The Holiday Shopping Scrum, in Perspective

With 10 days passed since Black Friday kicked off the holiday shopping season, financial media and analysts have pored over sales data. Speculation about what they mean for overall holiday season spending—and the economy’s strength—abounds. In our view, however, this overrates the importance of a few days’ spending on a very narrow basket of goods.

A relic of the time when department stores had an unwritten rule not to pre-empt each other with holiday deals before Thanksgiving, Black Friday didn’t get its name from consumers getting bruised black and blue wrestling over doorbusters. Rather, it traditionally refers to the day retailers supposedly start to turn a year-to-date profit, going from “in the red” to “in the black.”^[i] Once just a single day, it has bled into the surrounding weeks and spawned several other catchily named shopping days. Some “Black Friday” sales begin on Thanksgiving or earlier in the week—or even early November. Boutiques joined the party with Small Business Saturday, while Sofa Sunday and Cyber Monday—now a full-on Cyber Week—capture online discount-seekers.

These days, most coverage highlights the five days from Thanksgiving through Cyber Monday. Initial estimates indicate these were pretty good to American retailers: Per a National Retail Federation (NRF) survey, 165 million people bought “gifts and other holiday items” during November 22 – 26, down -5.2% from the same period last year.^[ii] On average, customers spent $313.29, also down -6.6% from 2017’s total.^[iii] Cyber Monday online sales set a record, rising 19.3% y/y, and the NRF estimates retail sales are on pace to rise 5% y/y during the holiday season overall.^[iv] A solid showing on balance.

Financial media typically spill lots of pixels analyzing this shopping bonanza. This year, some coverage was cautiously optimistic, noting retail sales’ strength and anticipating more to come. Others fretted rising costs, tariffs’ impact and the risk of massive discounts denting profits. A recent dip in retail stocks fed these worries.

But while it can be food for thought, we think shopping stats from the Long Thanksgiving Weekend Thingy mean little for good or ill—and not just because discounting started weeks beforehand. An extra weekend between Thanksgiving and Christmas likely spreads out holiday shopping this year, further diminishing Black Friday’s role and casting doubt on attempts to draw conclusions about its implications for full holiday season spending.

November isn’t a huge driver of full-year sales, either. On average from 1992 – 2017, November retail sales made up 8.5% (almost exactly one twelfth) of full-year sales.^[v] Moreover, retail sales are only about 35% of consumer spending, which is predominantly services.^[vi] Hence, sales during this narrow holiday weekend window pale next to the broader economy.

Fears of rising costs and thinning profits crunching retailers are also misplaced, in our view. This is partly due to Black Friday’s dirty secret: Its huge discounts are often sleights of hand. Companies frequently raise baseline prices on products so that 80% doorbuster still leaves them with a healthy margin. Similarly, high-profile doorbusters usually apply to a limited number of products. Retailers anticipate customers will see other items they like once they are inside. This is one reason stores offer discounts for online purchases with in-store pickup—a practice that also economizes on shipping. This category rose 50% y/y this year, according to Adobe estimates.^[vii]

Although some sellers may miscalculate demand and book losses, this isn’t necessarily representative of the sector’s health overall—it is just normal business. Likewise, while higher input costs may squeeze retailers who can’t pass them on to customers, we don’t think this is a unique challenge. To the extent any business (retail or otherwise) struggles to entice customers with deals while still turning a profit, this likely reflects firm-specific issues. Managing costs is part of retail. If costs in one area rise, managers know how to cut them elsewhere. Moreover, this is a year-round reality, not just a November – December thing. Discounts aren’t unique to the holidays—see every end-of-season clearance sale ever. Lastly, we think coverage overstates tariffs’ impact here as well. All presently in place or threatened are just 0.3% of global GDP (per the IMF’s output estimate), and companies’ skill at sidestepping levies further limits their impact.