Is Black Friday a good deal?
Everybody loves a deal. And Black Friday is the biggest deal-day of the year. With door-busters being touted at Wal-Mart and Target and JC Penney and everywhere, many consumers are already starting to camp out.
But is this just retail theater? The common assumption is that retailers stock up on lots of goods in October and then mark down the ones that don’t sell. But that’s not the way it works. That $25 sweater probably cost the retailer $14. When it first goes on the rack, it gets a $50 price-tag. But the store quickly reduces that price to $45, then $32, so when they need to move the merchandise, they finally cut the tag to $25. They know most sweaters will sell there, but it takes a while to get to that price.
Stores have now trained consumers to expect bargains. Shoppers aren’t happy unless the price is at least 40% off. Ron Johnson, former CEO of JC Penney, saw the futility of this strategy. In 2011 fewer than one in 500 items sold at full price; consumers received an average discount of 60%. But they weren’t saving money—margins were stable. So he tried to shift the firm from high-low pricing to everyday-low-pricing. It didn’t work. Customers stopped shopping. Johnson lost his job and JC Penney may not survive its move back to discount-land. The stock has fallen 80% and their bonds are priced with a 70% probability of default.
But now consumers are suing the stores, claiming the discounts aren’t real. They want to know that the list price has some integrity. Still, there are real deals to be had, like $12 hoodies or $100 HDTVs. Just don’t ask me to camp out five days in the snow to get one.
Douglas R. Tengdin, CFA
Chief Investment Officer