How to identify new business opportunities

Extension generated thresholds for store formats by simply dividing the number of establishments by Minnesota’s total population for each respective year. In addition, Extension also calculated the sales per capita to provide context. 

Example: Clothing Store (NAICS 4481) using data from year 2020

• No. of establishments in MN: 1,810
• Gross sales in MN: $1,263,521,438
• Threshold (residents/business): 3,153
• Sales per capita (gross sales/resident): $221.42

With 1,810 clothing stores in Minnesota in 2020, there were 3,153 residents per store and $221 spent at clothing stores per resident. These are simple calculations based on only the population of Minnesota and do not take into consideration spending by visitors from outside the state, or likewise, the spending Minnesotans do in other states.

Thresholds for a store format change over time, along with consumer tastes and shopping patterns. Although clothing stores have remained at a consistent threshold, according to sales tax data since 2016, others such as book and music stores (NAICS 4512) have changed dramatically.

Figure 1: Clothing store threshold and number of stores by year

The thresholds for book and music stores have changed simply due to a fewer number of stores, decreasing from 950 establishments in 2012 to 440 in 2020.

Thresholds for retail and service categories in Minnesota

The number of Minnesota residents per business varies greatly, depending on the type of business. In 2020, there were as few as 555 residents per drinking or dining establishment to as many as 95,108 residents per amusement park or arcade.

Per capita sales also provide useful context for general spending by store format, as well as a sense of the scale of resident spending. For example, there are many personal care service establishments, such as barber shops, hair stylists, and nail salons, but the amount spent at these businesses pales in comparison to big box general merchandise stores.

Personal care service businesses only received $92 per Minnesota resident in 2020, down from $129 per resident in 2019 — a decrease likely related to the COVID-19 pandemic. In contrast, building material firms increased sales per resident by more than $200 during the same period to $1,394 per resident.

Application to your community

Figure 2: New York Mills, Minnesota with a five-mile trade area

Since thresholds are based on simple population counts, you must first find the population for a reasonable trade area you want to analyze. You can, of course, simply compare the population of your city to the threshold list for an initial assessment of where there are gaps in your community for certain businesses. While this is a great place to start, the approach will miss people living near your community who spend as much as local consumers, and therefore underestimate the size of the market for a business.

We are typically not good at estimating population size outside of city limits. For example, the population of the city of New York Mills in Otter Tail County was 1,294 in 2020, but the total population within just five miles of the city center was more than double at 2,708.

If you are defining a trade area for a large community, it may also include nearby small towns. Conversely, defining the trade area for only a portion of a city makes sense if you’re examining opportunities suited to a particular neighborhood.
 

Figure 3: Rushford, Minnesota trade area

A demographic mapping tool, such as Business Analyst Online (BAO) can quickly generate not only the population for any trade area you define but also demographic and spending data by product. In addition, BAO has a threshold tool as well, which defines a trade area based on population from any given point. For example, if you’d like to see how big of an area you’d need to reach 10,190 people to meet the threshold for a furniture store in Minnesota, you would set a point in a business district of the community and BAO will define the area by ring or drive time.

Your purpose for determining a threshold will drive the size and shape of your trade area. For example, if you are examining a single business category, your trade area will be larger or smaller depending on whether or not you’re considering a destination or convenience business.

While a sporting goods or furniture store are destination businesses that typically have wide trade areas from which they pull customers, a barber shop or nail salon are convenience businesses that pull customers from a limited area. Your intention is to investigate which types of businesses may work for your community, so a general trade area that works as a composite for all businesses is best.

For many communities, school district boundaries work well as a general trade area. Identifying your community’s general trade area helps you sort through the thresholds of businesses to narrow down potential opportunities.

If you are a community leader or economic development professional, your interest may not be in any one particular business but rather which types of businesses would work in your town generally. In this case, Table 3 provides a sense of what’s realistic by population size for a trade area of 1,000, 2,500, and 5,000 people.

Identify the industries with a threshold of one or more and compare them to your current businesses. Thresholds are a simple measure, however, and being below a one does not mean a business is impossible.

Considerations

While thresholds are simple measurements of market demand, they are a helpful place to determine some basic market analysis for discovering business opportunities. As you further refine an analysis of your community, other important factors should also be considered.

1. Retail hierarchy and clustering. Large full-service shopping centers can support a wide mix of businesses, whereas a modest hamlet can support only basic convenience stores and goods. Niche retail has traditionally been found only in full-service shopping communities, although e-commerce has opened up some new opportunities.

   
   Regardless of size, however, similar types of businesses will cluster near one another instead of being evenly spread across the landscape. A 2014 analysis is available for business mix by size of community.
    

2. Proximity to competition. Whether a community stands alone or is situated within the shadow of a large regional center can greatly impact whether or not it can support a particular retail or service business.
    
3. Vitality of current business district(s). Retail business development hinges on the well-being of neighboring businesses. Often healthy, well-trafficked business districts easily attract new retailers while sleepy ones suffer. Public investments, business organization, and the general attractiveness of a business district can provide some momentum to turn a business opportunity into a reality.

Other resources

• Census Business Builder, US Census: This tool provides access to census data by business type and geography to assist entrepreneurs with researching business opportunities.)
• Pesch, R. Where do your community’s customers come from?
• Downtown Market Analysis Toolbox: This compendium of resources provides information for you to perform your own market analysis.