Location decisions have great strategic importance because they have significant effects on store choice and are difficult advantages for competitors to duplicate. Picking good sites for locating stores is part science and part art.

Some factors retailers consider when evaluating an area to locate stores are (1) the economic conditions, (2) competition, (3) the strategic fit of the area's population with the retailer's target market, and (4) the costs of operating stores. Having selected an area to locate stores, the next decision is how many stores to operate in that area.

When making the decision about how many stores to open in an area, retailers have to consider the trade-offs between lower operating costs and potential cannibalization from multiple stores in an area. Most retail chains open multiple stores in an area because promotion and distribution economies of scale can be achieved. Although scale economies can be gained from opening multiple locations in an area, there also are diminishing returns associated with locating too many additional stores in an area due to cannibalization.

The next step for a retailer is to evaluate and select a specific site. In making this decision, retailers consider three factors: (1) the characteristic of the site, (2) the characteristics of the trading area for a store at the site, and (3) the estimated potential sales that can be generated by a store at the site.

Trade areas are typically divided into primary, secondary, and tertiary zones. The boundaries of a trade area are determined by how accessible it is to customers, the natural and physical barriers that exist in the area, the type of shopping area in which the store is located, the type of store, and the level of competition.

Once retailers have the data that describe their trade areas, they use several analytical techniques to estimate demand. The Huff gravity model predicts the probability that a customer will choose a particular store in a trade area, based on the premise that customers are more likely to shop at a given store or shopping center if it is conveniently located and offers a large selection. Regression analysis is a statistically based model that estimates the effects of a variety of factors on existing store sales and uses that information to predict sales for a new site. The analog approach—one of the easiest to use—can be particularly useful for smaller retailers. Using the same logic as regression analysis, the retailer can make predictions about sales by a new store based on sales in stores in similar areas.

Finally, retailers need to negotiate the terms of a lease. These lease terms affect the cost of the location and may restrict retailing activities.