Fisher Investments Editorial Staff

Doorbusters! Discounts! Ka-ching!

By, 12/02/2013
Ratings244.729167

The US exported Black Friday to the UK. Photo by Dan Dennison/ Getty Images.

A one-day window to buy a 50-inch flat screen for just $250 or that stellar love seat at a 30% discount. Two words: Black Friday. Though these days, that’s a bit of a misnomer. Now, Black Friday spans longer than just one day—retailers offer colossal deals days or even weeks in advance. Some worry these ramped up discounts might indicate a faltering economy—weak demand, weak profits. Look a bit deeper, however, and the picture brightens. Even with all the discounts, consumers appear ready to spend more this holiday season than last, and businesses are pretty good at remaining profitable while offering steep discounts. Once again, it seems economic reality is better than too-dour expectations—another indication this bull market has plenty more wall of worry to climb.    

As far as Black Friday sales totals go, when the final numbers come out, bear in mind discounts are no longer one day only. Many online retailers offer discounts well ahead of Black Friday, and brick-and-mortar chains are following suit. As a result, Black Friday and the entire post-Thanksgiving weekend are becoming somewhat less of a driver of total holiday season sales. They can be a handy bellwether, but one day isn’t a season, and a season isn’t a full year. Even if sales simply match last year’s totals, that doesn’t mean 2013 overall can’t beat 2012.  

While some pundits are hip to Black Friday’s waning relevance, most headlines are happy to keep the day’s mystique alive—it’s too easy (and too fun) a story to ignore. Who doesn’t love the tales of frenzied shoppers racing for doorbusters (provided, of course, no one gets hurt—Black Friday does occasionally have a dark side … pun intended). But with all the coverage comes the usual round of hand-wringing about what it means for the state of the economy.  

Some claim the intense discounting means demand is weak—folks wouldn’t buy without discounts—and retail sales will suffer if they buy only at low prices. Yet disposable income, the key driver of sales, is on the rise. It is growing a touch slower than in recent expansions, but that’s in keeping with sluggish overall growth. It isn’t a sign consumers are weak—actually, they seem poised to spend even more than last year! The National Retail Federation expects holiday season retail sales to gain 3.9% this year compared to last year’s 3.5% increase. Even month-over-month retail sales are increasing as reported by the US Census Bureau. Consumers just love deals and discounts. The lure of low prices is powerful—deep discounts get folks in the door. Once they’re inside, however, they buy plenty and don’t limit selections to what’s at bargain-basement prices. Look at it this way: People are spending more, and they’re getting more bang for their buck.

This brings up the other Black Friday concern. Some worry the aggressive promotions will ding profits. It’s true some discounting isn’t great for bottom lines. For example, retailers’ margins take a hit when they have to slash prices to clear excess inventory. But that’s not what happens on Black Friday. Black Friday discounts, for retailers, are the good kind! Retailers are in the business of buying and selling goods for a profit. Black Friday wouldn’t happen if it weren’t profitable, and retailers plan deals well in advance to be lucrative. Many pre-arrange pricing with manufacturers—they work backwards with their suppliers to set starting prices to yield fat margins even after the advertised markdowns. Essentially, they create the illusion of a discount. They set the “suggested” price artificially high, then mark it down to something more normal. To consumers, it looks like a deal, but looks can be deceiving.

Typically, retailers follow a simple pricing procedure: They sell goods for roughly double their cost. On Black Friday, it gets trickier. For 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.” An average selling price that’s about double the cost—right in line with the norm.

This is why retailers do just fine even while appearing to offer fire-sale prices in November and December. From 2009-2012, even with all the Thanksgiving, Christmas, Easter and many, many more discounts along the way, retailers’ gross margins were about 27.9%. Their tricks just work—they get shoppers in the door, and they keep transactions profitable. Everyone wins! And, importantly for investors, even with all the supposedly once-in-a-lifetime deals offered this weekend, already-strong Consumer Discretionary earnings and revenues likely keep chugging along.

Perhaps the most telling news about Black Friday is the most surprising: We exported it! Yes, Black Friday is officially a thing in the UK, too. Our British friends might not shop to burn off their turkey, stuffing and pie, but this year they, too, lined up for discounts and doorbusters. And it happened in the UK’s best year economically since before 2008. Businesses didn’t see opportunities of a British Black Friday because demand there is weak—they offer “lightning deals” because they see demand is rising and want to capture it. It’s the same here—businesses are merely competing to get folks in the door, competing for a slice of all those rising incomes. And with few seeing this for what it is, there are likely plenty of positive surprises in store. 

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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