ECON First believes that business success centers around the businesses knowing the economic and demographic characteristics of their primary market area. While business experience, insights and intuition are essential, they are substantially advanced by hard data.
ECON First is often asked to evaluate a primary market area (PMA) to determine if there is sufficient excess demand to support entry of a new establishment. ECON First uses a straight-forward demand/supply framework to perform such an evaluation.
This is demonstrated most clearly by reviewing a recent analysis completed by ECON First.
IS THERE ROOM FOR ANOTHER LIQOUR STORE?
The developer of a new local shopping center asked ECON First to determine if the three mile radius PMA around the new center could support a new liquor store.
The first step in the analysis was to estimate residential demand for alcohol within the PMA.
The U.S. census tracts within 3 miles of the proposed new liquor store were considered to be the store’s primary market area. Bureau of Census American Community Survey data for 2015 was compiled on the number of households and mean household income for the PMA census tracts. Based upon this data, the aggregate household personal income in the PMA in 2015 was estimated to be $797,771,011.
According to the U.S. Bureau of Labor Statistics Consumer Expenditure Survey, in 2015 the average household with mean income falling in the range of the PMA households spent 0.00691% of their annual before tax income on alcoholic beverages.
Simply multiplying aggregate household income by the percent, the estimated PMA household spending on alcoholic beverages in 2015 is $5,516,437.
On the supply side, there are currently two liquor stores operating in the PMA.
The Census of Retail Trade for the county in which the PMA is located, together with the most current county NAIC wage and establishment data from the Bureau of Labor Statistics QCEW was used to determine that the average gross sales for a liquor store in the PMA’s county in 2015 was $1,952,118.
Thus, the total 2015 gross sales for the two liquor stores in the PMA were estimated to be $3,904,236.
THE BOTTOM LINE
With estimated 2015 PMA household expenditures on alcoholic beverages of $5,516,437 and estimated gross sales by existing PMA liquor stores of $3,904,236, the residual residential demand for a new liquor store is $1,612,202, or 83% of the required gross sales for an average new liquor store.
ECON First specializes in providing the hard data that allows business owners to make more informed decisions regarding start-ups. expansion, marketing channels, and pricing strategies. In this case, ECON First uses a straight forward demand supply estimate to determine the extent of PMA saturation for a good or a service.
Dr. John E. Stapleford