Chapter 12: Budget and Finance

Chapter Overview

Pop-up retailing is a form of temporal business operation that is embraced by many, from global luxury brands and multinational big box retailers to internet pure-players to micro main street mom-and-pop shops. While some pop-up shops are part of big budget campaigns for brands, others are leveraged as gateways to new business ventures. Regardless of the business size, financial planning, as part of a comprehensive business plan, is one of the most important steps for successful business operations. This chapter will cover topics related to budget and finance for pop-up retail operations.

Setting the Context

1. Budget Planning for a Pop-up Shop

1.1 What Should You Budget For?

Regardless of business size, budget planning is an essential component for success. A budget is comprised of sales and spending for a given time period. The budget should be used as a tool for assessing how the business is doing by comparing the actual figures for sales and expenditures with the forecast figures by day, by week and by month (if applicable).¹ For pop-up retailers, a budget could be developed based on the length of the pop-up operation, from a few days to a few months. If there are substantial differences between the actual and budgeted figures, further steps must be taken to identify the contributing factors. For example, if sales did not meet the target, the pop-up operator may need to reconsider the marketing strategies. In contrast, if the sales are much higher than forecast, the pop-up retail manager may need to adjust the staffing level and the merchandising plan (discussed in Chapter 10) to ensure adequate customer service and inventory levels to cope with the demand for the entire pop-up operation period. If the expenditure is too high, cost-cutting mechanisms must be implemented.

The sales budget is estimated using the method explained in Chapter 10. It includes factors such as number of classifications, number of units, the price of each unit (markup %) and location (i.e., demand, stock-to-sale ratio). The expenditure budget can be divided into costs of goods sold, operating expenses (such as rents and salaries) and capital expenditures (such as point-of-sale systems or store fixtures).

1.2 Costs and Expenses Involved in the Set-up, Operation and Take-Down of a Pop-Up Shop

The pop-up shops run by established national or international brands or retail chains can be supported as part of their overall marketing budgets. These pop-up shops often serve as a vehicle for marketing and brand communications and provide experiential shopping experiences to engage customers. No sales targets are established or enforced. In contrast, the entrepreneurs who plan and operate pop-up shops to test the market, liquidate inventory, or launch new venture startups usually set clear sale and profit targets.

In this section, we discuss the cost structure of a pop-up shop.

1. Cost of Goods Sold (COGS): refers to the cost of purchasing merchandise from vendors/suppliers for resale.² Oftentimes, freight and delivery charges as well as workroom costs (to prepare the merchandise to be floor-read) are included in the COGS.
2. Operating Expenses: refers to the costs required to operate a business. Operating expenses can be divided into two categories: fixed expenses and variable expenses. Fix expenses are those do not change with the business volume. Examples include: rent, insurances, licenses/permits, depreciation of equipment, and staff salaries. Variable expenses are those change with the amount of business. Examples include: advertising and promotional costs, utilities, telephone, internet, and professional consulting fees.
3. Capital Expenditure: refers to the expenditure to purchase capital equipment, such as point of sale system (POS) and/or store fixtures. Most pop-up retailers opt for renting the capital equipment unless the pop-up shop is positioned to transition into a long-term store operation.

1.3 Evaluating Financial Performance

Evaluating financial performance is an important way to measure the effectiveness of strategy implementation. Among many basic financial statements, a Profit and Loss Statement (also known as a P&L or an Income Statement) provides a clear overview of a retail business operation. Table 12.1 below shows a Profit and Loss Statement in its basic form.

Table 12.1 Sample Profit and Loss Statement (Basic)

It’s worth noting that the Profit and Loss Statement is usually a summary of the performance of a retail business after a given time period. For pop-up shops, it could be after a pop-up operation has been completed. However, many entrepreneurs also prepare a pro forma Profit and Loss Statement in advance of opening their business. It requires much research and many educated estimates, but it works well as a planning tool.³ For example, to come up with planned sales, one must ask the following questions.

• What will the average sale in the pop-up shop be?
• How many customers are expected in a day?
• How many days will the pop-up shop be open?

Assuming an average sale of $45 per each of 50 customers, the amount of sales each day would be $45 x 50 = $2250. If the pop-up shop operates for 10 days, then the total planned sales would be $22,500.

With the planned sales, one can move on to estimate planned COGS. Using keystone markup, if an item retails at $45,  then the COGS = $22.5 (50%). The Gross Margin would be $11,250 which should cover all operating expenses plus yield a profit.

By carefully controlling the operating expense items, a pop-up retail operator can estimate the profit. If the pro forma Profit and Loss Statement shows a negative profit, then the pop-up retailer should go back and play with different scenarios to adjust planned sales, COGS and/or expenses. This is a great exercise for the pop-up retailer to determine whether their planned operation is a viable business idea and how to best approach a profit target.

2. Financing Options for a Pop-Up Retail Operation

2.1 Formulating a Proposal to Pitch for Financing

Pop-up shops may require funding support depending on the location, duration and scale of the operation. In his book, Pop-up Republic, Baras provides an example of the expense report for a 30-day pop-up shop in New York City, the most expensive commercial leasing location in the US.⁴

• Rent: $10,000 (a 2,500-square-foot space in Manhattan – or approximately 232 square-metres)
• Insurance: $500
• Permits/Licenses: $250
• Staffing: $7,200.00 (for 8 hours x 10 dollars/day x 30 days x 3 employees)
• Furniture/Fixtures: $2,500 (includes basic POS system, shelving, desks and other operating expenses)
• Promotion: $3,000 (includes grand opening expenses)
• Signs: $500
• Advertising: $500

The expenses may be covered by the marketing budget of a big corporation, but small business entrepreneurs may have to turn to different sources for financing. Regardless of the financing models, the first step of planning a pop-up shop is to develop a simplified version of a business plan that can be presented to the key stakeholders of funding sources, such as the director of marketing, family and friends or small business loan officers at local banks.

Although approaches to financial and business planing may be different for pop-up shops, the core elements of a business plan remain the same. The Business Model Canvas proposed by Osterwalder and Pigneur (2010) provides a useful strategic template for building business plans.⁵ It enables both new startups and leading global businesses to integrate strategic, operational and marketing aspects into the plan for a profitable company.

There are nine building blocks in the Business Plan Canvas:

1. Key  Partners
2. Key Activities
3. Key Resources
4. Value Propositions
5. Customer Relationships
6. Distribution Channels
7. Customer Segments
8. Cost Structure
9. Revenue Stream

The Business Plan Canvas helps entrepreneurs to build and grow a business idea into a clear plan, while large corporations can use it as a roadmap to examine their business vision and areas of operations and then further articulate or adjust their strategies. Pop-up retail operators can use the Business Plan Canvas as a framework to formulate their proposal to pitch for financing internally and/or externally.

2.2 Financing Options for a Pop-Up Shop

2.2.1 Personal Sources of Funding, Loan Finance, Equity Finance and Trade Credit

Research shows that it is common for nascent entrepreneurs to use money from personal savings and credit cards almost exclusively when they first conceive a business idea, and that it is usually not until after the new venture grows, that they will acquire debt and equity capitals.⁶ Hence, depending on how mature the pop-up retail operation is, an entrepreneur can decide on their financing approach.

Loan finance is “money borrowed from a finance company, such as a bank, and repaid over a period of time at either fixed or variable rates of interests”.¹ The lender usually requires some forms of securities against personal or business assets. Few entrepreneurs have adequate personal funds to sustain the operation of a pop-up shop, so they must rely on some form of financing to support the business on a long-term basis. Loan finance allow the entrepreneurs to to keep full ownership of their business but the debt capital must be carried as a liability on the balance sheet as the borrowed principal and interest must be paid back based on the set schedule.⁷

Equity finance is the personal investment in a business by the owners. The most common source of equity capital is the entrepreneur’s own savings and credit cards since they’re the least expensive sources of funds and many entrepreneurs see the benefits of being self-sufficient. In addition, investors and lenders expect entrepreneurs to contribute start-up funds to their business to show that they are willing to take the risk and not borrow excessively in the beginning, which puts greater pressure on cash flow.⁷ Some experts suggest that, generally speaking, an entrepreneur should be prepared to contribute 10%-25% of the required cash before looking for outside financing.⁸ Bringing in outside funds in the form of equity capital means that a certain percentage of the business ownership will be surrendered. Entrepreneurs often turn to their family members and friends as a second source of funds before trying to attract investments from private investors or venture capital companies.

Business angels are those individuals who are prepared to invest money in a business.¹ The differences between business angels and venture capital companies involve the size of the investment and risk averse tendency. Business angels usually provide a smaller amount of funding, but are more willing to risk a new business adventure.

Trade credit is a deferred payment term (also called supply-side financing) negotiated with suppliers. It can help offset the cost of the merchandise during the start-up period by paying the vendors in 30, 60 or 90 days, interest free.²

2.2.2 Applying to Government Programs

Accessing external funding resources is critical for the growth of small businesses, but it’s challenging to obtain them. As a result, many governmental programs have been developed and implemented to facilitate access to financing and they usually take the form of a guarantee or loss-sharing program.¹⁰

One such program is the Canada Small Business Financing Program (CSBFP) which was launched in 1999 with the objective to improve access to financing for small and medium size enterprises (SMEs). In addition, the Canada Business Network has wealth of information regarding grants, contributions, subsidies and loan guarantees provided by government departments and agencies as well as other financing sources, such as private sector financing, financing from non-government organizations and crowdfunding sources.

Each program and funding source typically has its unique structure and funding model. Hence, entrepreneurs interested in obtaining financing should review the program information before approaching the funding program or seek assistance from a small business consultant for guidance.

3. Pop-Up Shops as a Low Cost/Low Risk Venture for Retailers

3.1 Pop-Up Retailing Trend

“Pop-up retail, once a novelty, is now the norm”.¹¹ This is because the pop-up retail format uniquely appeals to different stakeholders: customers, retailers, landlords, local authorities and community leaders.

According to Baras (2016), “consumers are now favouring locally made products, both for environmental reasons and because of desire to know more about the merchandise they buy – where, how and by whom a product was made. They want an antidote to the homogenization of choices that are offered by chain stores and chain restaurants and while e-commerce offers convenience it does that by eliminating the shopping experience that many shoppers feel is just as integral to the buying process as the items that are for sale”.⁴

For retailers, while bricks-and-mortar stores add pop-up shops as an omni-channel addition, internet pure players also enlist pop-up retailing as a means to a add human touch to what is lacking in e-commerce. Furthermore, pop-up shops have provided new ways for artisans to sell their products, property managers to lease their spaces, established brands to launch their new products and celebrities to engage with their fan bases⁴, and all the new opportunities are made available with a relatively low cost and low risk pop-up option with no long-term commitment, by design.

From a landlord’s perspective, pop-up retail operations have helped to reduce vacancy rates, bring in increased foot traffic and create a refreshed feel to a well-established traditional tenant mix in an area or a shopping mall. For local authorities and community leaders, pop-up shops contribute to elevated commerce activities, increased interest in “shopping local” and sustained efforts to build vibrant communities.

Experts project that pop-up retailing is poised to become a permanent element in the broad retail economy. It’s a “universal” retail format that’s adaptable to a wide range of products and services, from luxury brands to fresh local produce at a farmer’s market, from tax service available in a kiosk to wine-tasting offered at a pop-up bar. Although Millennials are the main target customer segment for pop-up retailers, Baby Boomers share equal enthusiasm, as some of them envision their entrepreneurial spirits being channeled through pop-up retail operations after retirement.⁴

3.2 Pop-Up Shops as a Channel for International Market Entry

Pop-up shops also play a role in the retail internationalization process when retailers/brand manufacturers utilize them to enter non-domestic markets.¹² For example, Canadian phone maker BlackBerry has opened a pop-up shop in Manhattan’s Brookfield Place to sell unlocked models of its most recent product lines, in an attempt to make BlackBerry products more accessible and to reassure the market that the company is still committed to reinventing the headset business despite of rumours of demise.¹³

Although emerging and established brands may have different motives for choosing pop-up shops as a channel for international market entry, they generally fall into three categories:

1. Testing and adapting the brand and the retailer’s concept with foreign consumers who are unfamiliar with it.
2. Raising and sustaining the international profile of a retail brand.
3. Developing relationship networks with stakeholders in foreign markets.¹²

The key advantage of pop-up shops as a foreign operation mode is cost-effectiveness. In addition, many companies use pop-up shops in combination with other retail formats (i.e., company-owned stores) to further strengthen foreign retail expansion.¹² By doing so, pop-up shops contribute to the company’s revenue stream and help accelerate the company’s expansion in the foreign markets.

4. Pop-Up Shops as a Branding Strategy

4.1 Pop-Up Shops and Brand Experiences

Flexibility is an inherent characteristic of pop-up shops that has driven the increasingly wide adoption of the retail format. On the one hand, it provides up-and-coming entrepreneurs with “no frills” opportunities to access a market and test the waters for an eventual permanent venture, while on the other hand, established retail corporations flock to adopt the new retail format to achieve their own unique objectives.

Research that explores the luxury market shows that pop-up shops effectively strike a cord with the market segment eager to engage in new purchase experiences.¹⁴ Not only do pop-up shops complement their luxury parent houses while adding new dimensions (such as informality, friendliness and accessibility), but they also contribute to the enhanced mythical aspect of the luxury brands.

Pop-up shops have been embraced by many luxury brands as a way to renew and re-energize their customer base and provide novel brand experience to new and existing customers. The pop-up luxury stores are usually designed with big budgets and the primary focus is to promote superior brand experiences through interactive store designs, media stations and games.¹⁵ The metric for measuring success is usually not the traditional sales figure, but more the amount of word-of-mouth communications triggered.

4.2 Pop-Up Shops as an Event Marketing Tool

Pop-up shops have also been implemented as an event marketing tool to build brand reputation and brand community. In this case, pop-up retail is usually a part of a big ticket campaign for the brand. Pop-up shops, as a form of event marketing, can create a temporary branded environment and serve as a vehicle for non-conventional communication.

In general, event marketing is implemented by companies to achieve multi-faceted objectives.

• Corporate objectives: help to increase public awareness, enhance corporate image and promote community involvement
• Marketing objectives: help to reach out to target markets, communicate brand positioning and increase sales
• Media objectives: help to generate visibility and publicity, counter negative publicity and reinforce ad campaigns
• Personal objectives: help to fulfill management interest¹⁷

Research suggests that people’s event attendance positively affects their perceived brand equity.¹⁷ In the case of pop-up shops, brand experience is stronger among all forms of event marketing tested (including sponsored events, trade shows, street events and pop-up shops), and brand experience mediates the relationship between pre-event and post-event brand equity. In other words, after visiting pop-up shops, the post-event brand equity is higher than it was pre-event.

References

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