For better or for worse, Black Friday has become an American tradition. Over the past decade, the busiest shopping day of the year has warped holiday shopping habits, modified retail business strategies, and shortened Thanksgiving dinners -- an impressive cultural impact for a "holiday" invented by retailers.
Let's look back at the history, business strategies, and financial impact of Black Friday to understand how this phenomenon started and where it could be headed.
The history of Black Friday
The term "Black Friday" originated in Philadelphia in the 1960s to describe the heavy pedestrian and road traffic that usually occurred on the day after Thanksgiving. Over the following decades, retailers used the term to describe seasonal profitability. Some retailers operated at a loss from January to November, but holiday sales starting on the day after Thanksgiving would bring them back "into the black" with profits.
Yet, it wasn't until the late 2000s -- when retailers started opening at 4 a.m. or 5 a.m. on the day after Thanksgiving -- that the modern "Black Friday" was born. In 2011, several major retailers -- including Target (NYSE:TGT), Macy's (NYSE:M), and Best Buy (NYSE:BBY) -- opened at midnight for the first time. The following year, Wal-Mart (NYSE:WMT) and several other retailers opened their doors at 8 p.m. on Thanksgiving Day. By 2014, retailers were opening for business as early as 5 p.m. on Thanksgiving, effectively replacing Thanksgiving with a two-day shopping holiday.
The business of Black Friday
How did a holiday invented by retailers overwrite the oldest American holiday? The answer is simple: by using steep time-limited discounts, known as "loss leaders," to draw hordes of shoppers into their stores. Retailers sell these products at a loss, hoping shoppers will buy other products in the store at less dramatic discounts. Many of those products might seem cheap to consumers (when compared to regular prices), but the retailer is still making a profit.
Most retailers post Black Friday ads, coupons, and offers online to help customers plan their purchases. Other companies release their promotions at the last moment to ensure shoppers keep checking their websites for an announcement.
From 2010 to 2012, total Black Friday spending in the U.S. surged from $45 billion to $59 billion. In 2013, total spending slipped to $57.4 billion and then dropped to $50.9 billion in 2014, according to the National Retail Federation. That sharp decline hinted that Black Friday's heyday might be passing.
The future of Black Friday
The decline of annual Black Friday spending coincided with the rise of online shopping, where revenue on Thanksgiving and Black Friday in the U.S. surged from $1.06 billion in 2010 to $2.51 billion in 2014, according to comScore (NASDAQOTH:SCOR).
Granted, that's a small amount compared to total retail revenue from Black Friday, but it indicates more shoppers are getting fed up with waiting in long lines, battling other shoppers for "doorbuster deals," and missing Thanksgiving dinner with their families. Meanwhile, e-commerce companies such as Amazon.com (NASDAQ:AMZN) have ramped up their Black Friday efforts to provide similar deals online.
Rising e-commerce sales during that period puts brick-and-mortar retailers in a tough spot. On one front, they must match or beat online prices; on the other, they must race other retailers to the bottom to attract more foot traffic. To remain competitive, retailers started introducing steep discounts earlier, which weakened the overall impact of Black Friday. David Bassuk, managing director at AlixPartners, told Fortune that strategy "diminished the excitement" and essentially made Black Friday "a non-event" for most shoppers.
Black Friday will likely remain known as a major shopping day for years to come, but the manic mood might fade as more shoppers buy their products online.
Investors in brick-and-mortar retail companies should realize that decline could drag down annual revenue quickly, since November and December are traditionally their biggest months of the year. If Black Friday continues growing as an online event, Amazon, eBay (NASDAQ:EBAY), and other leading e-commerce players will likely profit -- continuing their long tradition of stealing business from brick-and-mortar rivals.