Pop-Up Shops: Retail Timeshares
Published on October 22, 2009 in Deb Purcell. 0 Comments Tags: Predictive Analytic Services, Retail, Retail Optimization, Retail Trends.
Deb Purcell, Pitney Bowes Business Insight
Pop-up stores, retail outlets that operate under a temporary lease, are not new. The term has been around nearly a decade. But in today’s economy, the concept serves a new purpose and is gaining attention from both retailers and landlords who, under different circumstances, would not consider a temporary arrangement worth the hassle or cost.
Earlier this decade, pop-up stores emerged in space constrained fashion centers like Manhattan as outlets for designers looking to test concepts and create excitement for their brand. In more recent years, pop-ups served online operators like E-bay as a way to augment their online operations with a temporary bricks and mortar presence. In both cases, the pop-up’s purpose was as much a marketing tool to raise awareness for a specific merchandise brand, as an opportunistic outlet for sales. A pop-up location also provided a barometer of potential future success. If the pop-up location exceeded expectations, the retailer had information to support a more permanent deployment.
In 2009, pop-up retail is addressing a decidedly different confluence of business needs. En masse closures of chain retail locations and independent retailers that have succumbed to weak consumer demand have resulted in historically high vacancy rates, creating an unprecedented “buyer’s market”. Faced with low current demand for their vacated spaces, landlords today are motivated to be flexible, and are behaving like time-share owners looking to fill a property throughout the calendar with multiple tenants. The pressure on landlords is juxtaposed with challenges facing retailers as they try to sustain operations, particularly in marginal locations, in a weak consumer environment. Retailers have become risk averse and have dramatically curtailed new store development. However, they also understand that some locales present unique opportunities for profitable operations in peak season, possibly signaling year-round potential.
Today’s retail pop-up strategy is really an extension of temporary holiday kiosks in regional malls, just on a larger scale. Pop-up locations allow retailers to tap into seasonal demand without making a long-term cost commitment. The key is that the retailer must experience a significant known, seasonal spike in demand, at least in certain merchandise, and be able to secure a lease during that exact period for the pop-up concept to make sense. In the best case, a landlord can find tenants with complementary sales patterns. For example, the same location may successfully support the Halloween Shops in September and October, ToysR’Us before Christmas, a candy maker or tax preparation service before mid April, followed by a gardening or barbeque retailer in early summer and a school supplies concept in late summer. The landlord can improve odds of securing multiple tenants during the course of the year by offering a flexible footprint that can easily be configured by each tenant. The graph below shows the relative attractiveness of a temporary location for a variety of retail types, assuming profitability is met in the months that account for nine percent of more of total sales.
One challenge to retailers operating in temporary locations is to generate enough awareness quickly to ensure that shoppers patronize the pop-up location before it closes. It is widely understood that a retailer in a new location will not generate the level of sales of an established location due to a concept called maturity, a period of time during which consumers find the new location and alter their shopping behavior to incorporate it. In 2009, several factors are mitigating that concern. Today’s shopper is characterized by a new frugal attitude that is creating openness to looking at shopping alternatives and making adjustments quickly. Brand loyalty is weak as shoppers place greater importance on price offering an added incentive to try out value-oriented pop-up shops. Additionally, pop-ups hit the sweet spot with younger shoppers accustomed to receiving information and responding in short snippets of time, offering opportunities for retailers who utilize new social media venues to quickly establish awareness and brand image. For an example, check out this site that tracks retailer activity on Twitter.
So the pop-up concept appears to offer a win-win solution for landlords looking to fill abundant vacant space and for retailers looking to operate in locations that are profitable only during peak periods of demand. But is this surge in pop-up locations a fad, or a long term retail trend? To answer this question, we need to go back to the causes and benefits derived by participating companies. Would landlords sign short-term leases if they were able to secure longer-term revenue streams? Only if they are anticipate being able to charge substantially higher rates in the future, and certainly not without commanding a premium! As the economic recovery gains steam, lease rates will climb, especially for short-term tenants if a more stable occupant is available.
As landlords charge more to offset the risk of the space becoming vacant more frequently after each lease expires, the higher costs will make pop-ups a less attractive option for retailers. However, if retailers can sufficiently streamline operations, their pop-up concepts may remain feasible. It will be interesting to see if more structured arrangements between retailers develop to reduce the vacancy risk to landlords, allowing the consortium to negotiate favorable lease terms similar to a single year-round tenant. This co-location strategy could continue to work in better economic times similar to the way quick-service restaurants, that offer breakfast and lunch, operate successfully out of a single location thereby providing customers with the right merchandise at the right time while leveraging their fixed costs.
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