Business location: factors and the role of e-commerce

Where a business locates can be the single biggest decision in its early life. Get it right and you have customers, talent and low costs. Get it wrong and you spend years fighting an uphill battle.

Why location matters

The right location:

• Brings the business close to its customers.
• Provides access to labour with the right skills.
• Reduces transport costs for materials and finished goods.
• Sits in an area with the right infrastructure.
• Stays affordable in rent and rates.

A bad location can lock in high costs and low sales. Even a great product needs the right place.

Key location factors

1. Proximity to market

Some businesses must be close to their customers:

• Retail and food businesses — high streets, shopping centres, train stations. A coffee shop on a busy commuter route trumps a coffee shop in a quiet suburb.
• Service businesses — hairdressers, dentists, GPs. Customers travel only short distances.

Other businesses can locate further from customers if delivery is cheap (warehouses on motorway corridors).

2. Proximity to raw materials

Heavy or perishable raw materials make this critical:

• Quarries and mines — must be at the source.
• Sawmills — close to forests.
• Food processing — close to farms (Stilton cheese must be made in three counties; champagne grapes from one French region).

Light, easily transported materials matter less.

3. Proximity to labour

• Low-skill industries — locate where labour is plentiful (e.g. distribution centres in former industrial towns).
• High-skill industries — locate near universities and graduate clusters (Cambridge biotech, London FinTech, Manchester digital).
• Manufacturing — has historically followed lower wages globally (China, Vietnam, India).

4. Proximity to competitors

Two opposite strategies:

• Cluster — locate near competitors. Customers can compare; cluster builds reputation (jewellery quarter, theatre district, Silicon Valley).
• Avoid — locate where there is no direct competitor. Especially for services like petrol stations, hairdressers.

5. Infrastructure

Roads, rail, airports, broadband, electricity, water. A distribution business needs motorway access; a tech firm needs fibre internet; a heavy manufacturer needs reliable power and water.

The UK's Golden Triangle (London-Cambridge-Oxford) attracts tech and biotech because of universities + transport + investors.

6. Costs

• Rent and rates — central London prices are 5–10× regional UK.
• Wages — vary regionally and internationally.
• Local taxes and incentives — Enterprise Zones, Freeports offer tax breaks.

7. Government incentives

Government can encourage businesses to locate in specific areas:

• Enterprise Zones — discounted business rates, simpler planning.
• Freeports — customs simplifications and tax relief (UK launched 8 in 2021).
• Levelling Up funds — regeneration of deprived areas.

8. Other factors

• Climate (e.g. agriculture, tourism).
• Political and legal stability.
• Quality of life (attracts and retains skilled staff).
• Image — being in a particular district can lend prestige.

E-commerce changes everything

The internet has weakened the link between a business's location and its customers. Two big effects:

Reach

A small business in a Yorkshire village can sell to customers worldwide via Shopify, Amazon, Etsy or its own site. Famously, a Welsh business (Notonthehighstreet) hosts thousands of small artisanal sellers.

Choice of location

• Less need for high-street premises — many e-commerce businesses run from a home, garage or warehouse on the edge of a town.
• Cheaper rent — locate where rent is low; ship to customers.
• Distribution centres dominate — Amazon and other online retailers cluster vast warehouses near motorways and airports (Amazon UK has 30+ fulfilment centres).
• Some high-street shops face threats — UK high-street vacancies hit 14 % in 2024 partly due to e-commerce.

But location still matters

• Returns and customer service — physical presence can build trust.
• Same-day delivery — needs warehouses close to cities.
• Click-and-collect — needs shops near customers.
• Some products need physical — supermarkets, takeaway food, furniture you want to sit on.

Real-world examples

• Greggs — locates on busy commuter routes (high streets, bus stations) where lots of people walk past at lunchtime. Recently expanding into transport hubs (Manchester Airport).
• Tesla Gigafactory Berlin — chose Brandenburg for proximity to European market, skilled labour, fast permit process and government incentives. Faced opposition from local environmental groups (water use).
• Cambridge tech cluster — Microsoft Research, ARM, Astrazeneca and dozens of biotech start-ups. Co-locate around the university for talent and ideas.
• Lidl distribution centres — placed near motorways for fast HGV access to stores.

Examiner tips

When asked to recommend a location, balance the type of business with the location factors. A coffee shop needs footfall; a software firm needs talent and broadband; a factory needs raw materials, power and transport. Always justify trade-offs (e.g. "central location is more expensive but the higher footfall justifies it").