The False Promise of Early Holiday Sales

And they're off. As of 8PM last night stores were full, lines were long - and fantasies were being dashed on both sides of the cash register.

Enticed by the promise of spectacular savings and engorged with sugar, carbohydrates and alcohol from their Thanksgiving repast, many American consumers headed to the nearest mall or mega-store to get a jump on their holiday shopping.

But analysts are beginning to question the economics of this annual rite of commercial frenzy.

The problem is that consumers have only so much to spend. Adding a few hours or taking a few dollars off is not going to increase the pot of available discretionary income - nor is it going to expand the number of potential buyers.

In fact, research is now demonstrating that by pushing consumers to buy in late November, merchants are simply cannibalizing sales from early December. As the following article and accompanying chart demonstrate, this may actually be depressing rather than increasing both sales and profits. The reason is that people buy what's available early - and then they're done. Both by the amount of money spent and by the crowds, the parking hassles, the long check out lines and the comparison between what they imagine and what is actually possible.

In addition, the overtime that retailers are often required to pay to get their employees to show up on a holiday or to put in extra hours cuts into their profits. And, from the consumers' standpoint, the merchants' efforts to contain those costs adds to the hassle. Anecdotal reports from stores last night suggest that sales help was sparse, adding both to the waiting times and to the frustration. This was particularly true, apparently, for electronics and video games, two of the items retailers highlight as especially low-priced to encourage early buying but which often require access from locked cases to prevent theft, thereby negating the whole point of increasing sales demand.

Unprofitable practices are rarely sustainable, even if businesses attempt to justify them as a marketing expense, a loss leader as some might call it, to get the holiday shopping season off to a good start. But the merchants may have created a 'tradition' whose legacy they are beginning to regret. JL

Justin Lahart reports in the Wall Street Journal:

With retailers' Black Friday arms race spilling over into Thanksgiving Day, everybody might be better off with a dose of detente. It was bad enough last year, when Wal-Mart offered "door-buster" deals on toys starting at 10 p.m. on Thanksgiving, and several other stores, including Macy's and Best Buy, opened at midnight. This year Sears is joining the fray, opening up at 8 p.m. on Thanksgiving. Target is opening up at 9 p.m. And so it goes.

Retailers, of course, will be quick to crow about the customers drawn in by ever earlier Black Friday openings. But it's not clear that the early sales accomplish much—and in the longer run they may raise costs.

The holiday shopping season is basically a zero-sum game: People spend what they are going to spend. The broad category of department stores and other retailers (such as clothing stores) that make department-store like sales fetched about 21% of their total sales last year in November and December, according to the Commerce Department. The share was the same in 2010, 2009 and 2008. It has drifted down slightly over time: A decade ago, the share was 23%.

What retailers are doing with tactics like opening ever earlier on Thanksgiving, then, is fighting for a bigger share of holiday spending, as opposed to making the pie bigger.

Indeed, one thing that last year's aggressive Black Friday maneuvers appears to have done is contributed to a larger-than-usual lull in sales in early December, says International Council of Shopping Centers economist Michael Niemira. Last year, the ICSC-Goldman Sachs weekly sales index fell by 2.4% over the two weeks following Thanksgiving week. That was the largest drop since 2000.

Maybe the retailers that pushed up Black Friday sales last year captured some market share by doing so. But those gains will likely only be temporary, whittled away as competitors follow suit. What's more, once they have made the shift, retailers will be unwilling to go back to the old days when they waited all the way until Black Friday to hold Black Friday sales, because that would make for tougher year-over-year sales comparisons.

Ultimately, retailers may find that all the Black Friday shifts have really achieved is the higher costs they incur from paying employees to come in for Thanksgiving. And if the job market continues to improve, those costs will only increase: It is easier to find people willing to work on a holiday with the unemployment rate at 7.9% than at 5.9%.

The reason retailers began the Black Friday arms race was to spark sales boosts that would appeal to investors. The irony is that all they may accomplish is a narrowing of profit margins that makes their shares less attractive.