Chapter 10: Merchandising, Inventory and Logistics

Chapter Overview

The competitive retail landscape has seen accelerated changes in the past decades and many changes have been driven by the evolving needs and wants of shoppers. In an omni-channel retail environment, retail operations are largely developed to reflect the changes in how customers shop and how retail space is utilized.¹ While savvy retailers are focusing on the customer experience, convenience and technology integration to lure shoppers back to the brick and mortar stores², each element of store experience has implications for all aspects of retail operations, such as pricing and promotions, inventory control and management, as well as logistics.

Pop-up shops, as a relatively low-cost option for emerging entrepreneurs looking to get a foothold in the marketplace, have gained popularity around the world. It’s important to note that even though pop-up shops are temporary by design and business owners can maximize the benefits of a no-frills presentation, experts advise them to operate to their full potential because pop-up retailers can gather important market data for future operations³ and the pop-up shop is about the brand and brand experiences for the customers. In this chapter, we will discuss the operational aspects of a pop-up shop.

Setting the Context

1. Merchandise Planning and Management for Pop-Up Shops

Merchandise is what a retailer carries in stock and makes available for sale. Retail merchandise is the backbone of any retail business and contributes to retail productivity – a key performance indicator of success.⁴ The two key elements in the merchandise planning process are the merchandise budget plan and merchandise assortment plan. With the budget plan, buyers/business owners have a clear idea of how much money to spend on purchasing merchandise. It also provides a guideline for buyers to determine the details for the assortment plan. An assortment plan includes the specific quantities and characteristics of each product based on specific factors such as brands, colours, sizes and materials.⁵ Merchandise budget planning and assortment planning are integral components of the procurement processes for a retailer. Daily and weekly sales records are compared with the plans to measure performances to avoid stockout situations and determine if  additional promotions are required to move any slow inventory. For pop-up retailers large and small, it’s critical to take into consideration the objective(s) and time duration of the pop-up operation when creating the merchandise budget plan and assortment plan.

In Chapter 2, we identified five objectives for pop-up shops:

1. Communicational: Pop-up shops with a primarily communicational objective focus on creating brand awareness, enhancing brand identity and influencing brand perception. Selling may be part of a communicational pop-up shop, but it’s of significantly lesser importance.
2. Experiential: Pop-up shops with an experiential objective devote significant effort to facilitating brand-customer engagement. The operation of experiential pop-up shops is usually an integral element of a firm’s marketing plan to build a brand community.
3. Transactional: Pop-up shops with a transactional objective relate to the economic dimension of commerce activities, where sales are at the core of business operations.
4. Testing: Pop-up shops with a testing objective emphasize gaining shopper insights and testing markets’ responses to new products/brands. They are a relatively low risk and low cost option for companies to enter into a new market or launch a new product/brand that may lead to changed consumer habits.
5. Institutional: In addition to satisfying the business objectives of a brand or retailer, an institutional pop-up shop also contributes to revitalizing local communities and promoting economic redevelopment of the area.

Since selling is not an essential element for pop-up shops with communicational and/or experiential objectives, merchandise planning and management discussions will focus on those pop-up shops with transactional, testing, and/or institutional objectives. While pop-up shops with transactional objectives are oftentimes engaged in short-term operations (i.e., a few days to a few weeks), pop-up shops with testing objectives can last from a few days to a few months. Many institutional pop-up shops go into a vacant space with an intention to turn into longer term tenants; thus their pop-up operations can be planned for three to six months. This chapter will focus on how to develop merchandise budget and assortment plans for ten days, four weeks and six months.

1.1 Merchandise Budget Planning

The selection of merchandise available is what differentiates one store from another. A strategic and innovative buying approach is critical to growing a healthy business. When it comes to merchandise budget planning, it is important to keep in mind: merchandise groupings; four key operating ratios; and markdown strategy.

1.1.1 Merchandise Groupings

Pop-up shops usually operate in a small retail space. Therefore, extensive merchandise categories and quantities are not feasible. A pop-up entrepreneur’s task is to plan the proper goods to impress the customers and build favourable images of the business, regardless of the merchandise type being sold (e.g., fashion goods, seconds, antiques, or commodities).⁶ Grouping merchandise into departments and classifications is one of the most important things to ensure retail success. Generally speaking, each department should account for 10% of the store revenue and each department should include no more than 10 classifications. Departments are considered separate business units that can be operated as standalone business entities. For example, women’s wear and men’s wear can be two departments of a clothing store.

Due to intense competition from big box retailers who are carrying an extensive amount of merchandise, many small businesses choose to specialize in limited groupings, but include a lot more merchandise varieties within the category. In the case of pop-up retail operations, department level may be irrelevant and merchandise classification is sufficient for merchandise groupings. Each classification can be further divided into sub-classifications, lines, items and Stock Keeping Units (SKUs). Figure 10.1 below shows an example of how to classify a store’s merchandise. ⁶

Table 10.1 Merchandise Classification System (Adapted from Kunz, 1998)

1.1.2 Advantages of Classifying Merchandise

A major advantage of classifying merchandise is to gain insight into customer behaviour. Customers cast votes with their money spent in categories (this can be drilled down to individual units) and this information can be used to adjust the inventory quickly, if feasible. Even though making inventory adjustments may not be feasible during the time of a pop-up operation, planned promotions may be implemented to stimulate slow-moving categories. Furthermore, the shopper insights can be used to effectively guide the budget planning for the next planning period in terms of dollar amount to invest in certain categories.

1.1.3 Four Key Operating Ratios

The four key operating ratios discussed below are important indicators for pop-up retailers, not only when conducting self-assessment of their business performance, but also when making future business decisions.

1. Stock Turnover Rate refers to the number of times that the average stock is sold during a given period of time.⁵ Stock turnover rate should be reviewed on a weekly basis. The higher the turnover rate, the less money is being held in inventory, and the better chance for a retailer to bring fresher products to draw more customers’ interests and spending.

Stock turnover rate = Net sales/Average inventory

There are two distinct product strategies related to stock turnover rate:

1. high margin, high price, low turnover
2. low margin, low price, high turnover

Depending on the retailer’s brand positioning and types of merchandise carried, they can choose to apply either or both strategies. For pop-up retailers that run operations for a few days with a transactional objective, low margin, low price and high turnover is the ideal strategy. For pop-up retailers with an objective to test the market  and run operations in a few days to a few weeks, either strategy can be implemented depending on the merchandise/service offering being tested. For pop-up retailers running operations for a few months, both strategies may apply with each strategy dominating certain classifications suitable for low stock turnover vs. high stock turnover.

Stock turnover rate is an important ratio when pop-up retailers plan their overall merchandise budget. For example, if the planned total sales for six months is $500,000 and stock turnover rate is two, the retailer should plan $250,000 worth of merchandise at retail value. As a general rule, the total purchase should not exceed 120% of the planned sales.⁶

2. Stock-to-Sale Ratio indicates the relationship between planned sales and the amount of inventory required to produce those sales.⁵ Stock-to-sale ratio is another measure of how well the inventory level matches the sales. As a general rule, a stock-to-sale ratio of 4 :1 is a good indicator for small retail businesses to run a profitable operation.⁶

Stock-to-sale ratio = Beginning of month inventory at selling price/Total sales for the month

3.Gross Margin Return on Inventory Investment (GMROII) is a measurement of the profitability of a retailer’s sales.⁵ Purchasing inventory is an investment for a retail business and GMROII provides a means to indicate how much money a retailer is getting back for every dollar invested in inventory.⁶

GMROII = Gross margin in dollars/Average inventory at cost

As a general rule, a GMROII greater than three is a good benchmark for business performance, as it suggests sufficient return to cover costs and make a good profit.⁶ Retailers should calculate GMROII at classification level so they know what the best performers in the store are and can use them as input for future decisions on buying, marketing, visual merchandising and promotion.

4. Sales per Square Foot refers to net sales divided by square feet of selling space.⁷ Sales per square foot is an industry standard calculation of how productively a retailer is using the selling space to generate sales.

Sales per square foot = Net annual sales/Total selling area in square feet

Industry trade organizations and consulting firms often publish the sales per square foot figures for various retail sectors and store types. Pop-up retailers can calculate the sales per square foot for the duration of their pop-up operation and convert it to an annual figure. By comparing the pop-up retail performance with an industry benchmark, pop-up retailers can gain insights into how their retail business compares to others.

1.1.4 Markdown Strategies

It’s a common practice in the retail industry to build in promotional markdowns and regular markdowns in a merchandise budget plan. Promotional markdowns usually take place in conjunction with a specific event, such as a customer appreciation sale over a weekend. The price change is temporary and the price will return to normal once the sale event is over. Regular markdown is the amount set aside for each month in the merchandise budget plan to address the slow-moving inventory to reflect the market value. Recognizing that buying mistakes are unavoidable, regular markdowns are taken to stimulate the sale and inventory turnover.⁶

Promotional markdowns and regular markdowns are mainly applicable to transactional pop-up operations, such as a warehouse sale. Other types of pop-up retailers can use the two markdown strategies on limited merchandise to create the spurt-of-the-moment feeling for shoppers.

Most pop-up retailers should follow a seasonal markdown strategy. This type of markdown provides shoppers exposure to full-priced merchandise for an extended period of time and then takes markdowns for the last few days or weeks of the pop-up operation.⁶ Since pop-up shops are perceived as providing a novel and engaging experience to shoppers, frequent markdowns should not be the main focus of the business strategy.

1.1.5 Creating a Six Month Merchandise Plan

Even pop-up retailers who operate for a few days or weeks – whether part of a larger retail chain or an independent online or brick-and-mortar shops – usually have a longer term plan. For this reason, their merchandise plan can be a part of a larger six month plan for the main business with the pop-up representing a brief time within that period. In the retail industry, merchandise planning is usually done for February–July (spring) and August–January (fall).

Here is an example of a six month merchandise plan.

Table 10.2 Six Month Merchandise Plan

For detailed instructions on how to forecast and create a six month merchandise (budget) plan, please review the following videos:

1. Six month merchandise plan: step 1
2. Six month merchandise plan: step 2 
3. Six month merchandise plan: step 3
4. Six month merchandise plan: step 4
5. Six month merchandise plan: step 5
6. Six month merchandise plan: step 6

1.2 Merchandise Assortment Planning

The merchandise (budget) plan sets the framework in terms of the dollar amount for a buyer/business owner to follow when it comes to purchasing goods for each classification. If the merchandise purchased meets the demands of the marketplace and reflects the retailer’s brand image, there will not be a lot of leftover merchandise to be marked down. Merchandise selection requires careful analysis of:

• the store’s goals and objectives
• the types of products offered
• past sales records
• the target market
• other factors might impact sales⁵

Pop-up retailers must establish a core merchandise assortment plan that fits with their objectives and target market. Although the assortment planning for pop-up retailers is focused on the short term, the process of planning is similar for stores who run year-round.

Many pop-up retailers offer unique products that differentiate them from their big box counterparts. In this niche marketing approach, the assortment of products is oftentimes narrow and deep, meaning they offer a limited number of merchandise classifications, but a wide variety of sub-classifications within each classification. This strategy positions a pop-up shop as a specialty retailer with extensive merchandise choices.

Here is an example of an assortment plan.

Table 10.3 Assortment Plan

2. Pricing Strategies for Pop-up Shops

2.1 Traditional Retailer Pricing Techniques

Traditionally, retailers’ decisions on initial pricing and subsequent markdowns are primarily based on cost and historical data. Most retailers implement a fixed percentage on top of the cost of the merchandise to determine a retail price. Keystone markup, for example, results in a 50% markup based on retail price. Another traditional pricing technique is to set the price above, on par with, or below the competition’s pricing.⁸

Before establishing retail prices based on a cost orientation, retailers consider the following factors.⁵

1. Target market: pricing is a direct relationship that a retailer establishes with customers. Most retailers can’t cater to all customers; they must identify a segment of the market in which to position their stores. A store manager needs to understand how the target customers view price. Is higher price perceived as equal to higher quality? Is quality customer service valued? Are customers willing to do comparison shopping to get the lowest price possible?  Will customers expect to negotiate on price?
2. Store policies: store policies are part of the retail strategy to create the store image. In practice, the following are the most commonly seen pricing strategies:
   1. Skimming pricing: a retailer charges the highest price possible to create a prestigious image of the store
   2. Penetration pricing: a retailer sets prices with aggressively low margins in order to sell high volumes of products to increase market share
   3. Loss leaders: a retailer strategically selects products with high market demand and sets their prices at a level where no profits are generated. These products are featured to build store traffic and a store’s value proposition. It is the hope that once customers are drawn into the store, they will purchase other items that have been priced with higher margins.
   4. Odd-cent pricing: built on price impression psychology, products are priced at an odd-cent ending to create the perception of being cheaper. For example, a product is priced at $9.99 rather than $10.00.
   5. Even-ending pricing: opposite to odd-cent pricing, products are priced at even-cent ending. For example, a product is priced at $42.00 rather than $41.95.
   6. Price lining: a retailer selects certain price points and charges all product assortment at those prices. Many retailers use the pricing strategy to create distinctions among the products carried in the store, for example, good ($15.99), better ($25.99) and best ($35.99).
3. Competition: retailers need to carefully analyze the competition’s pricing strategies and also examine their own product offerings. If a retailer is selling mostly national brands, the room for selling below competition is limited because it’s likely that the national brand manufacturers would charge about the same prices to all retailers. However, if a retailer is selling private labels or exclusive designer labels, the opportunity to charge a premium price is significantly greater. Customers would be willing to pay a higher price for the unique products and the prestige of owning the unique products.
4. Economic conditions: pricing strategies should be aligned with the overall economic conditions of the market and based on supply and demand principles. Seasonal adjustment and product life cycle should be integral elements of pricing decisions.

2.2 Selecting Pricing Strategies for Pop-Up Shops

Managers of pop-up shops should carefully select appropriate pricing strategies for their operations. The pricing policies should be consistent with those in the existing channel of operations (i.e., e-commerce and/or bricks-and-mortar stores). Since the primary functions of pop-up shops are to create excitement and engage shoppers in exciting and entertaining ways, not all traditional retail pricing techniques are applicable. For example, a skimming pricing strategy may be effective for a new product launch of a premium brand, while penetration pricing could be effective for a pop-up retailer contemplating a permanent presence in the business area. In addition, refund policies may differ at transactional pop-ups using a “final-sale” approach or directing customers to permanent locations and alternatives where appropriate. Decision makers should consider the duration of the pop-up operation, consistency and how the pop-up shop pricing contributes to the overall business strategy.

3. Inventory Management Strategies for Pop-Up Retail Operations

3.1 Establishing Inventory

3.1.1 Open-to-Buy (OTB)

Open-to-Buy (OTB) is the amount of funds available for buyers to make new purchases. It is calculated like this:

OTB = Budgeted end-of-the-period stock + Budgeted sales + Budgeted reductions (markdowns, thefts) − Beginning-of-the-period inventory − Purchases already received − Purchase orders placed but not yet received

OTB is calculated on regular basis as a part of an inventory management strategy. It is an integral element of pre-season and in-season planning when buyers consistently compare the actual sales figures against the planned, in conjunction with considering inventory levels against planned reductions, orders received and orders made but not received. OTB allows buyers to optimize inventory based on market demand, to build a safety buffer and to seek buying opportunities when they present themselves.

Pop-up retailers should include OTB when they conduct long-term planning. Even though it may not be feasible to leverage OTB for those pop-up operations of a few days or a few weeks, these retailers can still use OTB to replenish and re-establish inventory for the next pop-up event.

3.1.2 Purchasing Merchandise

There are different approaches to buying merchandise for pop-up retail operations depending on the objectives. For example, communicational and experiential pop-up retailers may only need to prepare giveaways/samples and limited product assortment if any, while testing and institutional pop-up retailers would need to carefully select products to be made available due to the selling focus. If a pop-up operation is set up for inventory liquidation, then the efforts would be devoted to organizing and presenting all items as efficiently as possible.

3.2 Controlling Inventory

Pop-up operations are temporal in a location and often take place in different locations over time which creates challenges for efficient inventory management. When pop-up retailers choose a location to pop up, they consider their target market. Depending on the size and layout of the space and length of the pop-up operation, managers make decisions on what and how much inventory to bring to the venue. Most retailers keep all inventory on the floor without a distinctive stockroom area, and many of them require a storage facility on site or close by to store excessive stock and address fluctuations of customer demands. Once the pop-up operation is done, the inventory will be transported back to a more permanent facility for holding inventory.

An accurate and timely inventory tracking and tagging protocol is important to help retailers do the following:⁵

1. Maintain a proper balance between sales and inventory level. This will help reduce instances of over-stock or under-stock in classifications and the store overall.
2. Identify slow-movers in a more timely fashion so markdowns and other promotional strategies may be implemented.
3. Identify best sellers early in the selling cycle so additional orders may be placed to increase the total sales. This will also help reduce loss of sales due to stockout.
4. Detect excessive shrinkage so loss prevention strategies may be put into action.

Carrying and maintaining inventory is costly (usually 20%–30% of the initial investment in inventory)⁹, so effective control of inventory is meaningful. A perpetual control system is more suitable for pop-up retailers.

The benefit of using the perpetual control system is that stock levels can be calculated at any time. While many pop-up retailers have computerized inventory tracking and tagging protocol, some small businesses still use a manual method. An advantage of a computerized inventory control system is that a retailer can maintain inventory control down to a unit. Radio Frequency Identification or RFID-equipped merchandise allows retailers to track a product from place to place while it’s in the supply chain. Some computerized inventory control systems have automatic replenishment capability which sends orders when inventory of certain items falls below a threshold set up by a buyer or store manager.

4. Logistics and Pop-Up Retail Management: Challenges and Strategies

Logistics in retailing are about product availability. As Fernie & Sparks (2014) state, “in order to make products available, retailers have to manage their logistics in terms of product movement and demand management”.¹⁰ That is, retailers have to anticipate the customer demand and be able to respond quickly when the demand changes. On the other hand, retailers must also move the under-demand products out of the customer-facing positions efficiently and cost-effectively.

Fernie & Sparks¹⁰ identify five components in the retail logistics mix:

1. Storage facilities: this could be a warehouse, distribution centre or stockroom in a store
2. Inventory: retailers hold stock or inventory with the goal of selling for profit
3. Transportation: all means of transporting goods from manufacturing to retail to consumption
4. Unitization and Packaging: large packaging in logistics terms and small quantity floor-ready merchandise
5. Communication: data collection and exchange with regards to demand and supply, but also volumes, stock, prices and movements of merchandise to facilitate the logistics process

All components are interconnected and all players (retailer and suppliers) involved in the retail logistics system must work collaboratively to achieve optimal logistics efficiency. When applying the “retail logistics mix” framework to pop-up retail operations, all components are relevant, but there is not a cookie cutter approach, as pop-up retail operations come in all shapes and sizes and with very diverse objectives. Nonetheless, the framework is valuable in guiding an in-depth analysis of the implications of each component when planning the logistics of a pop-up retail operation.

Another framework to facilitate strategy development for pop-up retail logistics is inventory parameters, developed by Sharma (2017)¹¹. Inventory parameters include:

1. Demand: demand should be associated with a suitable period (e.g., by day, by week, by month or by year). For pop-up retail, this might be the duration of the pop-up operation.
2. Procurement Cost: purchase cost and transportation cost. This is an important parameter for choosing a pop-up location and any required storage facilities.
3. Cycle Time: the time it takes between the initial procurement and stock replenishment. For pop-up retail operations that are run for a few days or a few weeks, this may not be relevant. However, as most pop-up operations are an integral element of a longer-term retail strategy, it’s still meaningful to consider how a given pop-up operation fits into a bigger picture.
4. Ordering Cost: the costs associated with processing and handling orders from customers by retailers or from retailers by wholesalers. This parameter directly affects pricing strategy for merchandise being sold at a pop-up retail operation.
5. Inventory Carrying Cost: cost of warehousing, insurance and handling. This is one of the most important parameters that affects retail business overall and therefore it’s an essential factor to consider when planning pop-up logistics.
6. Inventory Stock: the available units at any point in time. Careful planning must be conducted to ensure inventory level meets the anticipated demand for the duration of the pop-up operation.
7. Stockout Level: inventory shortage due to demand exceeding supply or uniform demand with a delayed supply. A certain level of buffer stock should be prepared at the pop-up venue or in nearby storage facility to respond to unexpected surges in demand. Orders should be placed with enough lead time to minimize the risk of supply delay or interruption.
8. Stockout Cost: the estimated loss of sales due to inventory shortage. This may be a result of customers switching to another brand, customers no longer visiting the store due to stockout. Since pop-up retail is one of the ways to encourage customers’ cross-channel behaviours beyond the pop-up operation itself, customers’ unsatisfactory experience (due to stockout) may spill over to their perceptions of the retailer as a brand, so strong emphasis should be placed on reducing stockout situations.

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