Market segmentation in property sector

Jochen Muhm, Dean of Faculty of Business Administration, SGU - Swiss German University Asia

Market segmentation - dividing a market into distinct subsets of customers - is an approach that commercial real estate developers can use to enhance the probability of successful marketing of their projects.

By developing properties to supply an unmet need, the developer achieves a temporary monopoly. To identify unmet needs, the developer must define the market area, make inventory of existing space and estimate the demand for particular kinds of space. Such an analysis can help determine the type and size of building that should be built as well as when it should be built.

Empty commercial space is a sign of the hard times in Jakarta and other big cities in Indonesia since the economic crisis hit the country in 1997. Vacant windows line up like sentinels, silent symbols of declining commerce reminding developers that theirs is a risky business.

One way to reduce the risk is to identify unmet needs in the market. By developing properties that supply an unmet need, the developer may achieve a temporary monopoly within the market area. Market segmentation, the key to identifying unmet needs, divides the market into subsets of customer's product requirements. For instance, retail-space developers should focus on consumers' needs for particular types of goods rather than on supplying a variety of retail space in hopes of attracting retail tenants. This means the developer must have certain retailers in mind - such as hardware, drugs or clothing - when the project is conceived. Through careful market research, the developer should be able to identify the product gap - those needs not adequately met - and the window of opportunity - the ideal development timing.

The product gap determines the type and size of building that should be built. The window of opportunity - based on an analysis of supply and demand data over time - reveals the appropriate time to launch the product on the market.

The retail-space market can be used to illustrate the application of this marketing concept in commercial real estate development. A retail shopping center serves the needs of consumers who live within the market area. The first step is to define the market area. Additional retail space within this market area is unlikely to cause consumers to increase their buying or to attract consumers who reside elsewhere. Therefore, the market analysis must identify segments within the market area that can support additional retail space. If an analysis of the supply and demand for retail space indicates sufficient consumer demand for particular goods that are inadequately supplied by retailers in the trade area, then development opportunity exists for retail space within those particular market segments.

The definition of the market area for the new planned retail shopping center in the Jl. Sudirman and Jl. Gatot Subroto area, Jakarta requires some understanding of consumer behavior. Consumers prefer to shop at the closest suitable location for products such as groceries, drugs and staple hardware items. These are convenience goods. They are frequently purchased and consumed daily.

Consumers will travel greater distances and compare what retailers have to offer when shopping for goods that are purchased less often, such as general merchandise, apparel and home furnishings. These are known as shopping goods or comparison goods. Consumers probably have to travel whatever distance is required to shop, but the development of new retail centers may quickly change established shopping patterns. Therefore, when the market area for a new retail location is being defined, simply drawing a circle with a radius of two, three or more miles around the site is inadequate. Obviously, the time it takes to reach the location is a major consideration and so are other related facilities or "barriers", such as rivers, lakes, tollroads and railroads.

Defining the market area begins with distinguishing between the primary and secondary market areas. Shoppers from the primary market area are assumed to be responsible for nearly all of the sales of convenience goods within the area. Shoppers from both the primary and secondary market areas are expected to visit retail sites within the market area when shopping for comparison goods. Boundaries of the market area are set by driving time, not distance. Traffic congestion lengthens the distance that can be driven within a convenient time duration and, therefore, makes the market area less ideal.

Normally, convenience-goods shoppers living in urban areas will drive five minutes or less to shop. Another similar retail facility can capture sales from a proposed center and the existence of several similar centers nearby may marginalize a new center by diminishing the size of its market area.

Analyzing the existing supply of retail space requires a thorough inventory of all retail space in the market area. To accomplish the purpose of the analysis, the space inventory must provide information on the amount and location of space within the market area occupied by various types of retailers such as groceries, drugstores and hardware stores.

The data of the estimated demand for retail space should be categorized according to the location of the various types of retail space within particular shopping centers as such data have an impact on the definition of market boundaries. Other useful information includes total retail space within the market area and the amount of leased and vacant space. The supply analysis focuses on the amount of space occupied by particular types of retailers within the market area. A significant amount of vacant space within the market should concern the developer if the space is suitable for retailers to use in filling any currently unmet needs. With the market area defined and the existing supply of retail space determined, the process of estimating the demand for particular types of retail space in the market begins. The first step is to estimate present and future spending for particular types of goods within the market area - the total market demand.

Total market demand is obtained by multiplying population estimates within the specific market area by estimates of per capita spending by type of good. The result provides an estimate of current purchases by market-area residents.

The analyst next considers the estimated share of the total sales that can be expected for the site in question and needs that are currently or projected to be unmet. It would be foolish to assume that one site will capture 100 percent of gross market potential. Customer surveys at similar retail centers can be used to estimate the site's likely capture rate by comparing a particular retailer's volume with the gross market potential for the market area.

With an estimate of sales expected for the site, the sales per square foot measure can be used to estimate the amount of retail space the site can support for each category examined. This estimate is then compared with typical store size for that type of retail outlet.

Careful analysis of the supply and demand factors in a particular commercial real estate market can enhance the probability of a successful development. Creating additional space that is already oversupplied in a market area is a formula for disaster. Applying the concepts of market segmentation and development timing (product gaps and windows of opportunity) to the planning and execution or real estate projects can significantly increase the probability of success.