I have a long-standing interest in Black Friday — less because I want to go shopping but more because it poses some interesting questions on how firms compete and how they manage customers. The news this year is that Black Friday is creeping evermore into Thanksgiving proper as retailers keep moving up their opening times. So why are they doing that? Two posts on Businessweek.com put forward theories. The first posits that this is being driven by customer segmentation (The Game Theory Behind Macy’s Thanksgiving Opening, Oct 15).
Traditions are being trampled on by the Corporate Retail Complex! Of course, consumers don’t have to go. Some won’t, and that’s precisely what the strategy folks at Macy’s are betting on.
The purists scandalized by the thought of shopping on the holiday itself aren’t likely to avoid Macy’s altogether. And with the die-hard bargain-hunters swarming the stores on Thursday, Friday shopping will likely be much more pleasant for those who are a little less committed.
So I must admit that I am a little dubious of this theory for a couple of reasons. First, this only make more money for Macy’s if it brings in more customers. That would be true if there are a set of people who hate their families enough that they don’t want to hang out with them on Thursday evening who wouldn’t otherwise go to Macy’s. Alternatively, opening on Thursday draws in some Macy’s regulars who would otherwise have gone on Friday. Those who loathe crowds can then enjoy a more relaxed atmosphere as they walk-off leftovers. Neither of those seem to hold. Those ditching their families are now faced with lots of alternatives on where to shop so it is not clear how Macy’s is winning new shoppers. Further, outside of Manhattan most Macy’s are at a mall so it is not clear how Macy’s on its own can deliver a less crowded experience on Friday.
The other part of this is that shopping later can only deliver good deals if the store commits to (a) keeping its door-buster prices for an extended period and (b) having lots of inventory. That to some extent goes against the notion of creating excitement in the store by creating a frenzy over exclusive deals.
Businessweek’s other explanation also invokes game theory (Best Buy and the Holiday Retail Prisoner’s Dilemma, Nov 19).
Best Buy this morning … warned about an “increasingly promotional environment.”
The retailer said it would keep pace, sticking to a price-matching policy it made permanent in February and similarly matching the early opening decisions of its rivals by welcoming shoppers at 6 p.m. on Thanksgiving. Best Buy Chief Financial Officer Sharon McCollam said the company is “highly aware” of just how much its competitors will be slashing prices in the holiday blitz from Thanksgiving to Dec. 25. “It is table stakes in our transformation,” she said of the decision to follow their lead.
Best Buy may have its hands tied, but a lot of retailers have the same complaint. None of them wants to have huge sales, but they don’t want to miss out on the crowds. Slicing off a big chunk of profits is just what it takes to get into the holiday shopping game these days.
This provides a decent example of what game theorists call a prisoner’s dilemma. If all the major retailers chose not to offer sales, each player in the sector would fare better. But if any one of them is going to cut prices eventually—like a prisoner squealing on cellmates—it pays to beat the rat to the punch.
This makes a little more sense but it doesn’t really get to why there is a race to open early. If it were just a question of offering consumers a good deal, Best Buy could just announce its deal on, say, a Sony TV and expect those wanting a TV to show up on whatever schedule Best Buy announced. To flesh out the story, I think we need to think of consumers having a limited budget. If a family is going to spend X dollars this holiday seasons, it is important to be the first retailer they visit. If consumers are not 100% certain of what they will find in a store and how much they will spend (so Best Buy can’t be 100% certain that they will have enough cash left to come in for that TV), earlier stores have a better shot at getting a large share of their holiday budget.
Now, put yourself in the shoes of my hypothetical family with X dollars to spend. If you have a cost of going to stores (especially if you need to be there at inconvenient times), where should you? There is an argument for going some place that guarantees product availability. That makes what Wal-Mart is doing this season really interesting (Early Thanksgiving openings may limit Black Friday chaos at big box retailers, Nov 25).
This year, Wal-Mart is offering one-hour price guarantees on 21 items like a 16 GB iPad Mini with wi-fi for $299 and an HP laptop for $278. If the store runs out of the item before the one-hour window is up, a customer can get a guarantee card that will let them get the item at that price later. It’s also distributing wristbands for hot items that might sell out.
This is a strategy that makes a compelling argument for going to Wal-Mart first — although it is potentially costly. A conventional Black Friday promotion with shoppers duking it out for a limited pile of sale items caps how many items will be sold at a deep discount. With this plan Wal-Mart may end up selling way more at a discount than it really wants. If we are talking about a product that starts off with a fat margin so that discounting merely takes us down to a tolerable margin, that may be OK. (For more on this, see this article from the Wall St Journal.) However, Wal-Mart may not have that same luxury on iPads.