Retail viewpoint: What are the lessons from the marginalization of Black Friday?

The rumors are true: The mad midnight rush of Black Friday is a thing of the past. Don't be fooled by the foot-traffic lull, however. The holiday season's window of opportunity for retailers is intact – it just looks a little less chaotic now.

For years, Black Friday was the single most important day of the retail year. Retailers would routinely declare that the incredible traffic and sales from this singular day after Thanksgiving was when books moved "into the black". Businesses would create marketing buzz around the day by offering steep discounts, and Black Friday marked the official beginning of the holiday season – the period when 30%-40% of all annual retail sales occur.

What changed?

The proliferation of online shopping, including the rapid growth of Cyber Monday, placed drags on the momentum of the traditional brick-and-mortar Black Friday in-store event. The convenience of ecommerce meant that some Black Friday dollars shifted even into Thanksgiving Day, as retailers could now target consumers on the holiday without needing to keep stores open. (see figure 1)

Convenience and putting the customer in charge of decisions is the new retail mantra. This means that the old Black Friday model of making shoppers physically wait outside in the cold for stores to open, and then often have them literally fight for a handful of allotted merchandise has increasingly become less desirable.

In the past few years, we've seen a reduction in the number of retailers that are open from Thanksgiving Day through the night into Black Friday. And if they open at all on Thanksgiving, more stores close earlier than a typical evening and open only a few hours early on the Friday. This changed mindset has made a measurable impact.

According to data from ShopperTrak, Black Friday foot traffic to stores is down approximately 19% from 2013 (see figure 2).

In fact, earlier this November, some retailers opened early on weekends in select markets to give their best customers an invitation-only, low-traffic time to shop the best deals. These retailers have flipped the script on Black Friday itself.

Margins matter

Black Friday and its adjacent shopping days remain very promotional. However, retailers do not necessarily need to offer deep, margin-hurting discounts anymore. Instead, successful retailers are increasingly developing special, higher-markup products that are brand right and provide value to customers – but more importantly, are not loss leaders.

Recent favorable macroeconomic conditions, including record-low unemployment, improved levels of consumer sentiment, and increased disposable income, plus healthier inventory positions have encouraged retailers to implement higher markups not just on special buys but across their assortment. These strategies, coupled with a flattish discount rate, have improved gross margins for retailers.

This is what we're calling the "double marginalization" of Black Friday: the shift to ecommerce sales at the day and time of customers' choice as well as increased profitability. This is a massive shift from trying to maximize one day of revenue to focusing on a longer period of operating margin.

How to maximize profits?

We have predicted holiday sales to increase 3.1%-4.1% year-over-year this season. Keeping this and favorable economic indicators in mind, it is easy to assume that profits will follow. It's not that straightforward, however. Retailers need to sharpen their strategies, so they can deliver both better product to their customers and earnings to shareholders during the holiday season. Here's what to do:

• Own the distribution: The most profitable ecommerce transactions are typically executed from a brand's own distribution center, without paying third-party fees or utilizing labor, facilities, or relying overly on higher-end real estate that wasn't originally purposed to fulfill orders.
• Build the customer relationship: While offering capabilities like ship-from-store or pick-up-in-store, retailers should be solving for speed and convenience at the customer's direction and creating a stronger relationship.
• Don't write off brick and mortar, but optimize it: Some of the most profitable transactions are still being conducted the old-fashioned way – in stores, where return rates are lower, fixed costs can be leveraged, and without spending on additional freight. To maximize four-wall profitability, we recommend that retailers research customer preferences, study historical foot traffic and sales by hour, and model future holiday season brick-and-mortar store hours and staffing with forecasted revenue and associated expenses.

While Black Friday will always have the anchor position in the holiday calendar, retailers must remember that these days it could mean a different day, week, or value proposition than in the past. Retailers that understand their customer preferences and strategically plan their omnichannel inventory and store operations will marginalize Black Friday in a way that will delight shoppers and shareholders alike.