The Geography of Demand, Expenditure Patterns, and Market Segmentation
Consumers are the lifeblood of the retail industry. Their preference, choice and shopping behavior fundamentally influence the way in which retailers conduct business, including where to set up stores and what merchandise to offer in the stores (Birkin et al., 2002). Furthermore, consumers are differentiated by income, gender, age, and ethnicity, and they tend to cluster in different parts of the city. Essentially, the spatial variation in demand governs the type, size and locations of retail stores (Jones & Simmons, 1993). Therefore, understanding the geography of demand for consumer goods and services and expenditure patterns is the first and fundamental step in market condition analysis, as illustrated in Figure 1.1 (Box 3). In market condition analysis, market analysts not only consider the current population size, but also forecast population change within a planning horizon. This chapter explains what factors influence the level of demand and why demand for consumer goods and services varies in different markets. In addition, the chapter describes such techniques as geodemographic analysis, market segmentation, and population projection.
Factors of Demand
A market refers to a geographical area with a population of consumers who have demand for consumer goods/services and have disposable income to purchase them. A market also has a spatial dimension and boundaries, though the boundaries can be fuzzy and arbitrary.
Many factors affect demand for consumer goods and sendees in a market. Population size, population composition, and disposable income are the most fundamental. Additional factors include family formation, price of goods and sendees, inflation rate, consumer expectation of the economic future, and government regulations. They affect demand in various ways. Moreover, in different places, the degree of effects of these factors varies, and so does the level of demand. This forms the basis for understanding the geography of demand.
All members of the population are end consumers of many types of goods and sendees. Population size is therefore the foremost factor of demand, especially for such necessities as food, clothes, and shelter. Typically, the larger the population, the higher the demand.
Also important is the population composition on the lines of gender, age, and ethnicity, which separates the population into different segments of consumers, who often have different tastes or preferences for consumer goods. It is common sense that consumers of different genders and ages purchase different types of products. For example, a population with a high proportion of children and youths may have a high demand for toys, baby clothes, and school supplies, whereas a population with a high proportion of seniors may have a high demand for health care-related products and sendees. It is well documented that the older population has been growing faster than the population of children and youths across all developed countries. The 2016 Canadian census shows that for the first time in history, there are as many seniors as children 14 years and younger in Canada (Press, 2017). Even in China, the population is aging rapidly, resulting from 35 years of the restrictive one-child policy. The aging populations have created a “gray market” of considerable size, consisting mainly of baby boomers. Some of them enjoy a decent pension, supplemented with a large pot of savings. Others live on a meager fixed income topped up by old age security and low-income supplements—two types of government benefits for senior citizens. There is perhaps one thing in common among the gray consumers: their mobility is greatly reduced, which affects their shopping behavior and patterns. Many of them shun big box stores and power centers in the suburbs, but prefer convenience shopping near the location of their residence.
Today’s younger consumers consist of Gen Y and Gen Z. The former group were born between the early 1980s and the mid-1990s; the latter group were born between the mid-1990s and the early 2000s, constituting the generation of millennials. They make up 25 percent of the U.S.
population and 27 percent of the Canadian population. These younger consumers tend to be tech savvy, and are more likely to do online shopping; or they shop in store but buy online (Black, 2019).
Consumers of varying ethnicity also exhibit different consumption patterns, resulting from their varying cultural and religious backgrounds. From a business point of view, ethnic minority groups collectively represent a large consumer market worthy of serious marketing considerations (Omar et al., 2004.) In both Canada and the U.S., the ethnic consumer market has been expanding rapidly, a result of not only increased immigration but also the expansion of the second and third generations of immigrants through new family formation. At the same time, the ethnic market has become more fragmented than ever, due to the diversification of immigrant origins. This is especially true in the immigrant-receiving metropolitan areas, where ethnic minorities now constitute a large segment of the consumer market. This market is no longer represented by low and unstable demand to be met by specialist businesses of low economies of scale. Population diversification has created new opportunities for ethnic entrepreneurs, and ethnic retailing has become an increasingly visible component of the retail landscape and the broader retail economy (Wang & Hernandez, 2018). Among all ethnic consumer goods, food is perhaps the most closely tied to ethnic identity and is the most frequently consumed. According to a report by Perry Caicco of CIBC World Markets (Condon, 2013), ethnic retailers in metropolitan Toronto take in $4—5 billion a year in food sales, as much as the total sales of Walmart’s food division in the Toronto Census Metropolitan Area. Mainstream corporate retailers have realized that supermarkets cannot be a melting pot providing generic products to everyone, and that merely running ads in ethnic media at occasions of ethnic festivals is not enough to capture the new market growth. They need to engage in ethnic retailing in a variety of new ways, ranging from acquiring ethnic business operations to hosting ethnic retailers as co-tenants on their business premises (Wang & Hernandez, 2018).
Another crucial factor that combines with population to determine the level of demand and market size is disposable income. While most countries have seen an overall increase in disposable income over the last few decades, there has been increasing social polarization with widening gaps between the upper and the lower classes (Birkin et al., 2002). Consumers with high disposable income tend to not only buy higher-quality (and also more expensive) products, but also buy replacement more often. Therefore, disposable income affects demand through influencing lifestyle and preference for consumer goods and services. Studies also show that income affects demand for different types of goods. Essential or basic consumer goods (i.e., the necessities that are consumed by all people) are not sensitive to income. However, as income increases, demand for inferior (i.e., lower quality) goods decreases, because consumers shift to better quality goods. For normal goods, and particularly luxury goods that are used for pleasure and esteem, demand increases as income increases. High-income households are also associated with high automobile ownership and therefore a higher level of mobility. They have more choices for shopping destinations too.
Level of income is also the most important differentiator of market segments in geography. High-income and lower-income households often live in different quarters of a city. To match the demands and maximize market shares, many corporate food retailers run two classes of grocery stores: one as premium and full-service supermarkets, the other as discount supermarkets. They are located in different communities and neighborhoods to target different income groups. Discount supermarkets in a low-income area may stock lower-quality produce and meat, including groceries with a closer best-before date.
In most Western economies (North America, Western Europe, Australia, New Zealand, and Japan), family and household size has been steadily declining, now with more DINK (double income with no kids) households or same-sex unions, as well as more single-person households. Typically, larger households and families have a larger shopping basket. The more persons in the family or household, the more likely the consumers are to seek out cost-effective pricing, which is regularly offered at large format discount stores and membership clubs in bulk packages. Because there are more individuals to provide for in their households, it makes sense for them to be budget-conscious in all of their purchases (Tripathi & Sinha, 2006; Bruce, 2017). Smaller households with similar income are less price sensitive. They often also buy smaller packages of food and household supplies, and stay away from membership clubs such as Costco and Sam’s Club. Overall, the demand for household appliances has been on the rise due to the increase in total number of households, because smaller condos also need to be equipped with basic home appliances.
Price of goods and sendees affects demand through the effect on purchasing power. For most consumers, higher prices reduce their purchasing power; so, as the price of a good increases, fewer units of that good will be purchased. While consumers maintain the usual level of demand for necessities (food, clothes, shelter, and medication), they shun discretionary purchases and reduce replacement frequency for high-price goods. The effect of price is also influenced by fluctuation in inflation rates. When inflation increases, demand decreases. Research also finds that consumer expectation of the economic future, such as a foreseen recession, may delay purchase decisions for big items and therefore suppress demand for the present time. Prices of related goods or services, which are either complementary or substitutes, affect demand as well. The complementary goods are those that are purchased along with another good. An example is gasoline and automobile. When the price of gasoline increases for an extended period of time, the demand for automobiles, especially large horsepower automobiles, declines. Substitutes are those that are purchased instead of a certain good. The opposite reaction occurs when the price of a substitute rises: consumers will want to buy more of the good and less of its substitute.
Retailers cannot raise people’s income, but they often manipulate demand through promotion and adverting. Promotion works by periodically reducing prices of certain goods within a limited time period. Advertising influences demand in three ways, by: (1) drawing consumer attention and informing them of the availability of a product; (2) “educating” consumers by demonstrating the features of the product; (3) persuading them to purchase the product for the feature, price, and quality of the products, even by taking a loan from lenders (Karlan et al., 2009). Research reveals that consumers are highly sensitive to advertisements, as they sometimes get attached to the advertisements endorsed by their favorite celebrities. This results in an increase in demand for a product.
Government policies and regulations affect demand in a combination of two ways: limiting supply of, and imposing high sales tax on, certain goods (such as the demerit goods of cigarettes, cannabis, and alcohol) to safeguard social well-being; and restricting price increases on essentials (such as food and medicine) to assist low-income consumers.