Mom-and-Pop

What is Mom-and-Pop?

The term mom-and-pop describes the small business entities that are independent or family-owned. It is in contrast to big-box stores, such as Walmart, Home Depot, Starbucks, and Pizza Hut. Mom-and-pop stores comprise a wide variety of businesses, including restaurants, groceries, repair shops, etc.

Under the investment concept, mom-and-pop can also be used to describe investors who are inexperienced and investing minimally in the equity market.

Understanding Mom-and-Pop Businesses

Characteristics

Mom-and-pop shops are usually family-owned and controlled. With limited capital investment, they handle small business volumes and run with minimal numbers of employees. Typically, the shops are not franchised and only operate at single locations. Therefore, their customers are mostly from local communities. Their products and services are more personalized.

Mom-and-pop stores are generally in the structures of partnership, limited liability company, or an S corporation. By starting up a store as a limited liability company, the owner is not personally liable for the debts carried by the store.

The structure of an S corporation was firstly introduced to benefit the mom-and-pop store owners. By operating in such a structure, the owners face limited liability and can run the business with perpetual life as a corporation, but at the same time, they can also avoid double taxation as a corporation.

Opportunities

Big chain stores typically provide standardized products to their customers for better quality control.  A customer can get the same Big Mac at the same price from any McDonald’s store. On the other hand, mom-and-pop shops provide more personalized products and interactive services.

Nowadays, personalized products and services are becoming more appealing to customers. It helps mom-and-pop stores to compete with the big stores and win customer loyalty from the local community. Additionally, with the development of technology, especially the internet and social media, mom-and-pop stores are getting more exposure to people in a greater geographical area. Their potential customers are no longer limited to people in the local community.

Another opportunity for mom-and-pop shops is the concept of supporting local economic growth. Customers are more willing to buy local products to support their community, as well as promote local economic growth. Mom-and-pop business owners can leverage the concept by operating with positive externality, i.e., providing environmental-friendly products.

There are opportunities for the well-performing mom-and-pop shops to expand. Many large companies were initially established as mom-and-pop businesses.

Whole Foods is one example. It started as a small store only selling natural foods in Austin, Texas. Then, they expanded by merging with another natural foods store. It now operates about 500 stores in the U.S., U.K., and Canada.

Risks

Despite the opportunities discussed above, mom-and-pop stores face many disadvantages when competing with big-box retailers and franchise stores. Large in size, the larger business entities enjoy economies of scale, which can significantly lower their operating costs.

Therefore, the local small stores are essentially disadvantaged in pricing competition. Also, large companies can allocate substantial amounts of capital for investment. It allows them to spend more on advertising and innovation.

Mom-and-pop shops are very financially vulnerable. They face limited sources of financing and mostly rely on bank loans. When the economic condition is unfavorable, such small stores may run out of cash quickly and face liquidity problems with limited capital.

Compared to the large companies that operate in multiple geographical locations, mom-and-pop shops are more sensitive to the changes in local markets. If the market of a specific geographic area does not perform well, large businesses might be able to cover losses in one market with gains from other markets. In contrast, the mom-and-pop stores will be greatly hurt without risk diversification.

Mom-and-Pop Investors

The term mom-and-pop can also be used to describe less experienced investors. Mom-and-pop investors invest very small amounts of their money in the equity market. They do not expect large amounts of returns from their investments and also bear low risks.

Due to a lack of experience, mom-and-pop investors can be irrational and impulsive to the fluctuations of the stock market. Such behavior may adversely impact their returns of investment. To address the problem, investors can hire financial professionals, such as brokers, or invest in mutual funds, which are managed by experienced portfolio managers.

More Resources

CFI is the official provider of the Commercial Banking & Credit Analyst (CBCA)™ certification program, designed to transform anyone into a world-class financial analyst.

In order to help you become a world-class financial analyst and advance your career to your fullest potential, these additional resources will be very helpful:

• Click and Mortar
• Electronic Retailing
• Profit Model
• Main Street vs Wall Street
• See all commercial lending resources