How much of new economic activity is supportable in a given market?

Inside the Whole Foods in Hyde Park Chicago, IL (opened 2016)

Inside the Whole Foods in Hyde Park Chicago, IL (opened 2016)

Walter Christaller was an early 20th Century German geographer. August Losch was a German economist of the same period. The combination of their seminal work on central place theory, regional and urban economics in 1933 and 1940 is still used today for the location of a firm in any given market. Their work principally related the profit-maximization of a business (e.g., brewery, baker, grocer, farmer, etc.) to the economics of location.

I became fascinated with their theories at the age of 20. Christaller's book, Central Places in Southern Germany (1933), and Losch's book, The Spatial Organization of the Economy (1940), were required reading in under graduate regional econ courses. Applications of those theories were more thoroughly examined in regional and urban economics courses in graduate school. My career - really, a natural vocation - has been a constant cultivation of their theories through real-life projects requiring an understanding of location economics.

A Network of Markets

I do not plan to get bogged down in theory and math formulae. Just want to quickly place retail and mixed-use development work of the 21st Century in the context of location economics. The above three charts are from Losch's book The Economics of Location, translated from German to English by William H. Woglom (Copyright 1954 Yale University Press). These represent the basic building blocks to consider in examining a market area for a given business (i.e., retail tenants, restaurants, hotels, apartments, office buildings, etc.). A brief description of each:

  • The geometric shape of a market is determined by the equilibrium point of total demand and supply as measured by potential and total sales for different goods and services (i.e., hexagonal). Think of each center as being a grocery store or a hardware store.
  • Regional centers are then defined in terms of the spacial distribution of the population, industries, and businesses. Density of consumers relative to competitors and specialization of industry (e.g., luxury goods versus staple merchandise) spreads geographically.
  • The table provides a series of formulae used to calculate the shape of the market.

GIS and the Network of Markets

A fundamental question that was being addressed by Christaller and Losch is germane today: How much of new economic activity is supportable in a given market? That economic activity may be the quantity of new: retail stores by type (e.g., grocery, apparel, sporting goods, etc.); limited-service hotel rooms; multifamily housing units; and multi-tenant office space. For mixed-use developments, highest-and-best uses analysis is framed by this central questions, too.

Use of modern technology in the application of a 1930's theory to quantitatively analyze the network of markets is as fascinating as the underlying theories themselves. A very simple way to show this connection is by examining the location of grocery stores in the Laguna Hills, CA, area.

The two charts above present the network of markets for Whole Foods and Albertsons.

Whole Foods

Whole Foods geographic area for five stores is about 27 square miles. This market area has the following characteristics:

  • 85,331 household consumers are estimated for 2017
  • Their median household income is $137,227
  • They spend approximately $482 million in supermarkets
  • An additional $19 million is spent by consumers outside this trade area
  • Whole Foods has a regional draw akin to an exporter of goods (i.e., specialty grocery items) to surrounding markets

Albertsons

Albertsons has more of a community-based area.  The nearly seven square mile market encompassing three stores has these characteristics:

  • 29,119 household consumers are estimated for 2017
  • Their median income is $126,729
  • They spend about $172 million in trade area supermarkets
  • Another $5.5 million is spent in supermarkets outside the trade area (i.e., the nearby Whole Foods)
  • Albertsons grocery stores tend to service smaller geographic units such as a neighborhood and community

Quantifying the Market

The charts above and the spending data reveal that Whole Foods and Albertsons are part of the same network of markets. Household consumers in the Albertsons trade area that spend $5.5 million in stores other  than Albertsons are most likely to be shopping at the nearby Whole Foods stores. That could also account for some of the $19 million in spending at the network of Whole Foods stores by consumers who live outside of the Whole Foods trade area. In many ways, these stores are inter-related geographically and economically; and are complementary to each other rather than strictly competitive.

Copernicus published On the Revolution of the Celestial Spheres in 1543. In it he proved that Earth revolves around the sun and planets revolve around it in a circle. He was using some fancy math and lots of field observation.

That, too, is what Christaller and Losch did in the field of economic-geographic sciences. Today, I sit in front of my 27-inch iMac, log-in a username and password and start pulling together the quantitative and qualitative analysis on a network of markets for retail and non-retail economic activities. That network of markets is informed by extensive field observations, too. And, the products generated relate to the quantification of new economic activity that is supportable in a given market; and the estimated new revenues and net operating incomes generated by a new business in that market.

The tools of analysis have gotten more sophisticated. But, the foundation for that analysis has been around a long time. My work is a dedication to the brick-layers of this craft.

Jerry L. Hoffman

Hoffman Strategy Group LLC, 4424 Hallcliffe Road, Lincoln, NE, 68516, United States

Jerry L. Hoffman is owner of Hoffman Strategy Group LLC, a firm nationally known for strategic development, economic analysis, and market location consultancy.