How Costco Saved Thanksgiving

Thanksgiving 2013 will likely be remembered as the year that Black Friday took over the holiday, with stores like Wal-Mart Stores  (NYSE: WMT  ) opening its doors at 6 p.m. instead of waiting for the clock to strike midnight. Most retailers did the same, afraid of losing potential sales by opening later.

But Costco Wholesale (NASDAQ: COST  ) refused to open its doors on Thanksgiving, instead giving its employees the day off. While this move certainly generated some positive PR for the company, it actually makes business sense as well.

A different model
The traditional retail business model is simple. The store buys merchandise at one price, sells it at a higher price, and what's left over after operating costs is the store's profit. In other words, the more stuff you sell, the more profit you make.

Costco, however, is not a traditional retailer. Costco is a warehouse club, where shoppers must buy and maintain an annual membership in order to shop there. In return, members get extremely low prices on many goods, with Costco only marking up items by about 15%.

What this means is that most of Costco's profit comes from membership fees, not selling products. In the last fiscal year, membership fees made up about 75% of Costco's operating profit. So for Costco, it's not about selling more stuff, it's about getting more members. And opening on Thanksgiving doesn't accomplish that goal.

The people showing up to Costco on Black Friday are likely already members, as the membership fee would make most of the deals less attractive. It stands to reason, then, that opening on Thanksgiving wouldn't result in too many new memberships. This makes the choice for Costco simple.

On the one hand, the company could open on Thanksgiving, deprive its employees of the holiday, and do essentially nothing for its bottom line. On the other hand, the company could remain closed, give its employees Thanksgiving off, and enjoy the PR benefits of being one of the few retailers that didn't ruin Thanksgiving. It's a no brainer for the company.

No choice for Wal-Mart
Wal-Mart isn't so lucky. There is a relatively fixed amount of money that will be spent by consumers this holiday season, and every retailer is trying to get as big a piece as possible. If one big retailer opens its doors earlier than others, not following suit would mean some of that money will be gone by the time any customers get to competitors.

Wal-Mart really has no choice than to match what other retailers are doing, since it can't afford to lose any of those sales. This creates a PR problem, as people begin blaming the company for stealing away Thanksgiving from both consumers as well as employees. Couple that with the PR nightmare caused by Black Friday itself, with reports of customers fighting over towels, of all things, and other ridiculous behavior within its stores. Nothing deters me from shopping somewhere like the prospect of a fistfight over cheap towels.

Black Friday, and now "Brown Thursday," or whatever Thanksgiving ends up being called, represents a standoff for retailers. There's no turning back now, and I expect shopping on Thanksgiving to become the norm. If anything this hurts retailers, with two days of heavy discounting instead of just one. I doubt that this will spur more spending, as consumers are likely going to spend the same amount regardless of whether there are sales on Thanksgiving. In retail's quest for more revenue, profits are being sacrificed.

The bottom line
Retail is a tough industry to begin with, and the push into Thanksgiving isn't helping. Costco's unique business model allows it to eschew a Thanksgiving sale without hurting its bottom line, giving employees the day off and generating positive PR in the process. While many retailers will see lower margins than last year due to this increased discounting, Costco has made the right choice and stayed out of the fray.

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Read/Post Comments (6) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 07, 2013, at 3:01 PM, hbk72777 wrote:

    So do the people that complain about employees having to work want to pay a membership fee to every store they shop in?

    I don't think so

  • Report this Comment On December 07, 2013, at 10:34 PM, tristinstone wrote:

    This is why employees of Costco love their jobs. Ask any Walmart employee and they cant stand working there.

  • Report this Comment On December 08, 2013, at 4:35 AM, Valtryst wrote:

    My mother had worked retail for the majority of her working life. I can remember quite a few holidays where she would request off, but only to be turned down by her management for various reasons. She was obviously let down, but so was her family. This was the norm for us.

    My mother has worked for Costco for over a year now, and yes she works hard for her money because they have high standards, but she is also treated with so much more respect by not only other employees, but management as well. They treat their employees well, that work hard. She has never been more satisfied in retail as she has since starting there.

    We simply love the fact that my mother enjoyed her first thanksgiving in quite a long... long time with who mattered to her, her family.

  • Report this Comment On December 08, 2013, at 10:45 PM, equaltime wrote:

    Working on TG or other "family" holidays is anti-family. At 3:00 my host's son had to go to work at Sears. Six of us played cribbage, watched TV, talked, shared while he was selling snowblowers with no snow! Then he had to be at work at 5am for black friday.

  • Report this Comment On December 08, 2013, at 10:46 PM, mariposa wrote:

    I hated working for Wal Mart I've had issues with them. I had to work every Thanksgiving black Friday and Christmas eve. It prevented me from being with my family three years in a row during the holidays. but in fairness to Wal Mart i do have to say this ...... after the year that an Wal Mart Associate was ran over by customers (he was a door greeter) and died. Wal mart has kept the doors opened from 6 a.m. to midnight on black Friday to prevent this from happening angain(yes there is Wal Marts that close). So credit do is were credit is do. Would I ever work for Wal Mart again? Probably not!!!!! yes there was other issues of why I'm not working for them even though I have had offers to come back.

  • Report this Comment On December 09, 2013, at 3:31 AM, whateve12 wrote:

    Ok. But what I don't understand is. Whether you open at 5am Friday or 5pm Thursday. People have the same amount of money to spend and actual more on Friday since for a good amount of people that was payday. So no I do not understand the early opening.

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