Wednesday, November 27, 2013

Black Friday and Retailers’ Theater

This Thursday you will probably be with friends or family for Thanksgiving.  The prospect of good food, good company, and good times will welcome the start of the holiday season.  For many, this week is about reconnecting with family.  For some, it’s all about Black Friday.  The day after Thanksgiving has always been a shopping day.  This year, retailers are rolling out heavy discounts and deals to entice shoppers to their stores.  The idea is to get people into specific retailers so that they will continue shopping there for the Christmas season.

For many retailers, this weekend is the first time they will be profitable this year.  Many run deficits until the holiday season, and rely on black Friday sales to indicate if they are going to do well over the next month.  The number of deals offered by 31 major department store and apparel retailers increased 63% between 2009 and 2012.  The average discount jumped to 36%, from 25%.  But is this a winning strategy?  Can retailers really need to cut prices to get people in their stores, and if so why wouldn’t they do this all year?

The truth is that the “deals” you are getting are not really deals.  Retailers work with suppliers to drive up prices before the holiday season.  The idea is to get shoppers to purchase particular products.  Take the following example:

“A supplier sells the sweater to a retailer for roughly $14.50. The suggested retail price is $50, which gives the retailer a roughly 70% markup. A few sweaters sell at that price, but more sell at the first markdown of $44.99, and the bulk sell at the final discount price of $21.99. That produces an average unit retail price of $28 and gives the store about a 45% gross margin on the product.”

You may be getting a deal, but retailers are still cashing in on the idea that there is a deal with your purchase.  This season, shoppers have been slow to buy holiday gifts.  According to a recent survey, the mean percentage of holiday-gift purchases completed was 24.3% in the latest week -- which was below last year's 31.6%.  Wal-Mart and Best Buy are expecting a particularly competitive holiday season.  The International Council of Shopping Centers estimates that sales at malls and shopping centers will rise just 2.5% this holiday season, compared with 4.1% last year.  That means retailers are fighting for fewer consumers, and lower profit margins.

This is leading many companies to try new approaches.  Target is price matching in order to get consumers in the door.  They are hoping that once there, shoppers will purchase marked up items that are not available at other stores.  This year Wal-Mart is offering its best deals online.  You have to sign up for a newsletter and like the company on Facebook in order to access special pricing.

So if you are heading out to the store on Friday, remember two things.  One; you probably can get the priced matched at any major retailer.  Two; its probably not a real deal, but cheaper than you would otherwise pay.

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