The Impact of Retail Location on Retailer Revenues: An Empirical Investigation

This paper investigates the impact of store location, a retailer's most costly and long-term marketing mix decision, on retailer revenues. We estimate models of consumer spending at the leading packaged goods retailers in a metropolitan market based on two dimensions of retail location: (i) proximity to consumers, i.e., travel times, and (ii) proximity to other stores, i.e., agglomeration. Both are important predictors of consumer spending and hence retailer revenues. Moreover, location effects are heterogeneous and often asymmetric across retail formats. Key findings pertain to discount stores and supercenters, which are simply discount stores with a full-service grocery. We find that travel times to a retailer's own stores have a much greater impact on Wal-Mart Discount store revenues than on Wal-Mart Supercenter revenues. We also find that grocery retailers generally benefit from agglomerating with discount stores while Wal-Mart Discount stores suffer from agglomerating with grocery stores. Substituting supercenters for discount stores causes these agglomeration effects to disappear, suggesting that demand for packaged goods is higher at supercenters than at discount stores because cross-shopping with grocery stores is reduced.