Mazda or Maserati. Target or Tiffany. Wal-Mart or Whole Foods. How does a prospective business owner decide what idea will work when selecting a market and what concept will crash and burn?
Demographic research is not limited to Fortune 500 companies looking to place their next flagship store. Correctly assessing the market, income, spending habits and population characteristics can make or break a new business. Enlisting a commercial real estate agent with a firm grip on the market or markets in which they operate is essential when starting or placing a business.
There are a variety of tools at the disposal of a well-equipped agent that can be tapped to gain understanding of the market. Very often a prospective business owner has grand ideas about the scope of the market they are targeting. While passion is essential to a startup business, when this passion is divorced from the reality of the demographic, the venture will fail, leaving the owner wondering what happened to the grand idea and why did it not translate well for the local population.
START WITH THE BASICS
The first step in using demographics to analyze a market is to start with the basics. A commercial real estate agent worth his or her salt can provide both the raw data and the market knowledge to apply the information. A sensible first step is to acquire a study that breaks down an area into concentric rings surrounding the target location.
These rings are often divided into one, three and five mile circles. A solid report is built on a base of population count, age and income. This analysis uses census data to break down the population by age segments, race, and median/average/per capita income. This information can be helpful in determining the structure of a population but does not address less tangible trends in a local population.
LOOK AT LOCAL TRENDS
Perhaps more important than the cold hard facts of the population are the less visible but crucial Tapestry Segments. These divisions are a window to the desires and tastes of a local market and use data to separate individuals into easier to understand categories. Esri, a geographical information systems provider, uses a compilation of statistics to separate a population into “67 distinctive segments based on their socioeconomic and demographic composition.”
Let’s examine the characteristics of a segment of the market that has a strong foothold in the Lynchburg area. This segment, called InStyle, comprises a group of over 2.5 million households in the US with a median age of 41 years and a median household income over $66,000. These households have a strong presence in the workforce with 68 percent of members currently employed with a tendency towards both spouses working. Technology plays a major role in the lives of this segment with a proclivity towards in-depth smartphone use and high connectivity with peers. Members of the InStyle segment spend around 20 percent more than the national average on food, housing, transportation and health care and around 25 percent more than the national average on entertainment, education and pensions. Their investment income and net worth is also significantly higher than average. While these individuals work in a variety of occupations they tend toward careers in health care, management, education, office and sales.
Data from Esri offers a further breakdown of each segment into LifeMode groups giving further insight into the preferences of the demographic. In this case, our segment fits into the GenXurban group with leanings toward organic living, home environment/design, investment planning and charitable activity. This group is more likely to own a home than average and scores high on the wealth, socioeconomic and housing affordability indexes.
ASSESS THE GAP
After determining the spending habits and preferences of a local market, the next step is to look at the Retail Gap Analysis for the area. These numbers indicate the level of saturation the market has for each particular segment of business, and the data is indicative of the capabilities the area has to support a new venture in a specific category. For example, if an entrepreneur was considering opening a restaurant, a retail gap analysis study would show the market demand, market supply and the gap between the two. If the supply already far outweighs the demand, reconsidering the business concept may be in order.
Great concepts can sink or swim based on the forethought that occurs prior to making a life-changing business decision. Spending time upfront to understand the characteristics of a local population and contemplate a target market will help smooth out bumps in the road and overcome unforeseen obstacles. Equally important to business acumen, financial stability and a quality product is an exhaustive comprehension of the locality and its preferences. When selecting a property and placing a business in the commercial real estate world, it is imperative to enlist the services of an agent that can navigate the complexities of demographic research. The help of a savvy local agent with a thorough knowledge of the market is critical to business success.
By Luke Dykeman