Exercise 1.3: Suppose that a developer is choosing tenants for a shopping center

Question

Exercise 1.3: Suppose that a developer is choosing tenants for a shopping center. There are four possible tenants: a DEPARTMENT STORE, a TOY STORE, a SHOE STORE, and a HARDWARE STORE. If each store were to be located in isolation outside a shopping center it would earn a certain level of gross profit per period (this is the level of profit before subtracting out space rent). In addition, each store requires a certain number of square feet of floor space, which is the same regardless of whether or not it locates in a shopping center. The relevant values for each store type are as follows: Store Type Department Toy Gross Profit in Isolation $100,000 S11,200 $7,800 $7,000 Required Square Footage 9,000 1,000 800 1,100 oe Hardware

Explanation / Answer

Answer:

Part a

The profit increases due to the proximity of the shops because of 2 main reasons:

1. The consumers would have to spend less travelling expenses and would prefer to shop in the shopping complex.

2. The shops would attract more customers as they would be able to see the display products of the various shops.

Part b

If Single-store shopping centres are set up:

Part c

Two-Store centers

Part d

Three-store centers

Four store center

Part e

The optimal shopping center would be "Department + Toy + Shoe"

Store type Rent Cost ($ 10 per sq. foot) Profit Department $ 100,000 $ 90,000 $ 10,000 Toy $ 11,200 $ 10,000 $ 1,200 Shoe $ 7,800 $ 8,000 - $ 200 Hardware $ 7,000 $ 11,000 - $ 4,000

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