Hitting the doorbusters this Black Friday? You're falling for an elaborate con.
Retailers are competing more fiercely than ever for consumer dollars this holiday season, with deep discounts on popular items to get people in the door. Many of those "sales," though, are utterly meaningless: When the sticker price is arbitrary, the actual price can be whatever a store wants.
Over the years, retailers have floated prices upwards before Thanksgiving to create the perception of steep markdowns — while avoiding a big hit to their profits. Consumers, by now unwilling to pay full price for anything, have played right into their hands. When J.C. Penney tried to introduce "honesty" in pricing, shoppers abandoned the store in droves.
Thus far, the deception has gone mostly unnoticed. Today, with the aid of the Internet, it's much easier to track prices, as the Wall Street Journal did for a great story out this morning. Here are the numbers:
The number of deals offered by 31 major department store and apparel retailers increased 63% between 2009 to 2012, and the average discount jumped to 36% from 25%, according to Savings.com, a website that tracks online coupons.
Over the same period, the gross margins of the same retailers — the difference between what they paid for goods and the price at which they sold them — were flat at 27.9%, according to FactSet. The holidays barely made a dent, with margins dipping to 27.8% in the fourth quarter of 2012 from 28% in the third quarter of that year.
A supplier sells the sweater to a retailer for roughly $14.50. The suggested retail price is $50, which gives the retailer a roughly 70% markup. A few sweaters sell at that price, but more sell at the first markdown of $44.99, and the bulk sell at the final discount price of $21.99. That produces an average unit retail price of $28 and gives the store about a 45% gross margin on the product.
In a 2012 presentation, Mr. Johnson, then still Penney's CEO, said the company was selling fewer than one out of every 500 items at full price. Customers were receiving an average discount of 60%, up from 38% a decade earlier. The twist is they weren't saving more. In fact, the average price paid by customers stayed about the same over that period. What changed was the initial price, which increased by 33%.
In an analysis for The Wall Street Journal, price-tracking firm Market Track LLC looked at the online price fluctuations of 1,743 products in November 2012. Prices climbed an average of 8% in the weeks leading up to Thanksgiving for 366, or about a fifth, of the products; the items were then discounted on Black Friday. Toys and tools had the biggest pre-Black Friday price increases—about 23%.
There are limits to this strategy: The Federal Trade Commission has rules about deceptive pricing, which say that a product has to actually be marketed for a certain price before being offered at a "discount." One lady is even suing J.C. Penney over misleading sale signs, and a defeat for the beleaguered retailer might lead to a pullback.
In the meantime, though, you might just want to take a morning on Black Friday to sleep in.