Help me understand "Black Friday"

Factual Questions
1

Since I’m not American or Xtian and have never celebrated Christmas, “Black Friday” leaves me baffled and confused. According to Wikipedia, the “black” is supposed to signify black ink, indicating that stores would be making lots of money today. However, isn’t the whole idea based around discounts, and the shoppers efforts to get these discounted goods before they run out? In some way similar to a Soviet style supply shortage?

So how is it then that the retailers make MORE money selling goods at a heavy DISCOUNT on that particular day? If they were still making money selling at the discounted price that people will fight over, why don’t they sell at that price all year round? Is it a matter of sheer sales volume overcoming the typically high fixed carrying costs that retailers face?

2

You can start here.

3

Ah. so “yes”, then.

I had thought it might be something like that, but I never really expected it to be true to such an extent. :stuck_out_tongue:

4

I worked for a department store as a manager. I never understood department store economics until I did. It’s a real eye-opener.

Let’s start with a single item. Let’s say that Dillard’s Department Stores buys 1000 jackets costing them $50 a jacket, for a total cost of $50,000. They price the jackets at $100. They sell 250 of them at that price, at which point sales are slipping a bit in pace, so they drop the price to $69.99. At that price, they sell off 300 of them. So far, they have made a total of $25,000 + $21,000 in sales, leaving them only $4,000 short of their cost. They still have 450 units available to sell. They drop the jackets to half-price, and advertise them in a sale flyer.

At this price, another 80 units get sold ($4,000). There are still 370 units to sell, but here is the key: everything those units get sold for is profit. So even if they end up selling them for, say $20, that’s all profit.

Now, for Black Friday: the same thing happens with a year’s purchases. They have all been made and paid for by Thanksgiving. All the merchandise for the calendar year is in and the cost has been spent. The key from the standpoint of the company is to have sufficient sales thereafter to make up those costs, and put the company into the black. As a general rule, that tends to happen right around the Friday after Thanksgiving, with its enormous shopping volume and its location near to the end of the fiscal year. From that point forward, everything the chain sells is adding to the gross profit.

Obviously, the financial situation is much more complex; retail department stores usually have relatively thin margins. But the idea is essentially as indicated.

So, the next time you go to buy a shirt at a department store, think of it this way: if it’s full price, they store isn’t making a dime off your purchase, likely. If it’s being sold for $7.00 (originally $59), and you are thinking how in the world are they making any money on that price, they are making nothing BUT money on that price. :eek:

5

OK, this part doesn’t make any sense. If the big selling time is around xmas, why then is there any need for the retailer to mark their prices down? Since everyone at this time is in a panic to buy more of everything, and demand is high, why do prices go down instead of up? I’m guessing it’s because the priority isn’t so much on volume as it is on selling every last item to minimize the carying costs for rapidly depreciating items like electronics or clothing?

To use your example:

I know what you mean, but I don’t really like the wording because it leads people to incorrect conclusions. Assuming that people did buy it at the original list price, then for what reason is there for the store NOT to charge to original list price, especially at Xmas when demand is presumably high?

Of course, you and I understand that fixed costs have nothing to do with the margins on individual items. The fewer sales throughout the rest of the year contribute equally to the profitability of the line as the larger number of sales at the end of the year.

I need to think about this a bit more…

6

They pour lots of money into advertising to convince you that Black Friday will feature the lowest prices of the year. In reality it may or may not. It greatly depends on how seasonal the item is. If you have ordinary shirts, for instance, those are not seasonal. They can be sold at any time, so shirts that don’t sell at Christmas may turn up on the bargain rack months later for even lower prices.

7

OK, so the jackets cost the store $50 each. And there’s some number of jackets they can sell for more than $50. So why would they ever buy more than that number of jackets from their suppliers? Sure, they’ll make a profit selling some at $100, some at $70, and some at $35. But wouldn’t they make an even bigger profit if they never bought the ones they’d sell for $35 in the first place? Is this just an artifact of the unpredictability of sales, that they don’t know well enough exactly how much of each item they’ll sell?

8

Hey, he’s on the SDASB, is he alowed to ask questions? I tought the SDASM was for answers only? :stuck_out_tongue:

I don’t have any trouble with the situation you describe, what I have trouble is why they start selling it for $35 during Xmas, when demand is the HIGHEST. It seems that customers that for the rest of the year, would not even look twice at the jacket for $100 are now clawing each other’s eyes out to buy the jacket at $35, then surely the reasonable thing to do would be to raise the price back to $100? That way, you’ll still sell some (maybe not all) of the jackets due to the higher demand and at the same time save yourself the hassle of cleaning blood off your shopfloor and counselling for traumatized shopgirls? At least, compared to reduing priced to $35 (below cost) and watching the ensueing pandemonium? Why is it that at the end of the year everything MUST GO? I can understand this somewhat for stuff liek clothes and electronics, but the consumer is still getting essentially “last year’s” stuff, a few days before the year starts again.

9

Competition.

All the OTHER retailers are trying to get the same customers, so raising prices simply sends those customers to other shops.

In addition, a lot of people do avoid shopping this weekend, to avoid the crowds, and a few people who enter stores this weekend (at least later in the afternoons when the mobs have gone wearily home) are looking for gift ideas and may not have the money to spend. Therefore, when the prices go back up on most* items at noon, Friday, or on opening this coming Monday, shops having a few big ticket items with lower prices will draw in more customers who will then buy regularly-priced items rather than going to several more shops to buy all their gifts. Whichever outlet does the best job of advertising a few hotly desired items at a low price will then benefit from the collateral sales of items at the normally inflated prices.

10

Many taxing authorities have specific taxes on inventory. Lower inventory means lower taxes.

It costs money to maintain warehouses. Products that cannot be sold until a season later in the year consume warehousing funds that could be used to handle inventory turns throughout the year.

11

Black Firday is the day after Christmas when no more Christmas trees can be sold and few can even be given away. All greens at that time must be shredded or otherwise eliminated and they are no longer considered green, but rotten black.

12

Chances are, in the example given, they HAD to buy 1000 units to get the $50 price. It could be that any quantity less that 1000 units had a price of $75 per unit. So you buy the larger quantity, sell as many as you can for the best price you can get, and blow out the rest.

13

The way I am understanding it, is once they sell enough jackets at full price to start profiting fully, lowering the price moves the items quicker and gets them the hell out. I worked Black Friday at my store yesterday (see the Pit thread for some monster bitching) and it was crazy how much stuff we sold out of that most people wouldn’t of bought at regular price. No one has been buying Canon SD600s at full price, then drop them to $200 and 35 of them are gone in a few hours. And with 1 gig memory cards - I think a lot of people were just buying them because they were cheap ($3 after rebate) not because they NEEDED 3 memory cards then.

14

You have 1000 different goods in your inventory. Maybe 200 will be sold out immediately, 600 will sell at about where you will predict them to sell and 200 will not sell as well as you expected. It’s those 200 you want to get rid of on black friday.

15

Partly. Partly it is because you cannot sell very many at “full” retail; trust me, when they can, they do!

Junior girls, for example, are ofte willing to buy at significant markup, without waiting for sales.

However, if in my example, they only had purchased the 250 jackets that sold full price, while the profit MARGIN would be higher, the TOTAL profit would be less, or, at least, that is what the store is gambling upon.
As to the issue of sales: without marking stuff down, traffic doesn’t occur. Full price items in this country are anathema to most of us; we’ve been Wal-Mart trained to believe that lower prices are better. So a store could sell 100 units full price, but by dropping the profit margin from 100% to, say, 60%, they can often quadruple or quintuple sales. That’s more money in the bank.

As an example: Dillard’s occasionally holds weekend sales where everything that is marked down is sold for 25% less than the marked price. You should see the stores on those days: stuff flies off the racks that was sitting there at 66% off without any interest.

Also, keep in mind that appliances are often slightly different: they have lower margins, and are rarely discounted except when put on sale. Thus, for example, you won’t find toaster ovens going through a markdown cycle, like you will on fashion clothes. In such cases, sales are simply a way to increase marginal sales.

16

I worked for a major retail electronics company for nine years and I can tell you the quarterly numbers were almost always in the black. That means we didn’t wait until the last quarter to start making a profit.

I can’t imagine Dillards trying to sell the same jacket all year long (who sells jackets in the summer anyway?) and only starting to become profitable in the last month or two of their fiscal year.

Here is Dillard’s quarterly income data:


PERIOD ENDING     29-Jul-06     29-Apr-06     28-Jan-06     29-Oct-05 
Total Revenue     1,748,568     1,879,022     2,379,561     1,761,225   
Cost of Revenue   1,122,273     1,179,437     1,552,615     1,147,109   
 
Gross Profit        626,295       699,585       826,946       614,116   
 
 Operating Expenses 
 Selling General and
   Administrative   522,236       506,201       569,643       516,745   
 Non Recurring            -             -        55,353             -   
 Others              73,995        73,390        75,630        75,814   
  
 Total Operating Expenses -             -             -             -   
 
 
Operating Income
  or Loss            30,064       119,994       126,320        21,557   
 
 Income from Continuing Operations 
 Total Other
   Income/Expenses Net    -             -             -             -   
 Earnings Before Interest
  and Taxes          30,064       119,994       126,320        21,557   
 Interest Expense    24,587        23,610        26,382        25,746   
 Income Before Tax    5,477        96,384        99,938        (4,189) 
 Income Tax Expense (10,250)       35,065         1,475        (1,510) 
 Minority Interest -   -   -   -   
  
 Net Income From
  Continuing Ops     15,727        61,319        98,463        (2,679) 
 
  
Net Income           15,727        61,319        98,463        (2,679) 
Preferred Stock And
 Other Adjustments        -             -             -              -   
 
Net Income Applicable
 To Common Shares   $15,727       $61,319       $98,463       ($2,679)
17

Those numbers from here.

Maybe somebody else can have a look at these numbers, but it looks to me like the quarterly gross profits stay well in the black all year round.

18

And there are probably many stores like Dillards that do run in or near the black all year. However, there are a lot of companies that run much closer to the break-even point and even into the red.

When I was at B. Dalton Bookseller, we had a couple of stores in the Detroit district that were in the black all year, but they were not anything resembling cash cows. The rest of the stores were right at the break-even point, except for a couple that ran in the red for eleven months. December brought the decent stores into the seriously profitable range and brought all the stores in the red up to profitable. Things were not quite so “desperate” at Frank’s Nursery and Crafts because we had two seasons: Mother’s Day through the third week of June kept the company solvent for the June reports and November/December brought in the last half of the year’s profits. January, February, and July were loss months for all but the best located stores.
My MIL managed a small women’s clothing store for years and, unlike Dillard’s, she made all her profit in December. Spring and Fall fashions helped keep the store afloat until December, but without a good December, the store failed.

19

Lots of stores with very long histories of seasonal sales have already purchased and scheduled delivery for goods that they cannot warehouse or put on available retail shelves as they are before black friday. Since the traffic is well known, moving everything in the store out and restocking before the month long end of Christmas shopping season is a major benefit. So, you put lots of WOW stuff on sale to get people into the store. You mark down everything you can, to encourage lots of volume on the day you are paying every single sales person you can get. Then you stand by for deliveries during the first week of December, to charge full price to as many people as possible before the end of the year. Then you let all your seasonal help go. Merry Christmas to them.

Tris

20

So how’s their bankruptcy recovery going, then? Or was that English Gardens?