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.
Timothy Green has no position in any stocks mentioned. The Motley Fool recommends Costco Wholesale. The Motley Fool owns shares of Costco Wholesale. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.