Every year we suffer through the so-called “Black Friday”, the day immediately after Thanksgiving that’s supposed to kick off the Christmas shopping season and is also traditionally the single biggest shopping day of the year. This means it’s a very important day for retailers, of course, but if you dig into the numbers, Black Friday is one of the worst days for retail establishments, not one of the best.
Let me explain…
According to the Chicago Sun-Times, average modern retailers have about a 5% margin on products, be they a pair of sneakers or a flat-screen television. The same story explains that typical Black Friday discounts are now 40-50%.
I understand the logic, that one or two extraordinary deals will bring people into the store and they’ll also buy non-discounted or lesser discounted products, thereby making up the difference in profit. But what if that no longer holds true?
Read the papers, you’ll see that across the United States people who went shopping at all on Black Friday were very careful about their purchases and were much more likely to go into a store and buy the one or two super-specials than a basketful of goods.
The result? Instead of getting a nice boost on profits and a good jump-start on Christmas / holiday shopping, the entire experience was more likely a complete bust for retailers, losing them, rather than earning them money.
While some analysts will doubtless peg this to the 2008 recession, I suggest instead that it’s the inevitable result of the increasing commoditization of our world, the reduction of everything to its cheapest possible manifestation.
This is what Linda Sanford and I wrote about in our book Let Go To Grow [aff], and it’s fascinating to see how it’s become a more visible retail phenomenon in the years since we wrapped up the manuscript.
Every time we shop at Wal-Mart or Target to get our product a buck or two cheaper, every time we pop online to save on sales tax, every time we research products to identify the lowest-cost outlet, we’re all contributing to the problem.
With a retail economy built on the need for a substantial profit to cover overhead and costs, pay city and county taxes, health care for employees, and offset theft and so on, this trend towards an ever-more-commoditized world is a scary one. If followed to its logical extreme, we won’t have any retail stores at all or we’ll have to impose online store tariffs that offset the dramatically lower overhead of online drop-ship companies. What choice will we have?
Meanwhile, we’ll have to see. I predict that retailers will report that gross revenue from Black Friday sales were okay, but that profit from these sales was down significantly from prior years. And next year, even if the economy is in better shape, won’t jump back.
Dave-
It’s often overlooked that this is actually the point of capitalism. Self-promoting “liberal market” or “supply-side” economists fight for the frictionless operation of markets, which would lead to a zero-profit price (with perfect competition). Of course, there are a lot of reasons this does not happen and will never happen, but one primary reason is that markets do not operate exactly as economic theory holds. We don’t have things like “perfect” information or competition. In fact, modern capitalism as it stands in a lot of ways suppresses competition, and increasing competition is the engine that lowers price. Wal-Mart and Target are part of a retail industry that runs by oligopoly. Competition between the two (and some less influential competitors) will never be enough to create zero-profit price.
Zero-profit is a utopia indeed, but what is amazing is the same ‘loss-leading’ business model has now creeped into retail.
Telcos, technology companies and other bigger ticket industries have been doing this for years, but the dynamics are different. They may lose selling you a game console but make it back selling you games, printers, cars, Internet service, financial services and the list goes on. You initial purchase has a future cash-flow attached to it.
Retail is brutal on margins and in terms of future cash-flow, well it isn’t called retail for nothing.
But operating on a loss-leading basis, as it appears most retailers are doing in these hard times just seems unsustainable.
I also agree there may come a time when we dont have retail stores at all or we’ll have to impose online store tariffs that offset the dramatically lower overhead of online drop-ship companies
Hello Dave,
The largest retailers in the country use the leaders to get you in the store,hoping that you will purchase non-discounted items. It is a marketing ploy at it’s best and worst. The problem does not lie with the large retailers though. It is the mom and pop’s and the medium sized retailers that fuel the economy and holiday sales. We have seen our traffic increase tremendously the last few months and have received emails from these small businesses inquiring how to list their inventory for sale as they see a bleak holiday season. Until the economy rebounds,the small and medium retailers will continue to dwindle away,leaving the “big box” guys to fill the void.
It brings to mind a blurb from a film I saw once…”Taco Bell won the restaurant wars”. It might not be verbatim but it clearly gets the message across.
JMHO
Great Article Dave. Myself, I never pay retail prices – except for grocery. Using sites such as FATWALLET and SLICKDEALS I’ve become addicted, and trained, to only use coupons and to only buy at extreme discounts. My “cacoon” is full of great stuff. A 42″ Plasma TV sits in my living room. Paid $275 for it brand new on closeout from Sears. A 42″ 1080p computer monitor (paid $275 brand new). $800 top of the line computer I bought in seperate pieces and assembled myself. $10 off $20 coupons from Petsmart feed my animals. Goods and services I routinely trade web design work with by posting ads on Craigslist. We had a flea problem. Traded extermination for a website. Needed new carpet. Traded for a website. Needed a new garage door. Traded. Needed some electrical and tiling work done – again traded.
Yes because it bring business to pretty much every business store there is in the country.
We ran a black Friday sale this year and it definitely didnt work out quite as well as we had hoped. Black Friday is definitely for scalpers. No real customers take part in Black Friday. They’re more concerned with quality service over crazy discounts. 🙂