How has Black Friday impacted retail stocks?

Black Friday has become one of the biggest sales events of the year for retail stocks, but has it helped retailers boost sales and acquire customers or pressured them to sacrifice margins in a race to offer rock-bottom prices?

Black Friday
Source: Bloomberg

'Black Friday (noun): a made-up holiday to boost the economy once a year.' – Anon.

Black Friday has become one of the sales events of the year, encouraging consumers to spend billions on gifts and self-indulgence, and unofficially kicking off the start of the holiday shopping season that can make or break a retailer’s year.

The original idea behind Black Friday was to get consumers to open their purse strings earlier in the year and this is still proving true today as spending continues to rise annually. This US export has proven to be a boon for many retailers around the world, which play on consumers' rabid appetite for a deal to drive sales, lure in new customers and push additional products.

But as Black Friday has evolved, extending from a one-day event into weeks of discounted deals and inspiring rival sales that compete for our money all year round, there is evidence that this event designed for the benefit of retailers is in fact having a detrimental effect on the industry. The relentless focus on discounts has led to a sledgehammer approach to pricing and trained consumers to rank their searches by price, encouraging a race to the bottom. Many argue the concept is ludicrous because these lower-margin or even loss-making sales shift business away from the more profitable holiday season in the subsequent run-up to Christmas.

Ahead of Black Friday 2018 we have a look at what stocks to trade and evaluate whether the retail sector’s own creation is still working in its favour or contributing to the demise of an industry that has been struggling in recent years.

What is Black Friday and how has it evolved?

Black Friday is a sales event created in the US and introduced in the 1940s as a way of using discounts to get people to head to the shops the day after Thanksgiving. The day of deals has become as much of a tradition in the US as the holidays it is sandwiched in between, but it is a newer development in other countries around the world.

UK consumers have been the most welcoming to Black Friday and lead the charge across Europe. The first event was only held in 2010 when Amazon expanded its Black Friday sale but it didn’t grab widespread attention until 2014, when most outlets had been dragged into participating by the big corporations and mainstream media thoroughly covered the stampedes and fighting in stores across the nation.

The event has grown so large that the biggest retailers in the US and Europe prepare 12 months ahead, with companies like Sainsbury's-owned Argos declaring it the biggest single day for sales of the year.

Read more: Sainsbury’s synergies with Argos helps boost profits

Black Friday vs Cyber Monday

Although the world was firmly on the path toward the digital age at the turn of the millennium, the era of online shopping was only just starting to gain traction as home computers became more common and internet speeds were upgraded. Still, there was a notable trend of higher online sales in the US on the Monday following Black Friday that sparked a theory that many shoppers were still browsing deals instore over the weekend as they had done for decades but holding off to purchase them online using their work computers.

At the time, digital retailers were still emerging businesses and looking to steal a slice of the pie from the bricks-and-mortar stores that were reaping most of the rewards. This led to the day being branded in 2005 as Cyber Monday by the National Retail Federation, a US trade association. This was the first rival to Black Friday’s success and it has shown that this industry-wide approach to sales can pay off: revenue on the first branded Cyber Monday in the US saw sales jump by over 26% year-on-year to nearly $500 million and that had exploded to $6.6 billion by 2017. Cyber Monday was designed to accelerate the shift toward online shopping and it has worked, with more people shopping online than instore each year since 2015. Last year, Cyber Monday was the single biggest sales event in the US, beating Black Friday sales of around $5 billion.

Cyber Monday has been able to overtake Black Friday due to the popularity of online shopping, with mobiles gradually becoming the device of choice. Mobiles were used for nearly half of all sales in the US last year and accounted for one-third of revenue (suggesting consumers prefer smaller-ticket items). Mobile sales were up 39% year-on-year and broke through the $2 billion mark for the first time.

Can Black Friday fend off rival sales on Prime Day and Singles Day?

More recently, the triumph of these new corporate holidays has inspired the biggest retailers to launch their own sales events. In the US this has been pioneered by Amazon’s Prime Day that offers exclusive deals to its subscribers and its rival Alibaba has led the charge behind Singles' Day in China, an anti-Valentines holiday that encourages singletons to treat themselves with a shopping spree in the absence of love.

One of the main reasons Amazon has been so supportive of this cut-price model of selling is because it helps the firm tighten its stranglehold over the market and either force smaller rivals out of business or to work through its platform so it can take a slice of the sales. It also offers an opportunity to improve market penetration by selling products (even at a loss) that help retain customers, improve engagement and lift incremental sales such as its Alexa voice assistant-powered smart speakers. Considering over half of all online trade on Black Friday goes through Amazon, it is unsurprising the firm decided to launch its own event in 2015 to mark its 20th anniversary. By limiting Prime Day to its subscribers it gets the best of both worlds without cannibalising its own sales on the Black Friday event that is open to the public, providing another opportunity to convert them into Prime subscribers, which boosts the next Prime Day sale and so on.

Read more: Amazon Prime Day keeps propelling the flywheel

Alibaba has taken a slightly different tact but one that seems to have made the world of difference. Singles' Day surfaced as an unofficial holiday in China in the 1990s as a way for single people to buy themselves a gift on November 11, but this was picked up by Alibaba in 2009 when its first sale generated nearly $8 billion in sales. Today the holiday sees everyone, not just those who are single, indulge in purchases and sales of $31 billion on Alibaba’s Singles' Day now comfortably outstrip total sales over both Black Friday and Cyber Monday in the US, Canada and Europe combined.

Read more: Alibaba breaks records with Singles' Day shopping frenzy

Source: Bloomberg, Amazon. Black Friday 2018 figures based on average estimates from five institutions

Black Friday may be the oldest holiday on the block but its importance to consumers has waned over the years as more events designed to get us spending start to enter our calendar. This one-day event now officially runs from Thanksgiving through to Cyber Monday but the sale seems to grow in length each year with retailers offering deals earlier than ever in 2018, spreading spending out over a longer period of time and detracting away from the importance of Black Friday itself.

Black Friday and the impact on retail stocks: the pros and cons

Black Friday and Cyber Monday have revolutionised the retail industry and look set to stay for the foreseeable future, but this sweeping change has brought both benefits and drawbacks for retailers of all shapes and sizes.

Benefits and drawbacks of Black Friday on the retail sector

Pros Cons
Can drive increased web traffic/footfall Drives emphasis on price and discounting
Improves customer acquisition Pressures margins
Can help lead to incremental sales Shifts discount sales to before holidays
Easier holiday fulfilment Highly competitive
Offers market penetration opportunity Can cause stock and inventory issues

How has Black Friday benefited retail stocks?

There is evidence that Black Friday has benefited the retail sector. Data from shopping-behaviour tracker ContentSquare found 59% of all customers shopping over Black Friday and Cyber Monday last year were new customers, allowing retailers both big and small to acquire a new base before the crucial December shopping season. Some reports suggest up to half of the new customers small-to-medium enterprises (SMEs) acquire during the event end up becoming repeat or loyal customers. The mass sale event also means the cost of acquiring these new customers can be lowered, particularly because most retailers offer a one-size-fits-all sale and marketing strategy. This also helps to increase footfall into stores or websites where retailers try to sell other items, including full-price ticket items, to increase incremental sales. UK bookseller Waterstones has previously said higher footfall was one of the biggest bonuses of Black Friday as many who entered ended up buying multiple items, including those outside of the sale event.

For certain sectors that often face challenges in fulfilling huge spikes in orders before the Christmas holiday season, such as flooring, furniture or kitchen companies, the Black Friday sale season provides an opportunity to get a head start on the busy December period to make it easier to fulfil holiday orders.

How has Black Friday hampered retail stocks?

The two biggest potential downfalls of the Black Friday sales event come down to length and price. The longer sales events now run for weeks before and after the main event in late November, virtually forcing retailers to offer discounts throughout the entirety of December before having to dive straight into the post-Christmas clearance and January sales. Beforehand, shoppers paid full price for the gifts they purchased in the run-up to Christmas but now they can bag a bargain both before and after the festivities.

Traditional brick-and-mortar retailers have already struggled to keep in the black as they lose business to online rivals and face higher costs to maintain their expensive network of stores and some argue Black Friday has done nothing more than simply shifted sales away from post-Christmas trade while also stealing sales from the Summer season. A November 2018 survey of 2000 UK consumers showed 56% of shoppers have delayed a purchase so they can buy it cheaper over the Black Friday weekend.

The sole focus on price is only being exacerbated by rising competition. PricewaterhouseCoopers estimated over 75% of UK retailers took part in Black Friday 2017 with expectations for that to grow this year. One major change that will be seen in 2018 will be the rise of social media platforms aiming to move into ecommerce, led by Facebook-owned Instagram which has introduced features that allow users to buy products they see on posts and videos as it looks to monetise its services outside of its main platform.

Another criticism of Black Friday is the impact it has on inventory and digital infrastructure. Small retailers have a hard time ensuring they strike the right balance between having enough stock to meet surging demand without being lumbered with too much inventory. Plus, the surge online has often caused more traffic than websites can handle, causing them to crash. This problem has often fell on the high street retailers that have struggled to transition online, with firms such as Debenhams and GAME seeing their websites suffer a complete shutdown in 2017. The same is true in the US, with companies like Macy’s seeing their website speed slowdown significantly under the burden of demand last year.

Read more: Macy’s beats expectations in Q3 earnings

Any downtime, however short, means lost business for retailers as customers have little patience before going elsewhere to buy products when a website shuts down. The debate surrounding Black Friday and Cyber Monday in this context centres on whether these events are pushing consumers toward online shopping at a rate than retailers are not ready for and that the whole concept sees the industry creating demand that it can’t actually meet. Either way, online shopping has gained irreversible momentum and companies must improve their digital operations to ensure 100% uptime all-year round. Mobile will be the most important platform to focus on as more shoppers are shunning laptops and PCs in favour of smartphones and tablets. Last year, the US, Canada, UK and other countries across Europe holding Black Friday sales saw more online shopping shift away from PCs and toward mobile – Germany became the first country to see mobile shopping breach the 50% threshold last year:

The rise of cloud computing, particularly the ‘hybrid cloud’, is expected to be a key tool in helping retailers deal with spikes in traffic and demand online. You can read more about cloud computing in this article about IBM’s acquisition of Red Hat.

What retail stocks to trade ahead of Black Friday 2018

Both Black Friday and Cyber Monday are expected to see more retailers taking part in the US and the UK this year, helping attract more customers. A variety of forecasts suggest the US weekend running from Thanksgiving to Cyber Monday will see overall sales rise anywhere between 14% to 22% in 2018. In the UK, where retailers have had a torrid 12 months that has seen more departures from the high street, the weekend event is expected to account for 10.5% of all fourth-quarter (Q4) retail revenues in 2018, possibly offering the ailing sector a chance to resurrect their fortunes before the year is out.

Below, we have a look at what sectors are expected to perform well this Black Friday and which UK and US stocks are worth watching ahead of the weekend.

What retail sectors will perform well on Black Friday 2018?

Televisions and electrical equipment have been among the most sought-after products in recent years but forecasts from GlobalData suggests this area will not be driving force of the weekend this year in the UK. Still, companies like Dixons Carphone have been among the strongest advocates for Black Friday claiming it allows them to gain market share. Instead, fashion and beauty is expected to see the most year-on-year growth this Black Friday weekend (up 3.8%), with consumers looking to buy premium products at lower prices as they start ticking items off their Christmas shopping lists. The online players like ASOS and Boohoo are anticipated to grow sales at a faster rate than their high street counterparts such as Marks & Spencer, which shuns the event in favour of a more evenly spread set of sales throughout the last quarter of the year.

The UK home category is forecast to have a tough time, with any notable growth set to be felt in the homewares segment that has 'been more resilient in 2018 than other home categories', says GlobalData. These estimates suggest companies like Dunelm Group and Laura Ashley could deliver mixed performances this year while others like Carpetright and United Carpets may underperform. Kingfisher-owned DIY chain B&Q is another brand that refuses to take part in Black Friday.

Another group to keep an eye on is value retailers like B&M, which some expect to do well amid a cautious climate among UK consumers with Brexit to follow just 130 days after this year’s Black Friday event. This is also expected to be true in the US, where off-price retailers like Ross and TJX Cos are both set for a strong weekend.

With many looking to lower the cost of their Christmas gift-giving the jewellery sector tends to see strong weekend sales. Although firms like Etsy take part, others like Tiffany do not.

In the US, a study conducted by CNBC in November suggests the consumer discretionary sector of the S&P 500 has delivered an average return of 1% in the week of Thanksgiving since 1990, outperforming the 0.56% delivered by the S&P 500 as a whole. Big names that typically perform well include Best Buy, Dollar Tree, Nordstrom and Michael Kors.

Retailers need to change their approach and make it work for them

Although more retailers continue to join the Black Friday sale season, there is a growing number of big names that are shunning it to chase more profitable sales.

The biggest problem with Black Friday is the focus on price which, at a time when retailers are already burdened, has erased all other elements that consumers used to consider: like the quality of the product or the experience they are being offered. Although retailers are taking elements like fulfilment and customer service into account the bottom-line reason most people shop on Black Friday is to bag a bargain. However, there is also evidence that the deals offered on Black Friday is a mirage, with consumer body Which? reporting that a whopping 87% of all products sold in the UK event last year could in fact be bought cheaper at other times during the year. If it’s not retailers being forced to cut prices to the bone, then it appears it is consumers being duped into spending on dud deals.

Black Friday and other sales events will continue to be promoted by the biggest players such as Amazon to ensure the day has a firm place in our calendars going forward, even if it means forcing other retailers to discount themselves to death. If retailers do attempt to transform the way they approach Black Friday then it will not be easy: moving away from price does not require structural changes but to change the mentality of consumers who have been trained over the years to hone in on prices and concentrate on nothing but the top-line ‘saving’ on offer.

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