, agricultural
or commercial?

If industrial, is it old and well-established or
recent and uncertain? '

Is the predominant activity of the town seasonal
or continuous?

. Is the town wealthy, well-to-do, moderately
well-off, or poor?

Are civic associations in the town aggressive,
moderately active, or inactive?

Is there good town spirit; that is, do the
residents cooperate on civic projects?

Is it a good town to live in with regard to
climate, schools, churches, banks, stores,
amusements, et cetera?

8. How large a trading area does the town have?

NONUTJEUOR)

3

The presence of some business clubs, whether business
bureau or a retail merchants' association, is an indication
of a live, energetic, optimistic, aggressive community.

These groups may contribute business information.

 

3Establishing and O eratin Your Own Business,
Department of“06mmerce, Ser es 0. 2? (WaShington, D. C.:
Department of Commerce, 1950), p. 14.

 

 

CHAPTER III

RETAIL TRADING AREA

Determining_the Trading Area

 

There are differences of opinion as to Just what is
implied by the term "retail trading area." In general, it
refers to a geographical area from whence retail patronage
is derived. I. V. Find, a professor of business at the
University of Wisconsin, suggests that a retail trading
area should be "that area from which the community receives
approximately ninety per cent of its total retail patronage."u

One of the methods of delineating a retail trading
area is the Law of Retail Gravitation. This method requires
relatively little work and was developed by Dr. William J.
Reilly of the University of Texas in 1929. The law states:

Two cities attract retail trade from an intermediate
city or town in the vicinity of the breaking point
approximately in the direct proportion to the square
of the distan e from these two cities to the inter-

mediate town.

Even though this law applies primarily to shopping goods,

 

4Isadore V. Fine, Retail Trade Area Analysis, School
of Commerce, Bureau of Business Research and Service,
University of Wisconsin, Vol. 1, No. 1 (January, 1954),
p. 11.

 

5Canoyer, op. cit., p. 9.

-r'_-- h J: -—-.-_-

 

 

it may be used to some advantage for the super market. The
mobility of the present day consumer makes shopping trips
more frequent and thereby makes food buying a part of many
shopping trips. The law considers population and distance,
but it fails to consider customer habits, motivations, and
other factors with regard to where people trade.

A simplified version of this formula is:

Distance of A to B

 

The distance from B to the
breaking point of the retail 1+ -Population ofTA
trade areas between two cities = Population of B

 

An analysis of the automobile license plates is an
important tool in retail trade area delineation. Checking
the registration of cars in the parking lots of a trading
area enables the retailer to obtain names and addresses of
shoppers. Their address can be plotted on a map and the
trading area as well as volume of traffic from each section
determined. Of course, in using this technique, an adequate
sample of registration numbers must be secured to give a
representative picture of the community.

The analysis of bank clearance data can aid in deter-
mining the trading area for a super market. This method6
involves the determination of the geographical distribution

of the out-of-town trade of the retail stores of the

 

6Fine, op. cit., p. 15.

-1“..th

 

 

10

community as evidenced by the bank checks received in pay-
ment for goods. This method assumes that the check trans-
actions fall into the same geographical pattern as the cash
transactions.

Application of this method is simplified if the local
bankers will permit access to their transit sheet records
of checks cleared on out—of-town banks. These check
tabulations are then posted to an area map to permit a
delineation of an area. This method only reveals the
location of the bank customers and provides only generalized
information as to where the customer came from.

The local newspaper circulation may indicate, to some
extent, the trading area. This can be used with daily or
weekly newspapers. The circulation number may be secured
from the publisher and the location of the subscribers are
plotted on an area map.

This technique is based on the assumption that the
newspaper subscribers will be customers of the community in
which the newspaper is printed. There are two weaknesses
in this technique. (1) In the large cities, newspapers
build up circulation in rural areas and these rural people
may trade in an intermediate town. (2) The second weakness
arises in the study of the trade area of a county seat.
Frequently the publisher builds his circulation around
interest in the political news of the county. The newspaper
may have heavy circulation in remote areas that do little

trading at the county seat.

11

The retailers in the community should have some knowl-
edge as to where their customers are located. For example,
a substantial proportion of the retailers in the community
may indicate separately on area maps what they believe to be
the trading area for their store. From these maps can be
determined the trading area which a majority of the

retailers agree upon.

Three boundaries. One method of defining the trading

 

area for any proposed site is to draw three boundaries
around each site. The innermost represents five minutes
driving time from the proposed site, the next ten minutes,
the last fifteen minutes time. Within each of these
boundaries, telephone or personal interviews may be con-
ducted--starting with the smallest-~to determine the food
stores patronized by residents. Such information provides
an accurate picture of shopping patterns within each boundary
and these, in turn, can be used as a basis for establishing
the trading area.7

Consumer surveys can play a major role in delineating
a trading area. Fine says, "the most accurate and most

desirable of the methods of analyzing retail trade areas are

 

7Alderson and Sessions, Cost and Profit Outlook,
Marketing and Management Counsel, PRiIadelphia, Pennsylvania,
Ix, No. 7 (July, 1956).

 

12

8

the consumer surveys." These may be personal interviews or
mailed questionnaires. These methods are desirable because
one is enabled to not only establish the exact outlines of
the retail area of the community, but also to determine

from the replies why the consumers do not trade in the
trading center conducting the survey.

These methods may build goodwill in the community, for
the people may realize the business operator is striving to
satisfy the customers' needs and desires.

The personal interview method provides higher accuracy
and completeness of findings than the mailed questionnaire,
but it also is very expensive. In using questionnaires, the
form should be brief and simple. The questionnaires may be
mailed to newspaper circulation lists, mailing lists chosen
from phone books, or other sources.

Interviews conducted within the newly defined trading
area are not only of value in checking the realism of the
definition, but also may be of value in determining the share
of market a new store might expect. This interview need not
be lengthy, and several factors besides residence may be
extracted from it: dollar amounts spent on food, where
food is bought, by what means and how long it takes to get

to the store, and whether or not the respondent thinks he

 

8Fine, op. cit., p. 17.

fl

13

would buy at the proposed super market. It should be kept
in mind that opinions based on this last point may be some-
what unreliable; it is almost impossible to draw conclusions
from such an opinion unless very definite characteristics

of the proposed store are described.

The basic purpose of defining the trading area for
each proposed site is so potential food expenditures can be
estimated and so the independent businessman can estimate
the share of this potential which his new store may expect

to obtain.

Rural trade. In a small town where there is much

 

rural trade along with the town customers; the trading area
is determined by assuming it extends as far as the rural

mail routes. By making this assumption, the prospective
operator may investigate the distance and number of house-
holds the post office is servicing and include this territory

and population count in the trading area.

 

Aerial photography. "From your seat a few thousand
feet up, you can make a good analysis of where the heaviest

concentration of population and traffic is,"10 says Roger

 

9Personal interview, Mr. Swanson, Grand Rapids
Wholesale Grocery, Grand Rapids, Michigan.

10Super Market News, October 8, 1956, p. 37.

 

14

Smith, realty manager of Safeway Stores. Aerial photography
can play a role in determining the definite characteristics
of a trading area. Aerial photography may provide a
perspective as to the barriers, rivers, bridges, mountains,
cliffs, et cetera. This photography may show the actual
dwelling units in an area and the possibilities for further
building of dwelling units. Main highway arteries and flow
of traffic may be revealed from this advantageous position.
Mr. Roger Laverty, Jr., president of Corbin Development
Company, real estate subsidiary of Fitzsimmons Stores, Ltd.,

states, "We can see many obstacles from the air Just a few

 

 

miles away which serve to divert traffic from the site."11
This aerial approach provides a "birdseye" View of the
general trading area.
Selecting an Area Within the Town

In selecting an area for a super market, Helen
Canoyer lists several factors to consider:

1. Size of the trading area

2. Type of customers

3. Income of the people in the area

A. Parking facilities

5. Amount and quality of competition

6. Population characteristics

7. Local habits and customs of the people 12

8. Extent to which the area is a trading center.

11Ibid.

12

Canoyer, op. cit.

 

15

After the boundaries of the trading area are deter-
mined, the competitors, population, and buying power of the

trading area must be evaluated.

Competition. The geographic location of the competi—

 

tors within the trading area should be known, as well as
their individual strength and effectiveness. In discovering
the geographic locations, the competitors' locations should
be plotted on a trading area map. Such a map can be readily
prepared from information usually available in the adver-
tising department of a local newspaper or by a block to
block canvass.

The amount and quality of competition are vital in
considering a location in a trading area. Information as
to the number of stores and volume of sales can often be
obtained from the local civic organizations, such as the
chamber of commerce, trade associations and business groups,
local real estate companies, and market-research agencies.
In studying the competition of the area other information,
such as foot frontage, number of checkouts, sales area,
whether or not they are chains, and other information are

13

pertinent.

Population. When anticipating the location of a

 

super market in a trade area, the size, trend, and

 

13"How to Measure a Trading Area,"

Vol. 27, No. 1 (January, 1951), p. 168.

Chain Store Age,

 

16

characteristics of the population come into focus.

Since all people are consumers, the size of a trading
area's population provides an indication of the number of
potential customers. If the trading area is the community
itself, the population may be found in the decennial census.
Other approximations of population may be obtained from
city government offices, state government offices, chambers

of commerce, or Sales Management's Annual Survey of Buying

 

£9163-

Another method of determining the number of people
living in the area is to make an actual count of occupied
dwelling units. Local newspapers, chambers of commerce,
and city planning offices may provide aid in determining the
number of dwelling units.

The analytical maps and block statistics of the
decennial census offer a dwelling count. It can be assumed
that there are three and one-half persons per dwelling, and
if the family spends on the average of one thousand dollars
a year on food, the potential business of an area can be
estimated. Block statistics present the opportunity of
dealing with any size area. A check with home delivery
Vendors of bread and milk can give an estimate of the
number of family units in the trading area.

There are some urban communities where population data
are available and trading areas can be worked out by

employing census tracts and checking the trade boundaries.

17

These tracts usually have a population between three and
six thousand. The areas are established with some regard
for uniformity in size, in population characteristics and
density, and for natural barriers. The population data of
the census tracts include sex, age, race, nativity, citizen—
ship, country of birth, highest grade completed in school,
employment status, class of workers, and occupation.lLL
Included in the information about housing are occupancy
status, tenure, value or monthly rent, type of structure,
state of repair of plumbing equipment, size of household,
persons per room, radio, refrigeration equipment, and type
of heating. All of this information is useful when
attempting to estimate the potential of a trading area.

It is equally important to ascertain the trend in a
city's population. The size of some areas has remained ap-
proximately stable over long periods of years, whereas
other areas have experienced pronounced increases or declines.
Even though an area with a stable or declining population
may offer possibilities for a successful store operation,
it is preferable to locate a super market in a growing

trading area.15

 

luCanoyer, op. cit., p. 34.

-

15Christos Lillios, "Super Market Site Selection“
(unpublished Master's thesis, Michigan State University,
1953), p. 50.

 

18

In observing the population trend of a trading area,

it is important £3 compare the rate of growth of that area

 

with nearby trading areas. Also the Census of POpulation

may be consulted for growth or decline of population. The
trend in population can be estimated by the school population,
number of electric meters, and the number of homes to which
mail is delivered. The telephone company and electric com-

pany can aid in determining the population trend.l6

Still another indicator of trading area growth is the
amount and nature of construction in pro ress. The
amount of new constructIon being done is indIcated by
the value of construction contracts awarded and the
number and value of build permits issued. This infor-
mation is available in the monthly releases on building
construction which is published by the Bureau of Labor
Statistics for about two thousand towns over twenty-
five hundred in population.17

 

The reason for community growth should be analyzed.
The retailer should know whether there are sound reasons
for growth and future expansion or if population growth
has been influenced by artificial factors, such as war
plants or military installations, which have a questionable
duration.

The characteristics vary considerably among trading
areas of the same size as well as unequally populated areas.
It is possible to obtain information regarding the com-

position of the population according to sex, age, race,

 

16Ibid.

l7Ibid.

 

19
religion, educational level, native or foreign born, per-
manent or temporary status, and other characteristics.

The composition and occupation of the population are
important determinants of buying habits of people. For
example, foreigh-born population will exhibit very differ—
ent buying habits from native-born population. Some trading
areas may have large groups of a particular race and consid-
eration must be given to this group, like the Negro in the
South.

The size of the family has a tremendous influence on

 

buying habits of the family. Naturally, larger families
consume more food than small families, causing a larger
potential food volume.

When the independent proprietor desires to analyze the
population characteristics, he needs to know if the people
are old or young. The young married people will accept
change more readily than older people.

Industrial workers will differ from office workers
in their buying habits. A careful study of the size and
composition of the population of an area will help the
prospective retailer decide such points as: variety of
products, price lines, specific commodity lines, merchandise
to display, amount of floor space, store atmOSphere, and
color schemes.

One of the best ways of obtaining a good, general
idea of the characteristics of the people is to walk up

and down the street, talking to them in stores, banks, and

20

on street corners, observe their shopping habits at all
hours of the day, and investigate their religious and enter-
tainment activities.

Most of the population information can be obtained
from the decennial Census of Population, state government
offices, bureaus of business research in local universities,

or chambers of commerce.

Buying Power of the Trading Area

 

Markets have often been called "people with money to
spend." In studying and analyzing the trading area, it is
necessary to evaluate the trading area's total disposable
income, the distribution of that income among the population

and the sources of income.

Indices for buying power. The total retail sales of a

 

market may be used as an indication of the buying power,
since sales vary with buying power. The Census of Business
gives actual figures of entire retail sales of every state,
county, and town of over 2,500 population in the nation.

Annual sales estimates are also provided by Sales Management

 

magazine and biennial data by Standard Rate and Data Service.

 

 

The total retail sales of an area may be misleading in terms
of buying power since people may go into another area to
purchase certain types of merchandise.

The better indexes of buying power usually are those

that have been determined on the basis of several selected

21

factors. There are selected indexes which provide a single
index of buying power. The International Magazine Company
has an index based on thirty-two different factors. Another

is by Sales Management magazine and Business Week magazine

 

 

which publish quarterly the income indexes for twelve
regions.

A buying power index is not foolproof, because the
idemand for a particular product does not necessarily vary
directly with buying power, or total retail sales. Differ-
ent climates and types of population influence the demand
for the product; furthermore} the distribution of income
may affect the buying, particularly of nonessentials. Two
trading areas may have the same buying power; for instance,
one area has more people of the high and low income levels
and the other is a middle income area. The high-priced
goods may sell better in the first area, but the better
market may be the middle income area with the uniform income
distribution. It is a well-known principle that the more
equal the distribution of income among the population, the
higher the standard of living and the level of consumption.

There seems to be a close relationship between the
amount that a family spends for rent and their income. To
find the general rental value of dwellings, the information
may be obtained from the census, from realtors, or by looking
over rental advertisements in newspapers. Roughtly, "it

can be assumed that ten per cent of the family income is

22

"18

spent for housing. In multiplying the rental values by
ten, an estimated family—income level is obtained.

Some buying power indexes can be based on the trading
area conditions, such as:

a. The total estimated community income

b. Number of people employed and approximate wage

levels

c. Major types of employment (industries)

d. Value of agricultural commodities produced in

the area

e. Natural resources in the area (developed and

undeveloped) _

f. The industrial trend (expanding or declining)

g. Regularity and seasonality of production and

employment.

Consideration of these conditions will aid in formu-
lating opinions regarding the nature of the income, its
stability during adverse conditions and future trends.

In considering income sources, a trading area in which
a large proportion of the population is dependent upon a
particular industry is less desirable than one in which the
income originates from diversified industries. A single
industry or an individual company is more apt to be influ-
enced by seasonal or climatic variations.

' The prOSpective super market operator may determine

the income level of a trading area by consulting census

 

18U. S. Department of Labor, Bureau of Labor Statistics,
Family Income, Expenditures and Savings in 1950, Bulletin
No. I097 (Washington,‘D. 0.: Government PFinEing Office,
June, 1953).

 

19Robinson and Brisco, op. cit., p. 104.

#

23

publications, local neWSpapers, and market sources. The

Consumer Market Data Handbook, published by the United

 

States Department of Commerce, furnishes income data and
census tract rent data. This material may aid in estimating
the total income of an area.

By determining the income level of a trading area, the
small business operator can judge the potential volume of
business available. One source of information reveals the
above average income level families (above $5,000) spend
$23.19 a week for food; the average income level families
($3,000-$u,999) spend $20.00 a week for food; and the below
average income families (below $3,000) spend $13.81 a week
for food.20 I

Thus, this source supported by other surveys conducted
by newspapers and government agencies reveals the average
weekly expenditure for food is twenty to twenty-five dollars
per family. Data, revealing the percentage of income spent
by families for commodities, are obtainable from the Bureau
of Labor Statistics, United States Department of Labor,

and the Bureau of Human Nutrition and Home Economics of the

United States Department of Agriculture.

Potential Food Volume of the Area

 

By estimating the number of families in the various

income levels, it is possible to estimate the total food

 

20Harry Beckner, "Market Research Applied to Food
Chains" (unpublished Master‘s thesis, Michigan State College,

1951), pp. 15-16.

 

24

volume of the trading area according to the following
method:

1. The number of families times per cent of families
in each of the three income groups = the number
of families in each income group.

2. Number of families in each income group times
dollars spent per family per week by the group
for food = total dollars spent per week for each
group.

3. Add the total expenditure for each group to obtain

the total food expenditure for the area.

Summary

Locating a super market requires a scientific
approach to supply the experienced super market operator
the facts needed to make store location decisions.

The inexperienced independent operator needs much
counseling and advice from helpful wholesalers, manufacturers,
and other experienced super market persons in store location.

Three major factors in locating a store are defining
the trading area, evaluating the characteristics of the
competition, population, buying power, and estimating the

prospective operator's volume for the area.

 

21
Ibid., p. 91.

 

CHAPTER IV

CONSIDERATIONS IN SELECTING THE SITE

Introduction

 

In selecting the site, the prospective operator fre-
quently encounters the problem of whether to locate on the
site available or wait for a more advantageous opening
later. This is true for the small independent as well as
the chain operator. Occasionally an independent operator
will establish himself at a mediocre location because he
failed to use the scientific approach to site analysis.

If the site available does not fulfill the major character-
istics for a successful location, the independent should
save his money and effort; for one mistake of this nature
would have him working for someone else.

When the anticipated super market is situated away
from a central shopping district and has no complementary
stores nearby, whether or not the market can attract the
necessary traffic becomes a pertinent question.

In central and secondary shopping districts, site
selection can be of principal significance. Because of the
substantial number and diverse character of existing stores
and other business, professional, and entertainment facili-
ties, there is in such a location a large amount of traffic

that is not dependent upon the drawing power of individual

26

stores or very small clusters of them.22 Two sites only a

block apart may vary tremendously with respect to profit—
making possibilities.

There are certain very definite hazards which should
be avoided and certain favorable factors which should be
used in selecting a site. A check list may be employed to
advantage, especially when used with an occupancy map. Such
a map is obtainable from the city, a real estate company,
or the operator may prepare one himself. These maps show
each store by name, frontage, rent, length of lease, et
cetera. Helen Conoyer provides the check list shown on
the following page for guiding the businessman in discovering

the advantages and hazards of a site in a trading area.

Traffic Flow

 

The idea of counting the number of persons passing a
given point during the day and classifying them according
to characteristics has been used in site selection for many
years. The opinion was once widely held that the total
volume of traffic passing a site was the most significant

factor determining its value for merchandising purposes.23

 

22Paul Brown and William Davidson, Retailing (New
York: The Ronald Press Company, 1953), p. 85.

23Ibid., p. 87.

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27

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31

 

Department of Commerce studies have revealed that there is

no dependable relationship between the quantity of pedestrian
2A

 

traffic and the value of a site as measured by retail sales.

 

 

Far more important are the qualitative characteristics of
the traffic. The analyses of the quality and composition
of passing traffic are highly significant..

To use the traffic count technique to greater advantage,
the pedestrians should be counted at intervals during the
day, for periods of fifteen minutes, from ten to twelve in
the morning, and from two to four in the afternoon. The
count should be made during hours that are of particular
importance to the super market. In some instances men are
included in the count and, in others, only women.

In addition to providing a basis for comparing the
relative desirability of alternative sites, traffic counts
are used as a means of roughly estimating the probable sales
volume of a location. The following chart is helpful in
determining the amount of pedestrian and automobile traffic.
Roughly estimating the probable sales volume of a location
has been used by some chain store organizations. A calcu-
lation of this kind is possible when the following inform-

25

ation is known:

 

24lbid., p. 87-

I:
E’Ibid.

fl

32

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33

The types of persons most likely to be customers

of the store.
The number of such persons passing the site during

the day. (Obtained from traffic count.)
The percentage of such persons likely to enter the

3.
store (based upon experience in other comparable

situations).
The percentage of those entering who will buy

4.

based upon experience in other comparable
situations).
The amount of the average sale (based upon trade

5.
experience).

Estimates derived in this manner must be adjusted

with the volume variations that occur at different times in

the week and seasons of the year. These estimates are

usually crude approximations but they may be sufficiently

revealing to indicate whether or not there is a probability
The inde-

of a profitable volume of business on the site.

pendent operator can approximate this approach by assuming
the number of persons likely to enter which can be estimated

by traffic checks of other super markets near the prospective

Estimates of other needed information may be obtained

site.
from other merchants, associations, or suppliers in the same

trade.
Studies of traffic flow usually reveal that one side

of the street is definitely more valuable than the other.
In trading areas where there is an extended warm season,

this is generally the side that is shaded in the afternoon.
This side, which enhances pleasant shopping by the customers,
is cooler and permits more effective window display.

Corner locations are valuable because two distinct

traffic streams can be tapped and more people can see the

34

However, super market

window displays and store interior.

operators are more interested in parking space and ease of
Pedestrians

access by car rather than pedestrian traffic.
stop on corners for traffic control lights and, when so
stopped, they will be inclined to enter an attractive store

if they desire to purchase some convenience items which were
There are always a limited number of corners and

forgotten.
sometimes the rent charged is out of proportion to their

relative value especially for a food store.

Accessibility
The importance of accessibility of the site under con-

sideration is a vital factor to the success of the business.
There are several major considerations involved in the
26

accessibility of a site. They are the following:
1. Distance of the proposed store from residences

of potential customers.
Amount of traffic congestion prevailing in the
district and the variations in this congestion

during hours of the day and days of week.
Parking facilities available wdthin convenient

3.
walking distance of the proposed store.
4. Side of the street upon which the site is located.
Width of the street, so that potential customers
are not discouraged from visiting the store because
of being jostled or by a slow flow of street
traffic. Streets with marked inclines and dead

ends are also desirable.
The part of the block in which the site is
whether it is a corner location or

located, i.e.,
an inside location.

2.

 

 

Delbert J. Duncan and Charles F. Phillips, Retailing
(Chicago: Richard D. Irwin, Inc., 1951), p. 133.

35

In addition to the above accessibility considerations
public transportation is to be considered, although in many
areas a small per cent of the super market customers
arrive by public transportation. Consequently, public
transportation is not necessarily an important factor.

Driving time is a very important factor that many
location planners overlook--they often draw a circle on a
map, and consider everything within the circle as trading
area.27 Quite often, however, local traffic conditions

make it easier--and quicker-~for a shopper to drive to

another trading area that is actually further away.

Parking Facilities

 

The prospective retailer will want to estimate the
amount of parking space necessary for his market operation.
As more and more customers use automobiles, parking space
becomes increasingly essential, and especially for the super
market where the bundles and packages of groceries are too
heavy and awkward to carry on public transportation vehicles.
Adequate space for parking is one of the most important
factors to consider in a site for a super market.
There are several ways to determine parking space for
a store's vehicular customers. The first method is to buy

whatever ground is available, construct a building and leave

 

27Joseph J. Trout, "How to Locate and Finance a New
Marfet," Progressive Grocer, V01. 21, No. 8 (November, 1955),
P. CL AF;

 

36

the remaining vacant area for parking. This is a haphazard
method and is not conducive to providing adequate parking.
Another method uses a ratio of parking space to the
sales space of the store. The amount of parking space for
a particular super market Will vary according to the pro-
portion of customers arriving by automobile. A four to one
ratio is desirable when one hundred per cent of the customers
arrive by automobile. When this method is used, the per
cent of trade arriving by automobile must be determined.
The following table is based on the assumption that all
potential store customers arrive by car and can be accom—

modated by a four to one parking ratio.

TABLE III
RATIO OF PARKING SPACE TO SALES SPACE OF STOREl

 

 

Percentage of Trade Arriving Ratio of Parking Space
by Automobile to Sales Space
100% 4 to l
90% 3-1/2 to 1
75% 3 to l
60% 2-1/2 to l
50% 2 to l
40% 1-1/2 to 1
25% l to l

 

1"Here's Help in Deciding Space Needed for Parking,"
Natéonal Grocers Bulletin, Vol. 39, N0. 2 (February, 1952),
p. 0.

Possibly, the chief weakness of the ratio method lies

in the varying space requirements of different parking lots.

37

A car covers approximately 140 square feet of ground, but
by the time aisles, drives, and wider parking stalls are
provided, the area allotted to a car may be 400 square feet.
Therefore, the number of automobiles that can be accom-
modated in a given area will depend on the parking angle,
the width of the parking spaces, width of the aisles, and
shape of the lot.28

The Urban Land Institute recommends that "a minimum
of 10 car spaces be provided for every 1,000 square feet
of sales space."29 Parking turnover varies with the type
of merchandise offered. If the store has a line of soft
goods, housewares, and health and beauty aids, besides the
produce, meat and canned goods department, the customer will
usually require more shopping time; therefore, her car
remains in the parking lot longer, decreasing the car turn-
over rate.

Another variable is the difference between peak load
and average load. The peak load may be the number of cars
parked on Saturday before Christmas, but realistically the
lot may be designed to accommodate the largest influx of
cars on Friday afternoon or Saturday, whichever is the

busiest period.

28HHerels Help in Deciding Space Needed for Parking,"

Ngtional Grocers Bulletin, Vol. 39, No. 2 (February, 1952),
p. 60.

29Ibid., p. 61.

 

38

A department store situated close to a super market
can present a parking turnover problem. The department
store customer requires more shopping time than the super
market customer due to the types of merchandise, therefore,
her car remains in the shopping center parking area a
longer period of time and decreases the parking turnover
which decreases the parking Space available for food store
customers. In another situation, the department store and
super market may be close together but not in a shopping
center. The customer may use the super market parking lot
while shopping in the store; then go to the department
store leaving her car near the super market. This decreases
parking turnover.

While the operator is planning the parking area, he
should consider the distance the customer must walk from
the parked car to the market. This would be no problem for
a small market operator with a small parking lot; but if
the store is located in a shopping center having a large
parking lot which is crowded with cars preventing the cuS-
tomer from parking near the market and requiring her to walk
a sizable distance, which she may be reluctant to do, she
may drive to another store which offers more convenient
parking.- People usually walk parallel to traffic and not
across a line of parked cars. Parking facilities should
be close to the market to provide short walking distances
for the customer. Parking is a customer convenience and

should be made just that.

H

39

Although there is adequate land for the actual building
and most of the location characteristics are favorable, the
operator may not desire to establish his store on a desig—
nated plot of land if there is insufficient parking area.
With insufficient parking area he may lose customers and
he would have no room for further expansion in the future,
providing his business merited it. The following chart

provides a form for compiling store and parking lot infor-

 

 

 

 

 

 

 

 

 

mation.
TABLE IV

SITE INFORMATION1
1. Business block located at
2. Location of available site
3. Lot size x
4. Alley __
5. Size of7existing building (if any) ‘Tg_ x
6. Size of store possible '7"’ x "
7. Size of parking lot possibIe x
8. Number of cars
9. Street parking: Angle ParalIel Meters
0.

Comments:

 

 

1Christos Lillios, "Super Market Site Selection"
(unpublished Master's thesis, Michigan State University,
1953). p. 64.
Negative Factors to be Avoided

There are certain factors generally considered as
detrimental characteristics to a store location. Vacant

buildings adjacent to or in the immediate vicinity of a

site are considered as bad neighbors, because they do not

40

attract trade to the vicinity of the location and they
detract from the appearance of the area. This may be some-
what alleviated if the new store's signs can be displayed
on the vacant building's windows. This may increase sales
and give the super market the appearance of being larger.

Another factor, which may be detrimental to a new
store location is a tall building neighboring the prospec-
tive location that may overshadow the building preventing
customers from seeing the market from a distance. The
super market usually maintains an outdoor sign advertising
the store. Unobstructed visibility is essential to attract
customers to the super market. A sign is effective only if
it can be seen from a distance.

Sometimes the direction of prevailing winds may be
detrimental in creating wind pockets resulting in dirt and
trash on the sidewalks and at entrances. Other disagreeable
factors, such as smoke, unpleasant odors, and noise from
nearby factories or shops will reduce the value of locations.
Poor sidewalks and proximity to automobile repair garages,
hOSpitals, factories, cemeteries, and funeral parlors will
discourage pedestrian traffic. Railroad yards have dis-

agreeable noises and should not be close neighbors.

Estimated Volume of Business
By estimating the potential volume of the prospective
super market, the operator determines whether the particular

location offers sufficient volume to provide an adequate

 

41

return on the investment. Knowing the potential volume
helps the prospective operator determine how large a
building should be erected for the proposed super market.
Before estimating the sales potential of a proposed
store, the total sales potential for the entire trading
-area must be determined. The question is how much of the
area potential could be obtained by the new store. In
coping with this question of the new store’s prospective
sales, the sales volume of the competitors, their weaknesses
such as an inadequate parking lot, poor merchandising
techniques, bad customer relations, obtaining trade from
the people shopping in another trading area, attracting
people living in another trading area who are willing to
shop at this new store need to be considered in the esti—

mating of sales volume for a new market.

Evaluation of Competition

 

Competition will determine, to some degree, the amount
of business a new store will be able to obtain, so the
prospective operator must be familiar with some techniques
of evaluating competition. He is interested in their sales
volume to give him some measurement of their business
strength. Still another vital factor is to discover the
acceptance and coverage of the competition within the
trading area.' By inspecting the store and estimating the
store traffic count of competitive markets, their effective-

ness can be evaluated. Very often, some prominent businessmen

42

in the area can provide evaluations of the competition.
Discussions can supply some information on the effectiveness
of competition; while some organizations secure information
by talking to the store manager of the competitive market.
Occasionally a sales representative of some manufacturer

can inform the new operator as to the effectiVeness of a
Competitive market. A businessman can observe the activi-
ties of the competitors either by walking through the

store or observing activities from the exterior. Usually,
if the store traffic count is high, the assumption is that

the competitor must be successful.

Analyzing competitor's cash register tapes. There

 

are several ways of estimating the competitor's sales

volume. One voluntary group has developed a unique method.30
The cash register in the competitor's store must be the type
which prints on the tape not only the dollar total of each
individual customer's purchase but also a cumulative figure
showing the number of customers for the day or for several
days. Then this company's representative makes the first
and last purchase of the day. By assuming an average based

on the company's experience per sale, total sales of the

competitor can be estimated.

Personal interview method. Another technique used not

 

only to estimate the sales of stores but also to form an

 

30Canoyer, op. cit., p. 34.

43

idea of the trading area size is the personal interview
method. Interviewers canvass the area to find out where the
people buy their food and why. This method is reliable when

carried out by a group of experienced interviewers.

Counting the number of check outs. One of the most

 

commonly used methods is that of counting the number of
check out counters and estimating the sales per cash
register. The weekly sales per register varies according

to the type of check out facilities, speed of cashier,
amount of store traffic, and assistance given by bag boys.
According to a survey of the opinions of some food operators,
"the conventional type of check out averages between $3,500
and $5,000 a week; while the motorized check out facilities

average $6,500 to $8,000 weekly."31

Even though there are
exceptional situations, average sales per cash register
fcan be used as one of the correlations in estimating store

volume.

Number of store employees. Still another method of

 

estimating competitor's volume is to count the number of

employees in the store and estimate sales on the bases of
an assumed average per employee. Sales in food chains and
super market organizations approximate twenty—five dollars

per man hour; therefore, this figure is used in estimating

 

31Lillios, op. cit., pp. 93-95.

44

the sales of competitive super markets. "Twenty-five
dollars per man hour is an overall store average, for this

figure does vary in the different departments.”32

Square footage of the store. Another technique is

 

determining the square footage of the store and estimating
sales on an assumed average of $2.50 to $3.25 per square
foot of selling area.33 The efficiency of the operator can
affect the volume per square foot in a store, so the above
figures provides another estimate. Several methods of
estimating sales should be used to provide a more reliable

figure.

Number of customers. A more elaborate method is to

 

count the number of customers coming out of the store and
take cash register readings at frequent intervals, such as
every fifteen minutes for a given period. This technique
will provide a reasonably accurate estimate of the average
sale per customer and, when multiplied by the number of

- customers for a given period, the sales for the week can be
determined by consulting company records as to the proportion
of weekly business done for the specified period. Generally,

34

such a technique is employed for two peak days.

——

2
3 Personal interview with Mr. Swanson, Grand Rapids
Wholesale Grocery, Grand Rapids, Michigan.

33LilliOS, op. cit., p. 95.

34Ibid.,p. 96.

45

Sometimes the estimate is obtained by counting the
number of people entering the store and estimating the sales
on the basis of an assumed average purchase per person.
Using this method makes it difficult to determine which
people entering the store actually made a purchase.

In extimating the per-cent of business which may be
attracted to the new store, some operators may rely on
experience received in other locations and the judgment
drawn from these experiences. In a survey taken of several
chains, they commonly conceived that an "estimate of twenty
to thirty-five per cent of the total food sales of an area

t."35

is expected by a new super marke Of course, the experi—

ence of these chains has resulted in these opinions.

State sales tax. In some states where there is a

 

state sales tax, the prOSpective operator may obtain sales
tax reports of the various retail establishments in his
area over the period of a year, especially those of his
potential competitors; and he may derive from these sales
tax figures the estimated volume of the competitors. After
the total volume of all the competitors is determined, this
figure can be compared with the total potential food sales
for the area, thus revealing the possible sales for the new

store.36 A reason this method is not always workable is

 

35Ibld., p. 43.

36Personal interview with Jack Brewer, Jewel Tea Com~
pany representative.

 

46

that the datatis released by company figures rather than
individual store figures and frequently covers a territory
larger than the trading area.. A form for evaluating the
characteristics of competition will aid the investigator in

his evaluation (see page 47).

Estimating the PrOSpective Sales for the New Operation
After the various factors, such as the number of
families, the average family income, the potential food
volume in the area, and the competitors and their volume
are given consideration, the potential sales of a new super

market can be estimated.

Rule of thumb method. One method used for estimating

 

the potential volume of a prospective super market is the
following:

number Of people in the area $7 00 — Weekly Sales

The figure four in the formula is the expected pro-
portion, twenty—five per cent, of the business available
within the area. The seven dollar figure represents the
average food expenditure per person per week. When the
number of people in the trading area is multiplied by the
average amount spent per person per week for food and then
divided by the expected proportion of business in the area,
the estimated weekly volume of a prospective super market is

determinable.

 

TABLE V

SUPER MARKET REPORT1

47

 

 

 

 

 

 

 

 

 

Store Address City

(indIcate the nearest cross street)
Dimension of building Area
Dimensions of sales room Area
Basement _____ Yes (____ same size as building,

______ No _____3/4 size, _____l/2 size,

1/4 size.)

Number of spaces in lot I Number of check stands

 

Other parking nearby

 

Store hours

 

Type of fresh meat operation:
self service, butcher service,
combination of both

Type of fish and poultry operation:
self service, butcher, both

Special departments, features and facilities

 

Description of exterior

 

Description of interior

 

Description of immediate neighborhood or shopping center,

if any

 

General impressions

 

0n the reverse side make rough outline sketch of building,
salesroom and parking lot, showing approximate dimensions,
and location of entrances to store and lot. Show street

names, and indicate type buildings adjacent to this store.

 

 

 

lChristos Lillios, "sfiier Market Site Selection" (un-
published Master's thesis, Michigan State University, 1953),
p. 9 o

48

Where a new unit will be located in close proximity
with another super market, another rule of thumb method has
been used. In general, where there was one store and now
there are two stores, both stores will do one hundred and

forty per cent of what was done by the former store.37

Estimates by other experienced people. The independent

 

operator, inexperienced in estimating the possible sales
volume, may enlist the advice of other operators in differ-
ent communities and get their estimates. The prospective
operator tends to stay on the conservative side. "Their
reasoning is that it is better to figure on a smaller volume
of business and build the store to meet this volume than to

H 38

plan on a larger volume that does not materialize.

Highway location. Estimating the prospective sales

 

of a highway site is very difficult. According to one
study,39 a highway site which 2,000 to 2,500 automobiles
pass per day is a good location for a super market solely
dependent on transient traffic. This study indicates that

five to ten per cent of all transient vehicular traffic that

 

37Samuel C. A. Hanna, "Analysis of a Location for a
Supermarket" (unpublished B.B.A., Massachusetts Institute of
Technology, Cambridge, Massachusetts, 1948), p. 44.

38Robert Formann, "Store Location and Trading Area
Analysis," Seminar Report, p. 7.

39Hanna, op. cit., p. 46.

49

passes the considered site each day will stop to shop. On
the assumption that five per cent of the traffic would
patronize the prospective location, the following formula
is devised to estimate the prospective sales for a highway
location:

.05 x 10,000 (number of automobiles passing the
location during the store hours for an
entire week)

x $20.00 (average food expenditure per week)
= $10,000 (weekly sales expected from transient traffic)

In estimating the sales for a highway location, con-
sideration should be given to the type of traffic passing
and the hourly distribution of traffic along with the number
of potential customers passing the location.

One chain operation determines the prospective sales
for a new market by making a count of homes within a one,
two, and three mile radius of the site, and assuming one
family lives in each home and each family has an average
food expenditure. The volume of the store is usually antic-
ipated by a "rule of thumb" method based on about twenty
dollars per week per family (assuming location is in a
section that would average four persons to a family). This
method measures the food volume within a reasonable trading
area of the site and the number of food stores in the area
have a considerable effect on the percentage of food business
available for a new store. Generally speaking, considering

competition already established, it is reasonable to expect

50

about twenty—five per cent of the total food sales within a

three mile radius.”0

The formula for calculating the prospective sales is:

number of families in the area

x $20 00 anticipated
4 .

= weekly sales

 

One cannot emphasize too strongly the importance of
traffic flow, accessibility, and parking facilities to a
prospective store location. If the traffic flow is toward
the center of the trading area, the store should be located
in the position to catch this incoming traffic. Many people
patronize a store because of its accessibility, therefore,
this factor ranks high on the site evaluation list. Mr.

New Fleming, president of the Fleming Company, says, "We
believe if a super market is located where it is easily
accessible to consumers, particularly by automobile, the
ultimate success of the store will depend upon its manage—
ment.“41

Several wholesalers throughout the country provide
store engineering service to assist the independent retailer
in store site selection, building, and layout. Some whole-
salers will purchase the land, finance the construction of

the building, and lease it to the retailer. Not only will

 

uoRobert Harkins, "Store Location," Seminar Report,
pp. 16-17.

41Interview with New Fleming, President, The Fleming
Company.

 

51

they perform these services, but they will install the
fixtures and arrange the stock in the display cases, on the

shelves, and on gondolas.

Summary

A parking lot has become an essential factor in
attracting customers to the super market, since a majority
of the super market customers shop by car. Provisions
must be made for parking facilities near a market location
or Mrs. Consumer will drive to the place where such facili-
ties are available.

In estimating the prospective sales for a new super
market, the exact volume figure of the competition is not
imperative, but approximate figures may aid the new operator
in deciding on the amount of potential food volume in the
trading area. There is always the possibility that the new
market may draw customers from other trading areas. The
new operator's estimated volume will determine the size of
his building, size of his parking lot, and total land area
needed. On the following page is a retail food survey form
which summarizes the important factors in evaluating and

locating a super market.

 

52

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CHAPTER V
FINANCING THE SUPER MARKET

Determining the Amount of Capital Needed

 

Now that the prospective sales volume of the proposed
food store has been estimated, the next important step is to
decide how much capital the prospective operator needs to
buy the land, construct and equip the building, purchase
the inventory, surface the parking lot, and maintain a
.working capital.

Assuming the anticipated store volume would be $20,000
per week, the area size of the building site plus the
parking lot can be figured. According to a recent figure
released by the National Association of Food Chains, the
average sales per square foot per week of selling area in'
the chain stores is $3.25.42 This figure is also used by
a prominent wholesale distributor in the food industry.
Assuming $3.25 to be the average sales per square foot of

selling space and $20,000 to be the anticipated volume, the

formula is:

anticipated volume divided by average sales
per square foot = sales area of prospective building

 

42Super Market News, October 15, 1956, p. 41.

The size of the selling area is figured with the
estimated weekly sales volume ($20,000) divided by the
anticipated average sales per square foot of selling area.
Using this method results in approximately 6,000 square
feet of sales area. Assuming the building to be divided
into seventy per cent sales area and thirty per cent stock,
preparation and cooler rooms, which are the percentages some
food store operators use, the total area size of the prospec—

tive building, in round numbers, is 8,500 square feet.

Land and building. There is difficulty in arriving

 

at an exact figure on land and building costs, since these
costs will vary slightly according to location of the
property and type of building erected. A safe estimate of
building costs would range from $7.50 to $10.00 per square
foot. In determining the building cost per square foot,
some operators may include refrigeration-heating facilities,
basement, upstairs, et cetera; therefore, when comparing
building cost, the operator must determine whether the
figures are comparable. Thus, a conservative estimate on
8,500 square foot building may be $63,750. This estimate
was obtained during a personal interview with Mr. Swanson,
Director of Store Improvement Service for Grand Rapids
Wholesale Grocers of Grand Rapids, Michigan. He has had
considerable experience in working with independent operators

on their store locating and building problems.u3'

—_‘

“BSwanson, loc. cit.

 

 

 

A fair estimate of land cost for a super market with
6,000 square feet of selling area and a parking lot of
24,000 square feet, assuming a four to one parking ratio,
would be $17,200. This land estimate is based on the average

land costs as reported by Chain Store Age and presented in

 

a pamphlet published by the National Association of Food
Chains in connection with their Spetember 1953 convention}L
Basic building and land costs of a market 8,500 square
feet on a plot of ground 32,500 square feet and based on
the above estimates would then run in the neighborhood of
$80,950. If air-conditioning were added, this would

increase the cost.

Equipment. The estimate submitted on equipment cost

 

is based on the opinion of a person who has had years of
experience in aiding independent operators establish new
stores or remodel old stores. This figure was also compared
with similar stores with the same volume.

It is estimated that equipment for a super market of
the size considered would be $36,000. This figure includes
all the necessary selling equipment and backroom equipment.
As a point of reference on actual expenditures of equipment
item for item, see "A Case Study in the Development of A

Supermarket" by Donald Rubens. Presented in this study are

44
"What Does It Take To Maintain Food Chain Leader-

ship in Stores?," National Association of Food Chains,
September, 1953.

 

56

the actual equipment expenditures by the Hart Food Stores,

Incorporated, Rochester, New York, in equipping one of

I:
/

their new 10,000 square foot markets in 1951.

Inventory. The opening inventory estimate, including

 

produce, meat, frozen foods, some non-foods, and dry grocer-
ies is $42,000, the costs of goods for one store with an
expected volume of $20,000 per week.

Leading super markets today consider twenty times per
year average turnover to be reasonable although outstanding
operations have been known to attain a turnover rate, taking
all departments into consideration, of thirty—six times per
year. At the same time, many successful large volume stores
do well on an average turnover of eighteen.

The above estimated inventory figure of $42,000 per
store might be broken down still further by estimating the
inventory for the meat department at $11,130, the produce
department at $3,990, and the grocery department at $26,880.
The initial opening inventory is estimated from typical
relationships between inventory and sales. If the gross
profit is nineteen per cent, using the figure in the
following operating statement, then the cost of sales is
eighty-one per cent of sales. On the basis of a $20,000

weekly volume and $1,040,000 yearly volume, the cost of

u5Donald B. Rubens, "A Cast Study in the Development
of a Supermarket" (unpublished Master's thesis, Michigan
State College, 1951), p. 31.

57

goods for the year is $842,400. A typical rate of turnover
is twenty times per year. This means that sales are twenty
times the average inventory investment. When the cost of
sales ($842,400) is divided by the turnover rate, twenty,

the cost value of the average stock is approximately $42,000.
The percentages used in calculating the cost of goods by
department is based on a $15,000-$20,000 weekly sales,

which is presented in "Facts in Grocery Distribution," by

46

Progressive Grocer. For a food store operating statement

 

of this size store, see the following page.

Parking lot. The estimated cost of the parking lot

 

(24,000 square feet) is $13,200. This estimate includes
the cost of black topping after grading has been completed,
and is based on an average cost of fifty-five cents per
square foot.147 The amount of parking area will vary with

the number of vehicular customers.

Cash. Generally speaking, cash on hand equal to ten
to twenty per cent of the total current assets is sufficient
for a retail grocery store. This amount should be enough

to meet daily needs and to provide some reserve for

\

46"Facts About Grocery Distribution,' Progressive
Grocer, Twenty-third Annual Survey, 1956 Edition, p. 19.

M7"What Does It Take to Maintain Food Chain Leader-
ship in Stores?," op. cit.

 

TABLE VII

FOOD STORE OPERATING STATEMENT1

[I

 

 

Average Weekly Sales $15,000-$20,000

Sales
Groceries 63.88%
Meat 26.55%
Produce ___.5
Total Sales 100.0
Gross Profit
Groceries 16.34%
Meat 21.90%
Produce 26.69%
Total Gross Profit 19.09
Expenses
Accounting .10%
Advertising .96%
Delivery expense .03%
Depreciation and leasehold .63%
Dues and subscriptions .03%
Freight .86%
Fuel .08%
Garbage disposal . 5%
Insurance expense .15
Interest expense .15%
Laundry .09%
Light, power, water .5W%
Rent/building expense .82%
Repairs .13%
Salary-—Grocery 2.89%
Meat 2.01%
Produce .99%
Service fee--Grocery 1-02%
Meat .21%
Supplies .81%
Sundry .3l%
Taxes——Payroll \.18%
Personal property 9.11%
Trading stamps 2.02%
Telephone .04;
Total expenses 15.
Operating Profit 4.08%

Owner's Salary

1.0%%
NET PROFIT‘ '

 

1"Facts About Grocery Distribution,“ Progressive
Grocer, Twenty-third Annual Survey, 1956 Edition, p.719.

59

emergencies. Carrying a larger cash balance would not be
profitable since idle cash is not producing a return and
cash turnover is just as vital to good operations as inven-
tory turnover.48 The cash required for this $20,000 weekly

volume store is estimated to be $5,000.

TABLE VIII
SUMMARY OF THE REQUIREMENTS

 

 

Item Amount
Land $ 63.750
Building 17,200
Equipment 36,000
Inventory 42,000
Parking lot 13,200
Cash 5,000

$177,150

 

Sources and Type of Capital

Naturally, after the prospective super market operator
has projected his capital requirements for the establishment
of the market, he desires to know where or by what means he
can obtain the capital. A very usual and logical question
a Prospective retailer will ask is, "How much money must I
have and how do I go about obtaining the financial aid I

may need?"u9 After determining the necessary amount of

48 W Hue and Associates,
Nelson A. Miller Harvey . gy,

"Establishing and Operating a Grocery Store," United sgates
Department of Commerce, Series No. 21 (Washington, D. ..

Government Printing Office, 1950), p. 72.

49"Financing Your New Super Market," Bulletin prepared
by the National ASSociation of Retail Grocers.

60

money the prospective owner must secure the capital.
The prospective grocer's sources of financing are as
follows:

Sale of stock—-common and preferred.
Issuance of bonds secured or debentures.
Loan from private investors.

Loan from a financial institution.

Aid through wholesalers.
Sale—~leaseback.

O\\DJ:'WI\)E-‘

Sale of stock. The prospective super market operator

 

may want to finance part of his new store site by selling
stock. The selling of stock by a new operator, who is a
stranger in the trading area, may be almost an impossibility
because he has no reputation in the area. This problem
may not exist with a prospective businessman who has been
active in civic and social activities and is known.

The prospective super market operator may form a
corporation by selling common and/or preferred stock. Mr.

Ned Fleming says,

A prospective super market operator may form a corpor—
ation by selling sufficient common stock to make a
twenty—five per cent down payment on fixtures and a
cash payment for the opening inventory; Egen the corpor-
ation may borrow the additional capital./

J. K. Lasser suggests four reasons for the small
' a

businessman seeking capital through stock:’

 

50

Cf

Fleming, op. 01

—I—

51J. K. Lasser, How to Run s Small Essinsss (New York:
McGraw-Hill Book Company, 1955), p. 100.

 

61

If you want to avoid debts,

If the economy is heading for a period of de-
flation,

If the maturity date or the fixed charges will
be a burden that cannot be met,

If your capital position and credit are weak.

JZ‘UOMi-J

Issuance of bonds or debentures. There are people
who do not want to assume the risk involved in ownership
participation, but these people may be willing to extend
the use of their capital to any business, provided there
is not too great a risk. To secure the capital through a
bond issue, the company will pledge its property.

To illustrate the financing of a store by debentures,
the following actually happened to Scott C. Detrick and
Joseph A. Raible, co-owners, Scotty's Markets:52

In arranging the financing for our new store which
opened last December, we discovered we were short
about $30,000 of the capital we needed. But we did
not want to delay_locating in this particular com-
munity.

Where was $30,000 available? Careful study of the
situation resulted in the idea of issuing debentures.

Debentures are sold mostly on faith. This was true

of ours. Any person entering a community new or
unknown would find it difficult to finance in this
way. People must see a business in operation to have
faith in it. However, we have been in business for
about six years, so customers were able to judge the
type of business we operated, and this justified their
faith in our future plans.

A debenture has last call. Should a business fail,
the bank would secure its money before the debenture
holder. The wholesaler would get his money. Then

52"They Sold Debentures to Finance Their New Store,"
Bulletin prepared by National Association of Retail Grocers,
p. 11.

 

62
what is left would be available for division among the
holders of the debentures.

We sold in units of $500, with 5 shares of common
stock at $10 a share. Thus each package cost $550.
To launch them, we suggested them to customers some-
thing like this: ”Mr. Jones, we are offering $500
debentures on a 10 year basis, at 6% interest. If
we can pay these out in 3 years, or 5, we reserve
the privilege of calling them in sooner. You are
familiar with our business operation . . ."

A super market which opened July 30, 1956 at Fort
Wayne, Indiana, owned by an independent operator, Mr. Henry
J. Eavey, required an investment of two and a half million
dollars. Mr. Eavey had a credit standing and reputation
in the grocery industry that justified the financing of
this super market. He is the president of a wholesale
grocery house at Richmond, Indiana, which has operated for
many years and this operation serves a voluntary group of
independent grocers in the territory.

Mr. Eavey decided to build a super market in Fort
Wayne, Indiana and received financial assistance from his
bank. His banker works clOsely with the Continental Illinois
National Bank and Trust Company of Chicago. Mr. Eavey's
local bank was not permitted to lend him enough money to
open this market because of the legal limits on that partic—

ular bank's maximum lending authority, so the Chicago bank

aided in the financing of this great market.53

Insurance companies as debenture lenders. Life insur-

ance companies are a source of long term debenture loans.

53Personal communication with Gordon Cook, Sr., Operation,
Incorporated.

63

The insurance company, in making long term loans, has no
depositors and no danger of a sudden demand for money as
does a bank. Insurance companies do make long term loans,

since much of their business includes long-term commitments.

Investment bankers and debenture money. Investment

 

bankers are chiefly middlemen. The investment house merely
assists the prospective borrower to decide on the type and
terms of his proposed loan, and then markets the security
for a fee. The investment house may sell the bonds to the
public or one of several large institutional investors,
such as, insurance companies, educational foundations,
pension funds, investment trusts, and the like. The expert
can size up the borrower's situation and present his appli—
cation to the best source for the funds. He can advise
what rate to pay, what features to include in the indenture
and what requirements and policies the respective money
sources operate under.5u The expert knows what leading
institutions are ready to make loans, their prejudices and
preferences and he may save the borrower money and time.
Sometimes the investment banker's own prestige can help the

Prospective operator get a loan.

Loan from private investors. Another plan for

 

securing capital is to find a contractor with some money and

 

BuArthur Richland, "How to Raise Cash and Influence
Bankers," Super Market Merchandising, Vol. 21, No. 8 (August,
1956), pa 11’6-

 

on

get him to build a super market, which the super market
operator leases. The next step is to arrange with equip-
ment manufacturers for financing of equipment, which is a
standard practice. Under this plan, all operator has to
do is pay for his opening stock and he may get temporary
credit on this from his sponsoring wholesaler.

Sometimes a local investor who believes in the com—
munity and is convinced of the future of a new super market

will make a loan without security, or with less than a loan

\H

institution would require.5 A small concern may get a loan
this way when a bank does not want to grant it. Sometimes
a local inventor will endorse the bank loan, agreeing to

pay if the maker of the note is unable to pay.

Loan from a financial institution. The twelve regional

 

Federal reserve banks are authorized to lend directly to
business enterprises when they cannot get money from the
usual sources on reasonable terms. These loans are at
present limited to five years or less and are for working
capital purposes only. The loans are available only to
established businesses, so new concerns cannot be accom~

modated.E6

55United States Department of Commerce, The Small
Essinessman and Sources of Loans, Economic (SmEII Business)
Series No. 69 (WaShingtoHT D. 0.: Government Printing
Office, 1948), p. 19.

E

’6Lasser, op. cit., p. 118.

65

The Small Business Administration makes regular loans
up to $250,000 maximum and limited loans up to $15,000. For
someone already in business and doing over two million
dollars volume, Small Business Administration makes no loans.
The following is a telegram from Wendell B. Barnes, Small

Business Administrator, to Super Market Merchandising:

 

 

Grocery stores and Super Markets in small business
category are applying for and receiving SBA loans.
82 such loans totaling $2,688,000 already approved.
All applications from eligible concerns given fair
and impartial consideration. Super Markets with
$2,000,000 or less annual gross are regarded as
small business. The act under which we operate
specifies no government loan funds be advanced unless
credit not otherwise available from private sources
at reasonable rates and that all loans be of such
sound value or so secured as reasonably to assure
repayment.57

Financing through wholesaler. Many independent

 

operators are affiliated with either a voluntary group or
a co-operative group. Many of the groups have set up
separate finance corporations to help finance good,young
retailers open new, large super markets. Many of the groups
are actively and aggressively seeking good, young retailers
or especially competent super market managers so as to help
them get started in business.

Some wholesalers make connections with banks and

insurance companies, which in turn, supply the retailer

57Wendall B. Barnes, "What Can You Get From SBA?,"
Super Market Merchandising, Vol. 21, No. 8 (August, 1956),
p. .7—

 

66

with the necessary funds. The wholesaler often guarantees
the repayment of part of the loan and sometimes the entire
amount. In either case, a reserve fund is set up by the
wholesaler to cover any loss which might occur.58 One
wholesaler said the importance and the need of a financing
program is indicated by the fact that forty per cent of
their cost-plus accounts had received assistance from the
wholesaler.

There is a thesis entitled, "A Proposal for the
Financing of Independent Super Markets by Wholesale Grocers,”
by Erwin Lee Feller which proposes an excellent plan for
financing the construction and location of super markets
for the independent operator. This thesis is suggested to
anyone who is further interested in financing super markets

59

by means of wholesalers.

Construction of a building with a sale and leaseback

 

agreement. Just what is a leaseback? Sidney Barton, who

is reputed to be the largest individual holder of leaseback
real estate in the country, says, "It is a holding purchased
for the complete price, which the owner has invested in
building and land, and then leased back on a specified long

60
term lease and rental.

 

59Erwin Lee Feller, "A Proposal for the Financing of
Independent Super Markets by Wholesale Grocers" (unpublished
Master's thesis, Michigan State University, 1954).

60"Barton on Leaseback," Super Market Merchandising,
Vol. 21, No. 8 (August, 1956), p- 53-

67

The leasee receives several advantages from this

transaction:61
1. He gets a market made to his own liking and
specifications.
2. Capital is freed for expansion purposes.
3. There may be faster turnover on money.
4. The rental which runs anywhere from 0.7 percent to

2.0 percent of total sales is a legitimate deduction.

If the operator is in the 52 percent tax bracket,

his rental cost is cut in half.

Since a typical lease would run from 15 to 25 years

and allows for a number of five or ten year options,

in many instances a lessee could control the land

and building for up to ten years. If the site is

no longer suitable for a super market, it may be

satisfactory for another business. In that case

the lessee not only works out a re-lease but may

realize a profit for himself through this re-lease.

6. Most leases contain negotiation clauses which permit
the lessee to withdraw from his contract if the
location proves to be a "dud."

\ in

Barton thinks anyone can qualify for leaseback,
providing he has good credit and his company's net worth
is at least $500,000. The potential purchaser generally
considers credit, net worth, and the real estate price as
the most important factors.

There seems to be a difference of opinion on the sale—
leaseback financing for Albert F. Donohue of Kidder, Peabody,
and Company, an investment firm, says that it (sale—leaseback)
most certainly is not the magical ”eat—your-cake-and-have-it-

to" technique that some may think.02 A sale and leaseback

 

61Ibid., p. 53.

62Albert F. Donohue, "Eight Questions and Answers on
Financial Growth,” Super Market Merchandising, Vol. 21, No.
8 (August, 1956), p. 52.

68

of a property means the seller disposes of his property,
probably never regains title to it, bears all of the
expenses of the property just as if he continued to own it,
yet repays the purchaser every dollar of the purchase price
during the primary term of the lease. The interest rate
contained in the lease-rental figure ordinarily is higher
than the rate on an unsecured long-term borrowing transaction.

This topic cannot be delved into thoroughly in this
thesis, but the differences in opinions reveal the fact
that the prospective operator should consider, ponder, and
discuss with experienced men, and have a thorough knowledge
of the sale-leaseback method before utilizing it.

The following chart classifies all the types of loans
and capital generally available to commercial businesses
and shows the sources from which such funds generally

emanate.

Working with the banker. Three kinds of money are

 

available:
Loan--For temporary use only-—must be returned.

Invested Capital--Permanent money--use as desired;
it is the operators.

 

Borrowed Capital-—Substitute for invested capital
under certain conditions-~use only
as directed.

 

Some people think of banks as institutions that loan
money to individuals or companies who do not need capital.

These individuals think that the bank never loans them

69

TABLE IX

nmImmlml

 

Type

Source

 

Unsecured loans
Short term:
Long term (debentures):

Secured loans
Real estate mortgage:

Equipment (chattel)
mortgage:

Accounts receivable:
Inventory:

Invested capital
Capital stock:
(common, preferred)

Private capital:

Borrowed capital'

Commercial banks.

Commercial banks,
companies.

insurance

Commercial banks, savings
banks, building and loan
associations, insurance
companies, real estate,
mortgage bankers, invest—
ment trusts, pension
trusts, universities, U. S.
government corporations,
investment bankers.

Finance companies, factors,
investment bankers, com-
mercial banks, insurance
companies.

Finance companies, commercial
banks, U. S. government
corporations, factors.

Commercial banks, factors,
finance companies.

Investment bankers (or their
own account or through the
proceeds of sale securities
to public), insurance com-
panies, investment trusts,
pension trusts, etc.

Individuals or investment
groups and syndicates.

Factors, finance companies.

 

1 2
Albert F. Onohue,
Financial Growth,"
8 (August, 1956), p. 5n.

"Eight Questions and Answers on
Super Msrket Merchandising, Vol. 21, No.

70

money when they need it. These operators should analyze
the reason for not receiving their loan.

The kind of service a retailer gets from his bank
depends upon the working relationship he has with the bank.
The retailer should have an understanding of the banking
loan system. He should make the bank president an advisor
or counselor to his business by informing the president of
financial incidents that occur in the business. If the
operator expects to purchase some equipment or fixtures,
he may ask the bank president's advice on the transaction,
whether the operator follows the advice or not. This way,
he will develop a friendship which may be of value in
securing loans later.

When the retailer is planning to construct a super-
market, he may want to show the bank president how the
location was chosen by showing the means of determining
the trading area and the characteristics of the population
trends, buying power, estimated potential food volume in
the area, and the anticipated volume of the prospective
operator's business. The retailer may show the banker how
the store size and parking lot were determined along with
other important store information. Presenting to the presi-
dent of the bank complete site location information may win
his confidence in the prospective operator, and thus the
banker is more readily agreeable to making a loan. The

banker will be interested in the prospective operating

71

statement, budget, and future plans of the new businessman's
enterprise. "When a climate of confidence exists, the
banker will try to figure out how he can make the loan
rather than to give reasons why he cannot."63 There is one
important point to remember. In presenting the information,
the operator should always be receptive to suggestions the

banker may offer, since the banker has varied experiences

in business transactions.

Choosing a bank. Not all prospective retailers may

 

be selective in choosing a bank, for there may be only one
bank in their small community. But if there are several
banks, consideration should be given the service each
bank has to offer before selecting the bank to patronize.
A bank should be chosen that is progressive and willing to
take risks on new businesses in the community. There may
be a bank in the community that makes a practice of loaning
money to super markets and is willing to advance a loan to
the prospective operator. 8

"Strict regulation of banking practice by government
agencies plays an important role in determining not only

how much a banker can loan, but to whom he can offer it."6u

6

—-Q

'2
J"Financing Your New Super Market," op. cit.

6“"F1nancing the Food Store," op. cit., p. E.

72

The bank may be convinced of the prospective operator's
business ability, but government banking regulations may
limit his loaning capacities. The amount that the bank can
loan is related to the bank's capital and surplus. The
operator may use the local bank for small loans and acquire

larger loans from a metropolitan bank.

Stay close to home. Convenience is a big asset in

 

dealing with a nearby bank. When borrowing from a big bank
in another city, the first question they will ask is why
didn't he use his local bank. He must have a legitimate
answer ready because in their investigation they will phone
his "logical" near-home bank. Bankers exchange information
freely so the impression made on the first banker may influ-
ence the entire borrowing history. The banker must have
confidence in the borrower's ability and can trust the
borrower's statements.

Here are some points to remember in presenting the
story to the bank:

1. Establish a sound credit reputation.
a. Pay all wholesaler bills promptly.
b. Keep bank accounts in good order.
0. Pay all loans promptly.
Keep business records in good shape.
Make yourself known to bank officials.
a. Ask them for business advice.
b. Make follow-up visits to show them improve-
ments.
4. Make a thorough study of potential trading area,
its development possibilities.
Present a sound, well—developed picture of your
need for financing to the bank.

UJM

\fl

73

6. Present all the facts, all the documentation you can.
7. Don't let one bank's turndown deter you, 5

Net Fleming of the Fleming Company, a voluntary sponsor,
suggests these qualifications to the operator going into
business for himself:

1. He must have proven himself to be a sound operator
either by reason of the fact that he successfully
managed a super market for a chain or successfully

operated a retail grocery store of his own even
though it might be a superette.

2. The ability to develop and train personnel and to
delegate authority.

3. An open mind to improvements and a desire to grow.

4. The ability not only to makemoney, but to save it,

as a basis for future growth.

"Free Capital" sufficient to make a seventy-five
percent down payment on fixtures, and cash payment
for the opening inventory. Preferable, too, would
be sufficient additional cash for working capital,
although this, in instances of weél-qualified
operators, might well be waived.6

U'l

The prospective operator should know his needs before
actually receiving the necessary funds to finance a market.
The prospective retailer must make a thorough study of the
amount of money needed to establish his business and should
get advice from the banker, wholesaler, and other market
operators before drawing any conclusions as to his needs.

To keep the business "above water," the operator

should ask for sufficient capital or loans to keep the

"How to Locate and Finance a New

65 Trout
Joseph 1 34’ No. 11 (November,

Market," Progressive Grocer, Vol.
1955), p.—HE-

c1.

66Fleming, op. 01

._——

74

business operating effectively and must anticipate his
ability to repay these loans without "strangling” the
business.

Wholesalers are becoming more and more concerned over
the financial assistance of retail operators, and frequently
they will support a prospective operator in a loan or buy
the land, build the market, and lease to the operator.

Mr. Gordon Cook, Sr., Operation, Incorporated, says, "If
the super market operator is really worthwhile, he'll get
financial help in some manner from his chief source of

supply."67

67Cook, Sr., op. cit.

——-

CHAPTER VI
SUMMARY AND CONCLUSIONS

Summary

This thesis presents methods and procedures the
independent operator can follow in locating and financing
a super market. This thesis also provides sources of
information which offer data and help in locating and
financing the operator's new market.

The site analysis section of the study reveals that
certain factors are more important in one type of location
than in another. This study also suggests factors that the
independent operator should consider in selecting a location.

The locating of a super market includes three main
problems: the selection of the trading area, the particular
site within the specified area, and the anticipated sales
for the considered site.

Several methods are used to determine the trading
area; namely, Editor and Publisher Market Guide, local news-
paper circulation map or figures listing license numbers of
parked automobiles, interviewing merchants and professional
men, tabulation of out-of—town checks, Reilly's Law of
Retail Gravitation, rural mail deliveries, and aerial

photographs. One or a combination of several methods may

76

aid in determining the trading area, depending on the
situation.

After the trading area is determined, the size, trend,
and characteristics of the population are vital information.
All people are consumers, so the trading area's population
provides an indication of the number of potential customers
in the area. A population analysis reveals the trends of
growth in the area which is of basic importance in locating
a market. Characteristics of the population to be consid-
ered include sex, age, race, religion, educational level,
native or foreigh born, permanent or transient status, and
others. These traits indicate the buying habits which
affect the potential volume for the trading area.

Decennial Census of Population, block statistics,
and local sources of market information provide material
on trading area population. The Decennial Census may be
untimely in many instances because of its decennial pub-
lishing time.

The buying power of a trading area is determined by
a number of indicators, such as total retail sales, general
rental value, and income level of the population. Income
date can be obtained from census publications, local news-
papers, and market information.

To find the potential food sales volume of the
trading area, the operator multiplies the number of people

in the area by the average food expenditure per person per

77

week. This gives the potential food sales volume of the
trading area for a week. Another method is to determine
the number of families in the area multiplied by the
average weekly food expenditure per family.

The prospective operator should estimate his com-
petitors' volume after the potential food sales for the
trading area have been determined. The sales volume of
existing stores can be obtained by the number and type of
check out units, the number of employees, the square footage,
customer counts, cash register tapes, sales tax, and other
methods. These methods may furnish a reasonably accurate
estimate of the competitors' volume.

The operator may determine his prospective sales
volume by comparing the total competitors' sales volume
figure with the potential food sales volume for the trading
area, which means more volume, or the store may draw people
from the competition. "Rule of thumb" methods are used to
calculate the portion of business a new operator may expect.
A new operator may anticipate twenty to twenty—five per
cent of the food sales in the area, if competition is
limited and the new store provides additional drawing power.
Another method is to multiply the number of people in the
area by average weekly food expenditure per person, then
multiply by the anticipated per cent of the total volume
the store is expected to draw. This gives the anticipated

sales volume for the new store.

78

Where a new supermarket is located in close proximity
to a competing super market, the combined volume of the two
may be as much as one hundred and forty per cent of the
former store volume.

Some other considerations for a new location are
parking facilities, accessibility, and traffic flow.
Parking facilities are a customer convenience and every
convenience possible should be provided. The parking lot
area is figured in proportion to the anticipated number
of vehicular customers and the store sales area.

There are negative factors,such as wrong side of the
street, rivers, cemeteries, industrial plants, poor side—
walks, hospitals, smoke, and other factors that may be
detrimental, and may detract customers from the location.

Knowing the prospective sales volume may help the
operator determine the amount of land needed, building
area, equipment, opening inventory, and working capital.
When these facts are known, the super market operator may
know the amount of capital needed to establish his store.

After the prospective operator determines the amount
of capital he needs, he must find some means of securing
this money. He is usually limited in the sources available
to finance the business. The main sources are, namely,
his own capital, relatives' money, a financial institution,
and/or a wholesaler.

The sale of stock to finance a new business may be

impossible for the independent super market operator, since

79

his business ability is not known. The large established
operator of a well-known corporation may be able to market
common and/or preferred stock.

The issurance of bonds may be a way of securing
capital from those who do not want to assume the risks
involved in ownership participation. This method may be
used only by incorporated businesses.

Insurance companies and investment bankers may be
sources of securing loans and assistance in obtaining loans.
Some contractors will build the building to the
operator's specifications and lease it to him. The equip—

ment manufacturers may finance the equipment and the
operator may pay for his opening stock or get temporary
credit from his sponsoring wholesaler.

The Small Business Administration makes regular loans
to a $250,000 maximum and limited loans to $15,000. Small
Business Administration loans are not available to a busi-
ness having a volume of over two million dollars per year.

Many voluntary or cooperative groups are actively
seeking good, young retailers and are helping to finance
them. Some wholesalers may aid the retailer in securing
necessary funds from banks and insurance companies.

The sale-leaseback method is used by many super market
operators. They buy the land and construct the building
and as soon as the store is in operation, sell the land

and building and lease it back.

80

Banks can be helpful to super market operators seeking
capital. The independent owner should have a working knowl—
edge of the banking loan systems. He should make the bank
president an advisor to his business and keep him informed
on financial incidents that occur in the business. The
retailer may wish to discuss the complete site analysis
with the banker and should be receptive to suggestions
that the banker may offer.

In choosing a bank, the retailer should patronize a
bank that is progressive, offers the most service, and is
willing to take risks on new businesses. The retailer
should stay close to home in his banking so that the banker

can observe his operation and give advice and assistance.

Conclusions

 

Independent super market operators are at a disadvan-
tage compared to chain operators in expanding their business.
The independent is inexperienced and is prone to depend
upon his knowledge instead of employing the services of
experts. Furthermore, he is successful in his present
Super market and believes in his business ability and
JUdgment. The chain operator has on his staff specialists
and experts to survey the trading area, select the site,
plan the store, and do the financing. The chain operators
are aggressively seeking new locations to satisfy planned

expansion.

81

The independent operator, to avoid losing out in
the expansion race, must aggressively plan expansion.

That is, as a group through voluntary or co-operative
associations, the independent must seek out new locations
and find means of financing new store construction in the
same manner the chain operator does.

The voluntary or co-operative group wholesaler offers
services to the members in the form of site selection, store
engineering, and financing. New super markets are planned
and built. Upon completion the super market is leased to
a member, thereby putting aggressive planned expansion into
the independent field.

Techniques for selecting super market location have
changed from selecting by guess to selecting by scientific
processes. Chain super market operators developed the
techniques which have proven successful. Today, the inde—
pendent super market operator with the cooperation of the
voluntary or co-operative group wholesaler uses these
scientific techniques.

The independent super market operator has available
assistance to enable him to compete successfully in the

highly competitive area of new store development.

BIBLIOGRAPHY

Books

 

Brown, Paul L. and William Davidson. Retailing. New York:
Ronald Press Company, 1953.

 

Duncan, Delbert J. and Charles F. Phillips. Retailing.
Third edition. Chicago: Richard D. Irwin, Inc.,
1951.

 

Lasser, J. K. How Es Run s Small Business. New York:
McGraw-Hill Book Company, 1955.

 

Luck, David J. and Hugh G. Wales. larket Research. Engle-
wood Cliffs, New Jersey: Prentice—Hall Company,
1952.

 

Robinson, 0. Preston and Norris B. Brisco. Store Organi—
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Company, 1950.

 

 

Magazines and Periodicals

 

 

Barnes, Wendell B. "What Can You Get From SBA?," Super
Market Merchandising, Vol. 21, No. 8 (August, 1956),
p' .16

"Barton on Leaseback," Super Market Merchandisingi Vol. 21

No. 8 (August, 19%“, , p718, ."

DOnOhue, Albert F. "Eight Questions and Answers on Financial
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1

 

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"How to Measure a Trading Area," Chain Store Age, Vol. 27,
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Richland, Arthur H. "How to Raise Cash and Influence Bankers,"
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19567, pp.‘42¥46.

83

Supermarket News, October 15, 1956, p. 42.

l

Tanney, William W. "Super Markets Data Program,' Appraisal
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Trout, Joseph J. "How to Locate and Finance a New Market "
Progressive Grocer, Vol. 34, No. 11 (November, 1 55),
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Government Publications

 

Canoyer, Helen G. Selecting s Store Location. Market
Division, Office of Domestic Commerce, United States
Department of Commerce, Economic Services, No. 56.
Washington, D. C.: Government Printing Office, 1946.

 

 

Establishing and Operating Your Own Business." United
'States Department of Commerce, Series No. 22.
Washington, D. C.: Government Printing Office, 1950.

 

Store Location. Bureau of Small Business, United States
Department of Commerce. Washington, D. C.: Govern-
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Miller, Nelson A., Harvey W. Huegy, and Associates.
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Grocers Build Better Retailers. Marketing Research
Report No. 112. Washington, D. C.: Government
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United States Department of Labor, Bureau of Labor Statistics.
Family Income, Expenditures and Savings is 1950.
BuIletin No. 1097. Washington, D. C.: Government
Printing Office, June, 1953.

 

 

 

United States Department of Commerce. The Small Businessman
and Sources of Loans. Economic (Small BusinessI
Series No. 697 Washington, D. C.: Government
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BEports and Bulletins

Alderson and Sessions. Cost and Profit Outlook. Marketing
and Management Council, Philadelphia, Pennsylvania,
IX, No. 7 (June, 1956).

 

84

"Financing Your New Super Market." Bulletin prepared by
National Association of Retail Grocers, n. d.

Fine, Isodore V. Retail Trade Area Analysis. School of
Commerce, Bureau of Business Research and Service.
University of Wisconsin, Madison, Wisconsin, Vol. 1,
No. 1 (January, 1954).

"They Sold Debentures to Finance Their New Store."
Bulletin prepared by the National Association of
Retail Grocers, n. d.

"Where Eight Nargus Members Ended Their Quest for Friends."

Bulletin prepared by National Association of Retail
Grocers, n. d.

Unpublished Theses

 

Beckner, Harry. "Market Research Applied to Food Chains."
Unpublished Master's thesis, Michigan State College,
1951.

Feller, Erwin Lee. "A Proposal for the Financing of
Independent Super Markets by Wholesale Grocers."
Unpublished Master's thesis, Michigan State College,
1954.

Hanna, Samuel C. A. "Analysis of a Location for a Super
Market." Unpublished B. B. A., Massachusetts
Institute of Technology, Cambridge, Massachusetts,
1948.

Lillios, Christos. "Super Market Site Selection."
Unpublished Master's thesis, Michigan State
University, 1953.

Rubens, Donald B. "A Case Study in the Development of
a Supermarket." Unpublished Master's thesis, Michigan
State College, 1951-

SWope, Paul S. "Evaluation of Food Chain Store Locations."
Unpublished Master's thesis, Michigan State University,
1954.

Eggsona1Communications and Interviews

 

Brewer, Jack. Personal interview, Jewel Tea Company.

Cook, Gordon, Sr. Personal interview, Operation, Inc.

85

Fleming, Ned. Personal communication, The Fleming Company.

Kiefer, Mrs. Marie. Personal communication, National
Association of Retail Grocers.

Schmidt, Albert. Personal interview, Schmidt Super Markets.

Swanson, Mr. Personal interview, Grand Rapids Wholesale
Grocery, Grand Rapids, Michigan.

Miscellaneous

Fortmann, Robert. "Store Location and Trading Area Analysis."
Seminar report.

Harkins, Robert. "Store Location." Seminar report.
"What Does It Take to Maintain Food Chain Leadership in

Stores," National Association of Food Chains Convention,
September, 1953.

r: E U?- M

 

 

 

 

 

 

”Twill