Can Holiday Shoppers Save the Economy?

November’s Black Friday ritual – which begins with shoppers lining up outside malls in pre-dawn darkness and ends with left-over merchandise strewn up and down store aisles – has become as much a part of Thanksgiving weekend as turkey and football.

 

The official kick-off to holiday shopping in the U.S. is always closely watched for two reasons: Consumer spending accounts for two-thirds of all economic activity, and retailers typically pull in half their sales and profits during the holiday season.

 

This year the stakes are higher than usual. Consumers have been credited with keeping the American economy afloat during a nearly two-year slump in business investment; consequently any sign of a consumer pullback now could slow down an already fragile recovery. “Christmas is important because the majority of retail sales are recorded in this quarter and consumer demand drives a lot of the rest of the economy,” says Wharton marketing professor Barbara Kahn.

 

Marketing professor David Schmittlein downplays the importance of this year’s unusually short holiday sales period (Thanksgiving came late and Chanukah early). “General economic conditions and people’s uncertainties about their job security really do loom large,” he notes. “I believe predictions of decreased spending have more to do with those uncertainties than with the length of the season.”

 

Despite an apparently strong Thanksgiving weekend, Ira Kalish, chief economist at the retail consulting and research firm Retail Forward, is standing by his forecast of a 3.5% sales increase this year, which would be the smallest increase in a decade.

 

The big Grinch this year, he says, is the two-year decline in stock prices along with uncertainty about a war in Iraq. “The economy is stuck in neutral,” he observes, although he acknowledges that October’s economic figures were stronger than expected. “One month doesn’t make a trend. Growth might be a little better than expected, but I don’t think it will be vastly better.”

 

Meanwhile, the National Retail Federation, a trade group for department stores and specialty retailers, projects holidays sales will increase 4% over 2001 to $209.3 billion. The International Mass Retail Association, which represents discount stores, says shoppers plan to spend an average of $863 on gifts this year, the same amount they predicted going into last year’s holiday season. But, the association added, shoppers usually spend 15% to 30% more than planned.

 

Retail sales for Black Friday alone were estimated at $7.4 billion, up 12.3% from last year, according to ShopperTrak RCT, a Chicago analysis firm. Wal-Mart Stores hit a single-day sales record of $1.43 billion, up 14% over Black Friday last year.

 

Black Friday received its name because it traditionally was the day retailers’ books tipped from red ink to black. But when retailers drop prices to lure shoppers, as automakers have in the past year, they may never see black.

 

According to Schmittlein, this year’s shopping season seems to be marked, again, by deep discounting that may generate sales in December but not necessarily profits in the New Year, when financial results are tallied. “Sure, the holiday season is important given the health of the overall economy,” he says. “And the consumer has been laying the foundation for the relatively stable economic condition at the moment. But you have to keep in mind some of those consumers have been [lured] by deep discounts. That makes the strength, or even the solidity, of the economic base somewhat suspect.”

 

Creating a Herd Mentality

Marketing professor Stephen Hoch suggests that the coupons and the scenes of shoppers lining up at 5 a.m. act to create an air of scarcity. “Part of all this is to get people into the stores. It’s clear – especially for the department stores – that they are desperate.”

 

Shoppers respond to the notion of shortages or heavy demand for certain products, he adds. “But the fact is, once you head into the department store you can’t go two feet before you are stumbling over merchandise. I see no evidence there is actual scarcity. People are getting up at 5 a.m. for what? That had to do with very early morning sales. The stores are trying to create a herd mentality.”

 

Aside from the hit to profitability, repeated sales create operational inefficiencies, Hoch says. “The way they push these sales earlier and earlier creates demand surges, then periods of no demand, and that makes it more difficult to operate. Everybody gets sucked up into it.” And when Black Friday is over, there is one unmistakable result: “The biggest, clearest impact is that the store is a complete mess at the end of the day and that is an operational inefficiency.”

 

According to marketing professor Lisa Bolton, who has studied consumers’ perceptions of price fairness, heavy discounting creates a dangerous mentality among shoppers that can be hard for retailers to reverse. “What happens is these reference points get created about what the price should be for an item and it becomes hard for a store to overcome that reference point.”

 

Discounting leads consumers to think pricing is generally unfair, she says, citing research she has done showing that consumers in Florida believe stores typically operate on a 30% profit margin, even though for grocery stores, the margin is only 1% or 2%.

 

“When people see a difference in price between a department store and a discount store they attribute that in part to higher quality at the department store, but also to the idea that the department store is making higher profits and their prices aren’t as fair,” says Bolton. “I think it is the discount stores that really saw the biggest increase in shopping over the Black Friday weekend.”

 

Internet Activity: The Trend is Up

A National Retail Federation survey found that 49% of consumers planned to shop in a discount store over the holidays, 30.6% were going to a department store, and 33.2% were planning to use the Internet.

 

On Black Friday, Internet shopping was up 30% over last year to $196 million, with home and garden and consumer electronics the largest non-travel categories, according to comScore Networks Inc., a New York marketing analysis firm. “There’s no question that’s a solid trend,” says Kahn.

 

In addition to direct sales, Kahn notes that the Internet also serves as a source of information for consumers, particularly in the early stages of researching a product.

 

According to Eric Clemons, professor of operations and information management at Wharton, the Internet is growing as a source of product ratings, or what he calls ’word of keyboard.’ (Some wags might call it ’word of mouse.’) “Increasingly, many of us get our purchasing information on line even if we purchase from a dealer, an agent, a sales person or a shop clerk.”

 

Clemons says the “reviews that consumers post on websites and with online rating services … limit the impact of false, misleading or meaningless advertising and promotion. This means that a manufacturer’s or retailer’s investment in quality and in differentiation have become more important than they were.” In other words, “with so many disinterested sources of reliable information, investment in meaningless advertising and promotion has become relatively less important compared to investment in desirability of the product.”

 

Clemons, who has been researching specialty brewers’ websites, has been struck this holiday season by the Internet’s ability to eliminate geographical barriers to shopping. “There are some Christmas beers manufactured in California that never make it out East, and some specialty chocolates and abbey brews [made abroad] that are never exported to the States but that can now be purchased online by anyone with a computer and a credit card. Ultimately, I would like to think that if there is something I want, anywhere in the world, and I can afford it … retailers will soon be all too happy to sell it to me.”

 

But for marketing professor Peter Fader, Black Friday brings out his inner Scrooge. The annual holiday shopping hoopla is among his top pet peeves. “I tend to be skeptical about the importance of the holiday shopping numbers. There is so much going on below the surface that it’s hard to put any real faith in those numbers.”

 

Beyond the example of consumers substituting profitable purchases for discounts, Fader says a lot of the mall traffic figures and revenue projections may reflect purchases that have been put off from other periods to the holiday discount season.

 

He suggests that more meaningful information for an analysis of retailers’ health or the economy’s future prospects lies deeper. “You have to look more at the individual level. How many people are coming back and buying again? Who are the people who are buying from you? What share of their wallet is allocated to you? There are a number of metrics that require more sophistication in terms of data collection and analysis if people care about the economy or a certain store or sector of the economy.”

 

Fader says the tools exist to mine this information. “But when it comes to the holiday season it’s a complete throwback. We’re only looking at the top-line numbers.” That tendency is particularly strong in a bad year, he adds: “People are looking to the fourth quarter and this holiday season to pull out a winner.”

 

The same thing happens with horses at the race track, according to Fader. At the end of the day people bet on long-shots more than they do at the beginning. “There is a psychological notion that if we break even and end on a good note it’s not such a bad day after all. It’s clearly irrational. It’s the very same mentality that you see with respect to the holiday season. I’d encourage people to look beyond the numbers and consider the strength of the horse.”

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