What Does the Holiday Season Have in Store for Retailers This Year?

The days of crazy Black Friday sales with outrageous doorbuster deals that result in stampedes are largely over. Instead, the holiday spending has spread out with consumers starting their shopping as early as Halloween.

In this episode of Industry Focus: Consumer Goods, Vincent Shen and Dan Kline explain why Black Friday has evolved into what it is today, how the changes affect companies that rely on this critical period, and what the forecast looks like for the remainder of 2016.

A full transcript follows the video.

This podcast was recorded on Nov. 22, 2016.

Vincent Shen: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. It is Tuesday, Nov. 22, and I'm your host, Vincent Shen. Joining me via Skype from West Palm Beach is fool.com contributor Dan Kline. How are you, Dan?

Dan Kline: I'm great. How are you?

Shen: I'm doing well. With the time of the year, and a topic in the news taking up a lot of headlines around this time of year with Black Friday and Thanksgiving, I figured we really couldn't help ourselves, we have to do a Black Friday/holiday season special, and talk a little bit about some of the different strategies and other developments we're seeing in the consumer and retail world. I figure first we can tackle some of the bigger-picture expectations for this year. Then maybe we can dive a little bit more into the specific trends in the industry, how specific companies are approaching this very important period for a lot of them. How does that sound?

Kline: Absolutely. It comes down to, Black Friday is not quite as big as it once was, but it's still absolutely enormous. The season itself is spreading out. You've been able to get Black Friday deals pretty much since Halloween ended. But a large percentage, above 21% of people who are going to shop, are still going to shop on Thanksgiving, and leading into Black Friday, that number is going to almost double. So it's still a giant deal. About 45% of Americans will shop on Black Friday itself, and 60% will shop between Thanksgiving and Sunday.

Shen: With that in mind, so many people in this country go out and purchase one thing or another, gifts or whatever it may be, looking for those deals, on Friday, on Cyber Monday, and throughout the next six weeks. My question to you is, is there anything on your list?

Kline: I'm going to buy some technology. I'm going to buy an Apple Watch, I'm going to buy a Google Home, and I'm going to pretend I'm buying them because you're making me so that I can actually understand them for future shows. But the reality is, most of those items are cheaper. Anything technology-related. Apple, you have to go to Apple vendors. Best Buy will have deals on Apple products. Apple might. They have in the past. But, in general, they will push you toward their vendors. [Amazon.com's] products are all cheaper on Black Friday, sometimes dramatically so. And Google Home is $99, down from $129. So it's a great time to buy certain things. But that brings up the whole Black Friday idea -- this is not a day or weekend where you can just go to the stores or jump online and assume that everything you're buying is a good price. You still need to be diligent and check, because the reality is, there's a lot of models and a lot of things where they're saying they're 50% off and they're actually slightly different model numbers with less features, or they're playing games there. So this is still a time when you have to be very careful and comparison shop.

Shen: I've also seen some of the studies they do where they say as much as even one in four items that you see in a Black Friday circular, something like a promotion or an email, is actually the same as what they were offering as a doorbuster, or a very attractive item, in terms of discount, from the previous year. At the same time, some people have complained that companies will raise their prices so they can advertise a bigger percentage discount, but in actuality, you're really getting less of a deal there. But I think everyone has seen firsthand the long lines, the crowded stores, and the overall mania that comes with the season, especially this upcoming weekend. 

I'd like to put into perspective for our Fools who are listening -- when you take some of the most well-known retailers in this country, and you look at their calendar fourth quarter, what kind of impact this period has on their annual results, it's pretty significant. Some major retailers that often come to mind -- for example, Macy's, their fiscal fourth quarter runs from November through the end of January. The revenue from that season made up just under one-third of their total top line from the year, but over half of net income for the year. Then, if you look at a Wal-Mart, for example, about 27% of revenue comes from that quarter, but over 31% of their bottom line. Big competitor Target, 29% of revenue, 40% of earnings. Best Buy really surprised me -- one-third of their sales will come from this holiday shopping period, but over half of their bottom-line profits are generated in this quarter. Even if you go to Amazon, you're looking at 80% of their profits coming from the fourth quarter.

What about specifically in 2016? I know there are these expectations. The National Retail Federation says that over 137 million people will be consumers between Thursday and Sunday, out there shopping, be it online or in stores. You said 20% on Thanksgiving --

Kline: Yeah, it's about six in 10 Americans will shop overall.

Shen: What about the expectations for this year? Bullish, bearish?

Kline: Bullish. Numbers are supposed to be up. About 3.5% was the original prediction. Things started a little bit slowly. The election cast a little bit of a cloud. And those early weeks when a few companies, like Office Depot, were getting out really ahead with their Black Friday deals early, sales were a little bit tepid, because the country was in a, first, "I don't know who's going to be president," and then maybe a little bit of confusion after the election. But it does seem like overall sales are going to be up. And with what you said about the percentages for all these big retailers, I would argue that for a Wal-Mart or a Target or Best Buy, it has become even more important, because digital sales are going to grow 9%-10%. If you're Best Buy and you capture a digital customer, your ability to sell to them the rest of the year -- you already have their credit card information and their email -- it puts you on on a more even footing with Amazon. It's great if a retailer can get people in and get a lot of sales. But if they can capture that info, they're setting themselves up well for the rest of the year, next year.

Shen: Yeah. As we'll see as we get into the second part of our discussion around some of those broader trends, and what companies are doing specifically, a big part of it that will here underlie every single thing we see with these companies is that they're balancing their efforts between their physical retail locations, if they are a traditional brick-and-mortar chain like Wal-Mart or Target, like you mentioned, versus their online presence and online business, trying to strike the right balance about where to focus, because you obviously have the stronger growth in the digital space, but also balancing the fact that they have these stores and they want to leverage them wherever possible.

Kline: I think the rules have changed a little bit. We all remember the days of people bashing each other over the head to get a Cabbage Patch Kid, or whatever the hot doll -- you don't remember that, but some of us older folks remember that. There are still some hot toys that will sell out, and maybe you won't be able to get them until Jan. 5, but the reality is, stores have been promising availability. You can go online, you can buy something, you can pick it up in the store. Even if they're out of something, you'll get a rain check, it'll be relatively quickly. Stores have done a much better job managing expectations and managing inventory. I think it's been a couple years since you've seen the story about a stampede of people at Wal-Mart where somebody gets crushed. They have spread out the season, and through managing distribution, they have changed expectations. So I don't think, as much as you're going to get a large amount of people shopping on Thursday and Friday, you're not going to get the same level of camping out so people can get -- I don't even know what the hot toy is. Maybe a remote-control BB-8, or whatever it might happen to be.

Shen: Yeah. I feel like what's also helping to potentially prevent some of those crazy headlines that you see, with the stampedes, waiting, huge hordes of people waiting at the doors for when they open at God knows when in the morning -- I think it also helps that people are more informed now, in general, in terms of what the options are, because they have their mobile devices, they can shop online and price-check how good the deal really is. I have something here that says nine out of 10 people will do online research before going to stores to make a purchase. Eight out of 10 people who have mobile devices will be using them actively when they're out shopping to price-check, maybe look at reviews and make a more informed decision. I think that also helps alleviate some of that pressure, whereas before, you felt like this was the only opportunity, like, "I need to get this doorbuster deal."

Kline: It does. I think stores have learned their lesson. You remember the days where Wal-Mart would have one television, back when a 32-inch television cost $400, and they would have one for $99, and people would kill each other trying to get it. You don't really see those limited-availability deals anymore. A few places are running "while supplies last," but for the most part, stuff is available. And most of retailers are taking the Amazon approach. A lot of things are discounted; nothing is ridiculously discounted. You're not going to get a new $1,000 laptop for $150. There might be some deals like that, but very few.

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Shen: Some of these trends and how they're playing out at specific companies that we know and love -- one thing I want to talk about is in-store pickup. We have mentioned Wal-Mart a few times already during this episode. In the past year, they've been promoting various in-store pickup initiatives. A big one was curbside grocery service. They have expanded that into new and established markets this year. In terms of the penetration that has seen -- Target says about 15% of its online orders get picked up at stores. Overall, the big benefit of something like in-store pick up is that it helps drive traffic to stores, where people will hopefully make other purchases. Even a J.C. Penney, I was really impressed to hear that consumers pick up as much as 40% of their online orders from J.C. Penney department-store locations. That is a relatively new capability for the company. Management has commented that the best part of that is that 40% of those shoppers who pick up orders in stores end up making an additional purchase when they're there anyway. What do you think? Have you seen more companies marketing this?

Kline: I think it's very important during the holidays. As a shopper, I don't want to brave the traffic, leave my house, to hope I get whatever device it is, or coffee maker, whatever ridiculous thing I'm going to buy for myself this holiday season. I want to know I'm going to get it. So if I can't order it on Amazon, and I'm going to buy it at a physical retailer, from Wal-Mart or Target or J.C. Penney, I want to be able to place the order and know that when I get to the store, it's going to be there. Now that I'm going to have to wait in line or fight through it. That is a really strong positive. I don't see it being an issue the rest of the year. The rest of the year, it's a lot easier to just go to the shop and pick something up than to wait in a customer-service line and pick up your online order. I've done that a few times, as we've talked about on the show before, and it's not the easiest system in the world -- though I expect they will be throwing more people at it for the holidays. But it's going to be very important for those companies, because it's going to put people in stores. They still have to check out, they still have to wait in line. They're going to see a lot of stuff, they're going to spend more money.

Shen: Yeah. Something with that as well that's another perk that comes along with an initiative like this is how it impacts how the companies manage their inventory, how they can clear out their inventory without taking hits, in terms of being forced to put on major discounts or markdowns. The idea basically is, if your local J.C. Penney location can fulfill that online order by basically pulling that item off the shelf, the company can avoid that shipping expense -- so, that's already benefiting their margins and their profits -- and, also, it will help them clear out their inventory, so they don't have things sitting around that they need to clear out for new products, and they take a hit by having to put it on clearance later down the road.

I want to talk a little bit about how other companies are approaching this with inventory management. This is something that I've had several episodes recently talking about, something like with SKU rationalization, stock-keeping units, how people are trying to simplify what they keep on their shelves, making their overall business, their operations, much more efficient and profitable. The thing is, that can mean not just simplifying product lines, but also being more cautious about the amount of inventory you keep on hand. Dan, you'll remember, last year, for example, a lot of people were still wearing shorts and flip-flops well into November. And a lot of apparel retailers got hit.

Kline: I'm wearing shorts and flip-flops as we speak. 

Shen: OK, so not quite fair, with you down in Florida. But even here, only this past weekend in Washington, D.C., has it really started to get very cold. And last year, a lot of apparel retailers got hit holding on to tons of their cold-weather apparel, and eventually having to discount that, put markdowns on that in order to help clear the inventory. DSW was one example, where they're approaching this year much more cautiously.

Kline: There's always going to be things you can't predict. We've talked about, I'm in Southern Florida. If you go to Target right now, there are no warm-weather clothes, because they have basically decided -- even though it's still 75, 80 degrees some days -- they have decided it's fall, or, our version of fall, so there's long-sleeved T-shirts, there's pants. That's an inventory bet. That's them saying, "Well, we could keep the shorts around, but we might get stuck with them, so let's take a longer season." That's why it's always hard to buy gloves in the middle of winter, because they have already moved on to summer. As a retailer, the more you know about what people want, the better you can manage your inventory. That goes back to store pickup. If I know 36 hours in advance that I've sold 17 espresso coffee makers, that tells me something about buying patterns. You could probably project that out to how many are going to get picked up in the store and know how much inventory. It all becomes data that can let you manage your products more efficiently.

Shen: Absolutely. Going back for a second to some of the apparel retailers that got hit with the crazy warm weather that we saw last year, and we're seeing a little bit of this year as well -- with DSW, for example. I really wanted to point DSW out because I like this description that management has given for their stores, in the idea that, basically, their stores are just warehouses or fulfillment centers that happen to open their doors to the public every single day.

Kline: And that's the model Wal-Mart is moving toward, where you're leveraging the fact that you have these giant stores. And sure, you're going to get some walk-through traffic. But it's all about what you sell, and having the thing someone wants, when they want it. Amazon actually does that better than anyone, making sure they have in a local fulfillment centers, the razor blades you're going to order, because you ordered them seven weeks ago, and it has an algorithm that shows you're going to order them again on that eighth week.

Shen: Absolutely. In the end, if they can, with the local in-store pickup, avoid the shipping expense, or reroute orders that are shipping from -- one of these DSW stores that have excess inventory on hand -- well, they effectively help to clear that inventory out without resorting to some kind of clearance or markdown and can help preserve some of their profitability.

Kline: Apparel, for DSW, for shoes, for clothes, there's a huge advantage to in-store pickup in that I'm at least going to look at it, if not try it on. There's always the possibility, if I order from DSW online -- which my wife does all the time, and I would say she sends back nine out of 10 pairs, because it's not quite what she wanted, it doesn't quite fit right. If she does the in-store pickup, she has the ability to pick it up, try it on, and give it back.

Shen: And if it doesn't fit, try on the next size up or down.

Kline: Absolutely. That applies to pretty much any product. How disappointing is it when you get your new 56-inch television and the bezel on it isn't what it looked like in the picture, and it's not what you want, so you have to go through the whole trouble of putting it back in the box and sending it back. Driving people to stores, but also using digital technology, is what physical retailers can do that Amazon can't.

Shen: Yeah. Underlying all of this is the idea that a lot of these companies are investing in their technology and their infrastructure to be able to roll out initiatives like this quickly to adapt, to take that data you mentioned, to evaluate buyer patterns, what's popular, what's selling, what's not, and to be able to keep, maybe, lower inventory products, but hopefully restock that as necessary, if demand seems to be really shooting up -- like you mentioned, back in the day, those Cabbage Patch dolls. 

The last topic I want to touch on, it seems to be a little bit controversial, or at least people fall into two different camps here -- whether stores should keep their doors open on Thanksgiving versus Black Friday. A lot of companies have jumped into the camp, and they believe that Thanksgiving, for example, just let employees have their day off, spend this time with their families, do whatever it might be, have that time available. Nordstrom, Barnes & Noble, Bed Bath & Beyond, T.J. Maxx, Cabela's, Costco, and REI, which we talked about last year, they generated a lot of discussion around this topic, with their #OptOutside marketing. With the numbers going around, with people spending their time at stores during the traditional Black Friday window, that has shrunk, because, as you mentioned earlier, it's spreading out more. What do you think? What's your take on this whole Thanksgiving, open/not open?

Kline: The only company not making a mistake is REI. REI is a lifestyle brand built around activity and being outside. For them to close and tell you to go take a hike instead is a smart public-relations move. Everybody else is making a mistake, and here's why. Most consumers have very little brand loyalty. If I've decided I'm going to shop on Thanksgiving Day, even though I love Barnes & Noble -- if I want to buy books and Barnes & Noble is closed and Target is open, I'm going to go to the store that's open. Very few people are waiting to go to their favorite store.

Now, if you're a specialty retailer, if you're selling jewelry or something very unique, OK, you can close your doors. But if you are a mass-merchandise retailer, if you don't open on Thanksgiving, those are sales you're losing that you're not getting back. And very few stores are going to get enough of a public-relations bump to say, "This was a good move." As far as the whole employees-getting-a-day-off thing, I worked retail for two years, I ran a giant toy store, and I would have opened on Christmas Day, I would have opened every single day. I used to open Easter alone just to have the sales. The reality is, if you work in retail, you are used to working bad hours. You work Sundays, weekends, and holidays. Thanksgiving doesn't need to be an exception, because it's your paycheck. If your store is open, it's taking in more money, its bottom line is going to be better, and there's really no reason, unless every retailer closes, for any retailer to close.

Shen: That's an interesting take, and I have to say you make a very good point with the idea that, unless you have a brand with incredibly strong loyalty, or some kind of specialty goods, or something along those lines, that if somebody wants to shop on Thanksgiving, they will simply go where the doors are open, and you lose out on that share of their wallet.

But I do want to say, some people who have argued against the idea of keeping your stores open on Thanksgiving is that, maybe not so much with consumers, in terms of winning them over with that promotion -- maybe REI is doing it right, like you mentioned -- but in terms of company morale and overall how that plays out with your various stakeholders and that public image, the morale of employees, the longer-term, less tangible effect they have --

Kline: Here's the thing, I'll go back to my retail experience -- there's a way to manage that. If I ask people -- first of all, for holidays, I took volunteers first. Who wants the hours? There are plenty of seasonal employees at all of these places that are just going to want the hours. Second, I made the day fun for employees. There would be pizza, there might be snacks, there might be sales contests, there might be giveaways.

As a retail manager, it is your job to make it so that when people have to come in on a day they otherwise wouldn't be coming in, that it's part of the rah-rah, go team. And maybe they're getting a bonus day off in the summer. Maybe they're getting entered into a lottery where one in every five employees gets an extra three days off. Whatever it is, there are absolutely ways to manage morale without making that a negative. You can't ignore that, you're absolutely right. Who wants to leave Thanksgiving and have to come in to work? But some people do, and others can be incentivized to.

Shen: Fair enough. I think when you are at the scale of some of these bigger retailers, it definitely makes it much more challenging to get those incentives right. But it's definitely interesting. I'm curious to see how the winds blow in terms of people's preferences, where the industry takes that. But overall, I think there will always be that die-hard contingent of stores that have their locations open on Thanksgiving Day, maybe sometimes the whole day, maybe sometimes just half the day, but wanting to hit those customers who are eager. Maybe it's a tradition for their family to go out after dinner.

Kline: I won't be anywhere near those stores. There's absolutely nothing you can't buy online that anyone is getting on my list. If you're on my Christmas list and you want something I can't buy on Amazon, or otherwise digitally, you are absolutely out of luck. 

Shen: Wrapping up here, I would say that, overall, we know, in terms of the financials, that this quarter does have a big impact on the annual results. But I think Black Friday, the title it once held as the official start of the holiday shopping season, where you have a four-day weekend, families get started on all their Christmas gifts, for example -- I don't think that holds any longer. It really comes down to the fact that companies and the retail industry overall has been essentially milking this for so long, and getting so aggressive in terms of their competition, it's just not as compelling anymore. The fact that you have all these different options, with companies that maybe want to offer good discounts year-round, rather than extreme discounts for this four-day period.

Other brands are taking the approach of spreading out the timing of their promotions so they don't have to compete during this incredibly crazy time for that share of people's spending. But it's diluted in a weekend what I would call the Black Friday brand. But overall, this is always going to be a period for a lot of the companies we follow here on this show in consumer retail, very important to see how they do, in terms of the actual results, but also to see how they handle what they're pushing out in terms of innovative new ideas, investments in technology, to see how they're trying to maximize their results from the holiday season. Any last thoughts from you, Dan?

Kline: I've been joking all month that my Halloween costume was dressing as a Black Friday circular, so absolutely this season has blurred. And it's important, but we won't know. Everyone on Monday morning will want to handicap this. We won't know how this season is going to turn out until Jan. 5. This is not a single day anymore. It's almost a six-, seven-week period. If it's a bad Black Friday, or a slow start to the season, it's like baseball, not football. It's 162 games, it's going to be a long holiday selling period, and they can still turn it around.

Shen: All right. Thanks a lot, Dan, for joining me. Good luck, if you're out there at all this weekend.

Kline: Not a chance.

Shen: If anybody has any questions or wants to continue the conversation with us, we would love to hear, for example, what your take is on keeping doors open on Thanksgiving Day, or closing them for the benefit of employees, and the message behind that. You can hit us up, and the rest of the Industry Focus crew, at Twitter, @MFIndustryFocus. You can send us any questions or comments via email at [email protected].

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