10. Evaluating Service Business Opportunities

Over the past three decades, service businesses have replaced many of the retail storefronts on Main Street.  Service businesses find downtowns as excellent locations because of their central location and proximity to community services such a government, health, education, and financial institutions.

This section provides a suggested format for quantifying market opportunities in specific service business categories.  It includes methods for estimating market demand and supply.  Other market factors are also considered to help identify service business categories for business expansion and recruitment efforts.

A central part of a market analysis is the detailed study of market demand and supply.  Market conditions can be assessed by service business type using estimates of consumer spending potential (demand) and existing business sales estimates (supply).  Unlike the retail analysis, square foot analysis is not applicable to most service businesses.

A comparison of demand and supply by business category can help identify gaps where demand clearly exceeds supply.  After considering other market factors including how and where local residents obtain services, conclusions could be drawn regarding potential business categories worthy of further market research.

In this section, supply and demand are measured by "business type" so that the results are more useful in business expansion and recruitment efforts. Specific business categories are used to add precision to the analysis.  Standardized categories using four and five digit codes from the North American Industry Classification System (NAICS) are used.

Appendix B presents a partial list of some of the service businesses that may be in a downtown area.  The study committee should review these and other categories and identify a short list of business types that deserve detailed review.  The short list can be based on survey or focus group findings, professional knowledge of members of the study committee, findings from downtown visioning efforts, and preliminary conclusions drawn from local demographic and lifestyle data.

A flowchart describing the process is presented in Exhibit 10.1. A sample press release to explain this part of the market analysis is presented in Appendix A.  A blank form that can be reproduced and used in this evaluation is provided in Appendix C.

Exhibit 10.1 - Assessment of Service Business Opportunities By Business Type

Service Business Demand Analysis

In analyzing the service business market, the level of current demand could signal the need for new or expanded businesses.  Unfortunately, data limitations often make it difficult to estimate demand.  A relatively simple way to estimate trade area demand is to use the 1997 Economic Census from the U.S. Census Bureau.

The Economic Census profiles the US economy every 5 years, from the national to the local level. It includes a variety of useful data including actual number of establishments and sales by business type and number of employees (full and part time). The economic census is conducted on an establishment basis. A company operating at more than one location is required to file a separate report for each location. Each establishment is assigned a separate industry classification based on its primary activity and not that of its parent company.

Using the Economic Census, actual sales levels (for each business category) for the state can be used as a surrogate for consumer demand.  The underlying assumption is that aggregate consumer demand at the state level is fairly well represented by the aggregate sales at the state level.  This is a reasonable assumption in states that do not experience significant sales leakage to adjacent states.

By dividing actual state sales by state population, state estimates of per capita consumer demand can be made.  These state estimates can then be localized through an adjustment for per capita income differences.

The following steps provide a relatively simple approach to estimating market area service business demand using Economic Census data.  The estimates of demand reflect consumer spending of people who reside within a trade area based on local per capita income and population.  However, they do not reflect where those expenditures are actually made.

Step 1.  Calculate Statewide Per Capita Service Business Spending

The data in Appendix B provides 1997 per capita spending for the State of Wisconsin. Similar tables can be constructed for other states by downloading the data from the U.S. Census Bureau web site (www.census.gov).

In the table, the number of businesses and sales from the Economic Census are listed as obtained from the U.S. Census Bureau.  Sales per establishment are calculated by dividing sales by the number of establishments.  This provides an average sales volume for each type of service business. 

Per capita sales are calculated by dividing state sales by state population for each business category.  State population estimates can be obtained through the Census Bureau's web site or through other public and private data sources.

Step 2.  Adjust for Differences in Income

The next step is to determine an adjustment factor that can be applied to state per capita spending to account for differences in per capita income.  This makes the assumption that consumer spending is positively related to income levels.  Accordingly, if local per capita income is higher that state per capita income, than local per capita spending should be higher than state per capita spending.

A simple method for calculating this adjustment is to divide trade area per capita income by state per capita income.  In many situations, this calculation will provide a reasonable and sufficient adjustment for the overall difference in per capita income.

A more refined adjustment for income can also be made using the Consumer Expenditure Survey (CES).  The CES is conducted by the U.S. Department of Labor.  It tracks the expenditures of "consumer units" which can be used in place of "households."  The survey is updated annually and includes average expenditures in a variety of retail and other categories.  Many of these " categories can be used to represent the service businesses used in this analysis. See Exhibit 9.2 in the Evaluating Retail Opportunities section for an example of how to calculate an adjustment for income using the CES data.

The adjustment for per capita income does not take into account the other market factors that affect sales.  For example, as real estate offices are often related to local home sales, demand will also be influenced by activity in the housing market.  These other market characteristics should be discussed as "other considerations" (to be discussed later).  Nevertheless, an adjustment for per capita income makes common sense and provides a starting point for localizing the state figures.

Step 3.  Calculate Primary Trade Area Service Business Demand in Dollars

Market area service business demand for your trade area can now be calculated as shown in the example for photography studios in Exhibit 10.2.

Service Business Supply Analysis

Step 1: Identify Existing Service Businesses in the Trade Area

The database should include a list of the names, addresses, and employment (full and part-time) of all the current service businesses in the category in the primary trade area.  For downtown businesses, a complete list could be obtained from your business inventory (see earlier section of this guidebook).  For trade area businesses that are located outside of your downtown area, a list can be generated from Chamber of Commerce membership (and non-member) lists, Internet yellow-page listings, private data firms that sell business lists, and your own business inventory.  InfoUSA (American Business Information) is one private firm that sells accurate business lists. The company actually calls every business in the country each year to update their database.  Accordingly, the precision and accuracy of their information may be better than data obtained from some readily available public sources.  However, these data sources should still be examined for possible errors or omissions.

Step 2: Add Other Descriptive "Comments" for Each Business

Additional information should be added to the database to describe how and to what extent each service business competes in the market area.  The strengths and weaknesses of each existing business will be important later in evaluating market potential for business expansion and recruitment.

Step 3: Estimate Existing Sales

Obtaining actual sales data for existing businesses in your trade area would be very difficult if not impossible.  Business operators simply do not want to disclose this information.  Public sales tax records are rarely available at a municipal, zip code, or smaller level of geography.  And even if they were, they would probably not disclose data down to the five-digit NAICS level.  Instead, it is typically necessary to make your own rough estimates of sales using your knowledge of these businesses and data from the 1997 Economic Census.

A "ball-park" estimate of annual sales should be made for each service businesses identified in steps 1 and 2.  Economic Census data on average sales per establishment figures for selected service business categories in Wisconsin is provided in Appendix B (similar tables can be constructed for other states by downloading the data from the U.S. Census Bureau web site.  Sources of sales per establishment data are also available through trade associations, Robert Morris Associates, the U.S. Internal Revenue Service, and the Urban Land Institute's Dollars and Cents of Shopping Centers publication.

Sales estimates can be refined based on the estimated number of full and part-time employees of existing businesses (estimates you will need to make).  The total number of paid employees for each business (in this category) in the trade area can be multiplied by the average sales per employee using the Economic Census data (such as the Wisconsin data in Appendix B).

Other Market Considerations

Examining quantitative aspects of demand and supply is only part of the analysis.  There are also a number of qualitative considerations that require local knowledge and insight into the market.

The previously calculated differences in consumer spending potential (demand) and current capture of those dollars (supply) need to be analyzed in context of other market factors.  Exhibit 10.4 provides additional considerations that add to the analysis of each category.

Drawing Conclusions

The quantitative comparison or demand and supply by service business category must be analyzed in combination with an understanding of many other market considerations.  If there appears to be a significant amount of unmet demand, there might be opportunity for an existing business to expand or a new business to be developed.  Business development opportunities may also exist in areas where supply seems to be much greater than demand. These communities may be very successful in drawing customers from outside their market area.  Exhibit 10.5 provides a sample reconciliation of demand, supply and other market considerations.

Analyzing Service Business Demand and Supply with GIS

Analyzing service business demand and supply with GIS uses similar techniques to those used for examining retail.  Various market conditions are mapped using either quantitative or qualitative methods. The most significant difference is that service business demand and supply will no longer be mapped in terms of square footage.  Instead, the mapping process uses either total dollar amounts or other market considerations.  As a result of these differences, the two following examples show how GIS can assist in analyzing these types of service business conditions.

Using GIS to Examine Cumulative Demand

As with retail demand and supply, mapping conditions for service businesses can show the feasibility of a desired location within a business district.  Therefore, the purpose of the map is to show the desirability of the location over other potential locations.  One method for analyzing a location's feasibility is to examine the cumulative demand around a site.  The amount of demand within a certain distance around a location is aggregated to show the total demand.  This method is extremely useful for analyzing convenience-based businesses where customers will travel shorter or pre-determined distances. 

An example of a convenience-based service business is a video rental store.  To examine the feasibility of a proposed video rental store, it is desirable to know how much demand exists around the site.  GIS can be used to determine the total demand by first calculating the local demand density (in annual dollars) over the trade area and then summarizing the total amount within a given distance (i.e. one mile).  The results of this type of analysis are shown in Exhibit 10.6.  This example shows a hypothetical example for a proposed video rental store on Boulder Colorado's famed Pearl Street.

Exhibit 10.6 differs from other demand and supply maps as it shows a 3-D representation of demand.  Using a 3-D map is another way to help the viewer to understand market data.  Differences shown on these types of maps may uncover relationships not apparent on traditional maps or assist in seeing the market in a new manner.  In this example, the peaks show areas of high cumulative demand while the lower areas show smaller demand amounts.  Furthermore, the locations of existing video store locations are shown with their relationship to demand. If the proposed location is near a peak of high cumulative demand and low supply, it could be a feasible location.

The video rental store example differs from other examples in this workbook, as the proposed Pearl Street location may not be optimal.  Not only is this location located in an area of low cumulative demand, but it is also near a number of existing competitors.  This is important, as not every analysis will result in a positive result.  However, this analysis is still useful as it can be used to refine the types of businesses for potential recruitment.

Exhibit 10.6 - Video Stores Supply and Demand Analysis

Using GIS to Examine Multiple Service Business Sites

Throughout this workbook, downtowns and business districts have been considered as a single part or component of a community's business environment.  That is, a community may have many separate business districts throughout the city.  However, smaller cities often consider their entire community as their business district. Thus, there may be several sites throughout the community that require analysis.  Finding the optimal location will help the business succeed and stay in the community. (Remember, keeping businesses over the long term is as important as their initial recruitment.)

Consider the problem of siting a new childcare center within a community.  While there are many factors to consider, many parents consider the convenience to the childcare provider.  Many times, convenience requires either locating a childcare center near parents' homes or their workplaces. As a result, childcare centers often locate near large employment centers or clusters of small children.  Determining where these clusters and employers exist (as well their relationship to each other) is an ideal task for GIS.  Furthermore, the locations of existing childcare centers can be mapped to examine potential competition.  Overlaying these different data layers allows the user to view a comprehensive picture of the market.  This usefulness becomes apparent in the following demand and supply analysis for a childcare center.

Exhibit 10.7 shows an example of a childcare demand and supply analysis in Watertown, Wisconsin.   A hypothetical demand and supply analysis has shown a gap in childcare services.  However, there are a number of potential sites for a new childcare location.  To analyze the locations, a number of demand and supply considerations are mapped using GIS.  The resultant map simultaneously shows the density of children age 5 and under, the locations and sizes of major employers, and the existing childcare competition.  Additionally, two potential sites for childcare centers are shown:

• Site #1 is located on Main Street.  It is centered in the large concentration of young children, but has several nearby competitors.
• Site #2 is located near a number of large employers.  It is still within the large density of young children, but not centered in the cluster like Site #1.

Both sites have their competitive advantages.  Site #1 is located within the center of a large concentration of young children and Site #2 is more convenient to employers.  However, Site #1 is near a number of existing childcare competitors while Site #2 has no nearby competition.  Both sites are convenient, but Site #2 has additional locational advantages.  Thus, Site #2 may be the best choice.

Exhibit 10.7 - Child Care Centers Demand and Supply Analysis

Appendix A - Sample Press Release

For Immediate Release
(Enter Date)

Contact: (Enter name and phone number of primary contact)
(Enter name and phone number of secondary contact)

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MARKET STUDY EXAMINES DOWNTOWN SERVICE BUSINESS OPPORTUNITIES

(Enter city) --(Enter main street organization) has examined the market potential of 15 different service categories in an effort to bring new business opportunities downtown.   Their research shows that the market could support expanded or new businesses including _________.  Downtown leaders plan on using this information in discussions with existing and prospective business operators in an effort to attract new ventures that will be successful in (Enter City trade area..

(Enter main street organization) 's economic restructuring committee completed the evaluation of service business opportunities as one part of a broader market analysis.  The evaluation studied trade area economic and demographic statistics to estimate consumer expenditure potential in the community.  This market demand was compared to estimated sales captured by existing businesses within each category.   The committee identified various business categories that had significantly greater demand than supply.

Study group volunteers then considered other factors that are important in assessing market potential for business expansion and recruitment.  Data from earlier parts of their market analysis were used to measure, local consumer attitudes, consumer characteristics and consumer behavior as they relate to various services.  In addition, their earlier research on the business mix in other communities and detailed information on market competition were used in their assessments.

The evaluation of service business opportunities will provide the (Enter main street organization) 's economic restructuring committee with data and analysis to support business expansion and recruitment opportunities.  This analysis will be updated and modified on a as-needed basis as new business opportunities are identified.  The assessment is only one part of the downtown market analysis.  The study group plans on completing similar in-depth examinations of retail, restaurant, entertainment, residential, office and lodging sectors of the downtown economy.

Interested parties may volunteer for the downtown market analysis team by calling (Enter name of committee chair) (Enter phone number) .  For more information on the downtown market analysis or on (Enter Main Street Organization) , contact (Enter Main Street Manager Name) , at (Enter phone number) .

Appendix B - Sales Data for Selected Service Businesses

State of Wisconsin
1997 Dollars
Based on the 1997 Economic Census, U.S. Census Bureau

Appendix C - Service Business Opportunities Evaluation Form

Service Business Category: _____________________________

NIACS Code: _______________

Service Business Demand

Consumer expenditure demand represents the amount of annual spending of residents of the primary trade area in this business category.  It was calculated as follows:

Service Business Supply

The table below lists all of the businesses in this category within the primary trade area.  In addition, there other businesses that compete to varying degrees for the sale of similar services, but are classified in other categories.

Other Market Considerations, Conclusion and Recommendations

Differences in demand and supply need to be analyzed in context of other market factors.  The following are additional considerations that add to the analysis of this service business category.