Market Selection Decisions for Department Stores

Selection of geographic markets for expansion is a major, long-term decision for retailers. Retailers often use the Index of Retail Saturation (IRS) in such decision-making. However, a recent study has shown that the IRS is misleading because it considers retail demand as being beyond managerial control. To make the IRS a valid managerial tool, both the total expenditures in department stores in area (TDSE) and TDSE with average household size must be considered. Using these factors, a model has been developed which incorporates the effects of managerial actions and environmental demand variables as predictors of retail demand. The model has been validated for the department store industry with data from over 200 Standard Metropolitan Statistical Areas. The study showed that per-household expenditures at department stores (i.e., the demand-side variable of the IRS) are not solely environmentally determined, but are strongly influenced by managerial actions. Thus, retailers who rely on the IRS are likely to reject some market areas that would be profitable to enter.