Black Friday

Posted by PITHOCRATES - December 2nd, 2013

Economics 101

Black Friday kicks off the Retailer Sprint at the Homestretch of the Retailing Year

The Thanksgiving weekend is over.  As is Black Friday.  It came.  We shopped.  And now it’s gone.  But have you ever wondered why we call it Black Friday?  Why do we call something so many people look forward to and enjoy ‘black’.  A color more associated with death and mourning?  Because of accounting.  That’s why.  Or so goes the myth.

Retailers survive on razor thin margins.  And many are lucky to break even through most of the year.  While occasionally their costs exceed their revenue.  And when that happens a business is in the ‘red’.  Which is a bad thing.  For if a business is in the ‘red’ too long it can go out of business.  Enter Black Friday.  Which kicks off the retailer sprint at the homestretch of the retailing year.  And the day retailers finally get well out of the red.  And comfortably into the black.

Retailers get most profitable in the last month of the year.  Because of Christmas.  As we celebrate the birth of Jesus of Nazareth by buying Christmas presents for our loved ones.  A bit off message for the true meaning of Christmas.  But it’s now part of the American tradition.  Because we love giving and receiving presents.  Something retailers are grateful for.  For it allows them to become profitable (or much more profitable) based on one month’s worth of sales.  After treading water for the first 11 months.

Accessories and Impulse Buying make for a Successful Black Friday

So what is the secret for a successful Black Friday?  It’s a two-prong strategy.  Get people into the stores with deep discounting.  Things stores break even on or even lose money.  And try to get them to buy other things once they are in the stores.  Things that have little discounting.  And higher markups.  They accomplish this through two tactics.  Accessories.  And impulse buying.

Impulse buying is getting people to buy things they did NOT come into the store to buy.  Retailers will space the discounted items strategically throughout the store.  And place items with higher markups on the pathway to the discounted items.  Things that are so good that people say, “That looks like something I want.  And I’m in such good spirits because of the huge savings on that other thing I’ve always wanted that I’ll throw this into the cart, too.  Why not?  After all, ’tis the season to be jolly.”

Unlike impulse buying accessories are not things that we fall in love with when we see them.  Accessories are the things that allow us to enjoy those discounted things more.  Things that are a pretty good bet that we will buy them.  So they mark these items up a lot.  You may buy a discounted television and home theatre system but the cables that connect the pieces together are typically not included.  A laptop needs a bag to carry it in.  Electronic toys need batteries.  Video game systems need video games.  Smart phones need service contracts.  Printers need paper and extra ink cartridges.  Etc.  Things few people rush excitedly to the store to buy.  But often buy them because they increase the enjoyment of those steep discounted items.

It’s a Good Time to Buy and Sell Stocks but a Bad Time to buy Groceries and Christmas Presents

There is one other element needed for a successful Black Friday.  People must have disposable income.  Or they must be confident in their employment.  Such that they are willing to run up their credit cards because they are relatively certain that they’ll have a paycheck for the indefinite future.  If people don’t have this then all the discounting in the world won’t help make Black Friday a success.  So the prevailing economy matters.  As does the economic outlook.  In fact, the success of Black Friday can tell us the true state of the economy.  And how people feel about the economic outlook.

So what has this Black Friday told us about the state of the economy?  That it’s bad (see Black Friday Weekend Spending Drop Pressures U.S. Stores by Matt Townsend posted 12/2/2013 on Bloomberg).

The first spending decline on a Black Friday weekend since 2009 reinforced projections for a lackluster holiday, increasing chances retailers will extend the deep discounts already hurting their profit margins.

Purchases at stores and websites fell 2.9 percent to $57.4 billion during the four days beginning with the Nov. 28 Thanksgiving holiday, according to a survey commissioned by the National Retail Federation. While 141 million people shopped, about 2 million more than last year, the average consumer’s spending dropped 3.9 percent to $407.02, the survey showed…

For the fourth year in a row, disposable incomes in 2013 have only inched up and job growth remains inconsistent. As a result, low-income Americans will again have a less-merry season than affluent consumers, who are more flush thanks in part to surging U.S. stock markets, which have attained all-time highs. Consumer confidence declined in November to a seven-month low, according to the Conference Board.

“Consumers are generally not in a great mood, feeling very uneasy about the economy and their jobs, and are looking for value this year,” Stephen Stanley, chief economist at Pierpont Securities LLC in Stamford, Connecticut, wrote today in a note to clients. “They have their list and will check it twice, but they are not going to the mall and grabbing a bunch of random stuff because it is on sale or looks nice…”

This kind of so-called mission shopping, where a consumer buys one bargain-priced item and then leaves, will hurt profit margins, Goyal said. It may also explain why the number of shoppers increased and their spending fell, she said…

While traffic at the Mall of America was higher than last year, shoppers planned ahead of time where they were going and what they were buying, said Maureen Bausch, the mall’s executive vice president. There was “a lot of mission shopping, and you don’t normally see that until later in the season,” she said.

That’s bad news for retailers, who normally get about 20 percent of their holiday sales from impulse purchases, said Marshal Cohen, chief retail analyst for NPD Group Inc.

More people shopped but each shopper spent less.  Resulting in an overall spending decline.  The first since 2009.  The last year of the Great Recession.  The worst recession since the Great Depression.  So these numbers are not good numbers.  And they’re not good because of the economy.  Disposable incomes are flat.  People are worried about the economy.  And worried about losing their jobs.  If they haven’t already.  So there is no impulse buying.  Only mission shopping.  Getting the one thing they came in for.  And then leaving the store without buying anything else.  Because they haven’t a dime to spare.  The economy and economic outlook are that bad.

Over 10 million people have left the labor force since President Obama assumed office.  Making for a bleak Christmas on Main Street.  But Wall Street is doing well under the Obama recovery.  While quantitative easing has raised grocery prices (or reduced portion sizes) that perpetual inflation has inflated stock prices.  And real estate prices.  Making it a good time to make money buying and selling expensive assets.  But a terrible time to buy groceries.  And Christmas presents.

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Kroger’s Profits dropped as they Struggled to Provide Inexpensive Groceries for Middle Class and Low-Income Families

Posted by PITHOCRATES - September 9th, 2012

Week in Review

People like to complain about the high price of groceries.  And a lot of people are doing that today.  Some even demand that the president do something about it to help the poor and middle class.  And he is.  He’s greatly expanded the food-stamp program.  As well as causing the high price of groceries in the first place (see Kroger profit dips but tops expectations by Associated Press posted 9/7/2012 on the Los Angeles Times).

Kroger Co., operator of Ralphs and other supermarket chains, said its profit slipped slightly in its second quarter on higher expenses and an increased tax rate.

The Cincinnati-based company said a key sales figure rose during the period as its loyalty program helped attract shoppers. But merchandise costs — which include advertising, warehouse and transportation expenses — also rose 4.3%.

Like other supermarkets, Kroger has been paying more to stock its shelves as a result of rising commodity costs.  The company has tried to offset the effect by introducing more store-brand items, which lessens its need to stock up on brand-name products…

Kroger is also facing higher costs. Its tax rate in the latest quarter rose to 34.5%, from 27.6% a year earlier.

I heard a kid call in on a talk radio show.  I think it was Rush Limbaugh.  Because I just left after having lunch.  Some young kid probably repeating what he heard his parents said.  He said something about the bags of chips he bought had fewer chips in them these days.  And he blamed President Obama for that.  The radio host laughed.  But said he did not believe it was the president’s fault.  Of course, the radio host was wrong.

All the Obama administration has done to stimulate economic activity is to encourage consumer spending.  With stimulus spending.  Deficit spending.  Lowering of interest rates.  Printing money (quantitative easing).  More low-income benefits.  Anything and everything to encourage people to spend, spend, spend.  But nothing to create a more business-friendly environment.  High taxes and high regulations and high energy costs increase the cost of doing business.  Forcing them to raise their prices to cover their costs.  Or to put fewer potato chips in bags of chips these days.  Because they just can’t raise their prices anymore.  So they have to lower the portion of chips in those bags to cover their costs.

Higher taxes on those ‘who can most afford to pay them’ (i.e., businesses) INCRESE the cost of living for everyone who buys from those businesses.  Like Kroger.  If the Obama administration cut tax rates businesses could more easily pay their advertising, warehouse and transportation expenses.  If the Obama administration eliminated the ethanol requirement for our gasoline there would be more corn available to feed our chickens and cattle.  Which would lower the prices of milk, eggs, cheese and hamburger.  If the Obama administration didn’t print so many dollars the dollar wouldn’t have depreciated so much and increased prices.  And potato chip manufacturers would not have to put fewer chips in their bags of potato chips to cover their costs.

So, yes, young talk radio caller.  You are right.  It is President Obama’s fault there are fewer potato chips in your bag of chips.

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High Prices in Canada sends Canadians South of the Border to do their Shopping

Posted by PITHOCRATES - August 18th, 2012

Week in Review

The Canadians are running south of the border for a better deal.  Much to the chagrin of local businesses stuck on the wrong side of the border with their higher costs (see Canadians outraged at attack on cross-border shoppers posted 8/15/2012 on 24 HOURS).

Annoyed at parking problems and long lineups at the stateside Costco, some residents there have set up a Facebook page calling for American-only hours when they can shop Canadian-free…

A Vancouver man who runs a website offering comparison prices, said lower prices and parity in the dollar still sends many bargain hunters south of the border. Cross-border shopping has also likely been spurred by Ottawa’s June increase on the amount Canadians can spend without paying duty (although day-trips are excluded…)

“We shop regularly in the states, especially for groceries. I can advise that organic goods are pretty much the same cost as regular goods,” said crossbordershopping webmaster Henry Tenby. “On average, you’re looking at saving about 50 per cent in terms of groceries…”

Shafiq Jamal of the Retail Council of Canada said local businesses are suffering and urged Canadians to keep their dollars at home.

A 50% savings on groceries when the exchange rate between Canadian and U.S dollars is almost 1 for 1?  That doesn’t leave much for the price difference between Canada and the U.S.  Other than taxes.  If the same food is 50% cheaper south of the border there is a reason for that.  Higher property taxes?  Higher business taxes?   A value added tax (VAT)?  Import tariffs?  A national health care tax?  A combination of all of the above?  It’s something.  And whatever it is the Canadian people don’t like it.  As they express their dislike by going south of the border to buy things they feel are more fairly priced.

There is nothing more irritating than having a Canadian friend that constantly badmouths the U.S. while he and most Canadians living near the border high-tail it south to do their shopping.  For they love their country.  But not enough to shop in it.

Canada is a great country.  Sired like the U.S. by a great country.  Britain.  But Britain is close to Europe.  And their social democracies.  And that contagion has infected her.  And it has drifted across the Atlantic to infect Canada.  Even the U.S.  Big government nanny state spending.  That requires a lot of taxation to support.  And forces people south of the border.  But that may not last.  For as the Americans catch up to the Canadians and the British nanny states their taxes will rise bringing parity to prices of their consumer goods.  Which is the only way to fix the problems in a social democracy.  By bringing other countries down to their level of economic misery.  For to have socialism succeed you can’t let anyone escape its oppressive utopia.

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