Choosing a Location (AQA A Level Business): Revision Note

The importance of location

• Business location is where a business establishes and runs its operations

  • Some businesses operate from a single location where they combine production, administration, sales and logistics

  • Others distribute operations across multiple locations to take advantage of factors such as wage costs, skill availability and levels of taxation

  • Remote businesses may not operate from a single location

    • They use online technologies to link dispersed staff and resources

• Location is one of the most significant and difficult-to-reverse operational decisions a business makes

  • The wrong location can increase costs, reduce access to customers or skilled labour and damage long-term competitiveness

  • Relocating once a business is established is expensive and disruptive

• Location affects almost every aspect of business performance

  • Costs

    • Rent, rates, wages and logistics vary significantly by location

  • Revenue

    • Proximity to customers influences footfall and sales potential

  • Staffing

    • Access to a skilled, affordable workforce depends on where the business is based

  • Efficiency

    • Transport links and infrastructure affect how smoothly the business can operate

Location cost

Property and land costs

• Property and land costs vary dramatically by location

  • Prime retail or office space in city centres costs significantly more than out-of-town or rural sites

  • For manufacturing businesses, the cost of land for a factory or warehouse is a major consideration

  • For retail and service businesses, the higher cost of a prime location must be weighed against the potential revenue it generates through greater customer footfall

Example

A coffee shop in a busy London train station pays far higher rent than one in a market town, but benefits from a significantly higher daily customer footfall

Labour costs

• Labour costs differ by region

• Average wages in London and the South East are typically higher than elsewhere in the UK

  • This can have a significant effect on the overall costs for businesses that employ large numbers of staff

• Business rates (local authority taxes on commercial property) also vary by location and can represent a significant fixed cost

• Utility costs, distribution costs and transport costs all differ depending on where a business operates

Demand and location

• Businesses that sell directly to consumers need to locate where their target customers are concentrated

• Footfall – the number of people passing a given location – is a critical factor for retail businesses

  • High-footfall locations generate more potential sales but typically cost more in rent

• Some businesses benefit from agglomeration – locating near complementary or competing businesses to attract shared customer traffic

Example

Car dealerships frequently cluster together along the same road, as customers shopping for a car are more likely to visit a street where multiple options are available

• Businesses selling online are less dependent on physical proximity to customers

  • They must still consider proximity to distribution networks and delivery hubs

• Market research should identify where target customers live, work and shop before a location decision is made

Access to resources and markets

• Manufacturing businesses need access to raw materials and components

  • Locating near suppliers reduces transport costs and lead times

Example

Steel manufacturers historically located near coalfields and iron ore deposits to minimise input costs

• Agricultural businesses must locate where climate, soil and water supply are suitable for their produce

• Businesses that distribute products widely benefit from central locations with strong connections to major road, rail or port networks

• Knowledge and technology businesses cluster in areas with high concentrations of skilled workers

Example

Technology firms cluster around Cambridge and East London - known as the Silicon Roundabout - to access a pool of engineering and software graduates

• Globalisation has made it easier for businesses to access resources and markets from a wider range of locations

  • There are now fewer locational constraints that once tied production to specific regions

Infrastructure and location

• Infrastructure refers to the physical and digital systems that support business operations

  • This includes roads, rail, ports, airports, broadband and energy supply

• Strong transport infrastructure reduces logistics costs and speeds up the movement of goods and people

  • Poor infrastructure in an otherwise attractive location can increase costs and reduce operational efficiency

• Digital infrastructure, including high-speed broadband and reliable connectivity, has become essential for technology businesses, financial services and any organisation with remote or hybrid working arrangements

• Businesses that rely on importing raw materials or exporting finished goods benefit from proximity to ports or major airports

Example

Manufacturers in the Midlands benefit from excellent road and rail connections to ports across the UK, reducing distribution costs

Government incentives and location

• Governments use financial incentives to encourage businesses to locate in specific areas

  • Particularly those with high unemployment or weak economic performance

• Incentives can make a less commercially obvious location financially attractive, particularly for capital-intensive businesses where fixed costs are high

Common types of incentive

Enterprise Zones and Freeports

• Designated areas where businesses receive tax breaks, simplified planning permission and reduced customs duties

Example

Freeports have been established in Teesside, Humber and East Midlands Airport following the UK's departure from the EU

Grants

• Direct financial awards to businesses that create jobs in target areas

  • These do not need to be repaid

Reduced business rates

• Local authorities may offer discounted rates to attract specific types of business

Subsidised training

• Government-funded programmes to upskill workers in target regions, reducing recruitment and training costs for incoming businesses

Ethical, environmental and people factors affecting location

• Some businesses choose not to locate in areas where employment laws are weak or poorly enforced, even where doing so would reduce costs

• Locating production in countries with lower environmental standards to avoid compliance costs raises significant ethical concerns and reputational risk

• Businesses must consider the impact of their presence on local communities, including environmental degradation and the use of local resources

Environmental considerations

• The distance between a business's location and its suppliers or customers directly affects its carbon footprint

  • Shorter supply chains typically mean lower transport emissions

• Businesses increasingly assess flood risk, climate vulnerability and exposure to natural disasters when considering potential locations

• Planning restrictions may prevent businesses from locating in protected areas, regardless of commercial attractiveness

People and workforce considerations

• Access to a skilled workforce is one of the most important location factors for knowledge-intensive businesses

• Local unemployment rates affect both the availability of workers and prevailing wage levels

• Quality of life factors – schools, housing, transport, amenities – affect a business's ability to attract senior employees who may need to relocate

• Commuter accessibility determines the catchment area from which the business can realistically recruit

Break-even, return on investment and location decisions

Break-even and location

• Break-even analysis can be used to compare location options by calculating the minimum level of sales needed to cover costs at each site

• Different locations have different fixed costs (rent, rates) and potentially different variable costs (wages, utilities)

  • A city-centre location will have a higher break-even point but may generate higher revenue through greater footfall

  • A lower-cost out-of-town site will have a lower break-even point but may attract fewer customers

• Comparing break-even points across different options allows a business to assess which location offers the strongest financial case given its expected level of demand

Example

A gym considering two sites – one in a city centre at £80,000 annual rent and one on a retail park at £35,000 – would calculate the number of memberships needed to break even at each location before committing

Return on investment and location

• Return on investment (ROI) measures the financial return generated by a location decision relative to its cost

• It is expressed as a percentage and calculated using the formula

$\mathrm{Return}\mathrm{on}\mathrm{investment}=\frac{\mathrm{Profit}\mathrm{from}\mathrm{the}\mathrm{investment}}{\mathrm{Cost}\mathrm{of}\mathrm{the}\mathrm{investment}}\times 100$

• A premium location may generate a higher ROI despite higher costs if it delivers a significantly greater increase in revenue

• ROI analysis should consider the time horizon of the investment

  • Some locations take longer to generate returns, particularly where the business is entering a new market or building brand awareness from scratch

• Break-even and ROI analysis are most useful when used together

  • Break-even shows when a location becomes profitable

  • ROI shows how profitable it is relative to the cost of being there