Retailers searching for profits during the holidays are increasingly seeing red.
Stores have traditionally counted on the stretch between Thanksgiving and Christmas for a big chunk of their annual profits. That's why the day after Thanksgiving is dubbed Black Friday, when retailers return to the "black" (making profits) from "red" (losing money).
But with the glaring lights of the Internet, endless promotions, and perks like free shipping and price matching, the holiday season isn't the Big Kahuna it used to be. The period accounts for just 20 to 40 percent of annual sales, down from two-thirds a decade ago, according to the National Retail Federation.
"It's gotten a lot tougher to grow profits," said David Strasser, a retail analyst with Janney Montgomery Scott. "November in particular has gotten much more promotional."
Over the years, the economics of the period have forced big box retailers such as Best Buy Co. Inc. and Target Corp. to get creative with their strategies. For Best Buy, the way to pump profits is to grow its sales by extending store hours, stocking plenty of goods and selling higher-margin accessories and services that complement the computer or TV.
"At this time of year it's not just about the deal, it's about whether the product is in stock and many of this season's hottest items are still available at Best Buy stores across the country," said Best Buy spokeswoman Amy von Walter.
Meanwhile, Target keeps inventories lean to avoid cutting prices. The company also uses its clout with suppliers to secure favorable financial terms for holiday goods. Its new digital savings tool Cartwheel is generating extra visits from customers, who tend to buy more merchandise per trip.
The brutal price wars are even forcing retailers to better hunt for sales and profits throughout the year, like the back-to-school season and Halloween.
A balancing act
"Retailers need to rebalance a little, to not depend as much on the Christmas holiday for sales," said Amy Koo, an analyst with Kantar Retail consulting firm in Boston. "They can make up the margin they lost during the holiday season by looking for opportunities throughout the rest of the year."
Retailers still make plenty of money in November and December, but they have to be more innovative to attract customers. It used to be that stores could raise prices on merchandise before the holiday season and then cut prices to give shoppers the perception of a good deal. But those tactics aren't as effective. With the Internet and the proliferation of mobile devices, consumers can instantly compare prices and deals. Retailers are also more aggressive with deals. Wal-Mart, for instance, announced Black Friday deals a good week early this year, a tactic soon matched by Best Buy.
Gamers help retailers
Luckily for Best Buy and Target, Microsoft and Sony released their first new video game consoles in seven years. Though the retailers will not earn much margin on the hardware, sales of related accessories such as headsets, speakers, and controllers will more than offset the profit hit. Best Buy in particular has milked the rollouts for all they are worth, holding midnight launch events and Madden tournaments across the country that have drawn hundreds of gamers to each store.
But those must-have items that sell at full price have becoming increasingly rare.
"The consumer must decide that it's a product they're willing to pay a price for," said Gerald Storch, a retail consultant who previously served as CEO of Toys R Us and vice chairman at Target. "Otherwise in today's economy, most consumers expect a deal."
Avoiding price wars
Target has historically avoided the price wars that are typical of Christmas. The company instead excels at creating excitement in other parts the year. For example, Target debuted exclusive fashion collections from Jason Wu and Prabal Gurang in February, typically one of the slowest months on the retailer calendar.
"Target is proud of our long history of offering our guests unbeatable value, while also delivering profitable sales and strong margins throughout the year and during the holiday season," said spokeswoman Katie Boylan.
"This performance is the result of many factors, including understanding what items will be topping our guests' lists, partnering closely with our vendors and building a relevant promotional calendar that offers the right products at the right times at great prices."
The retailer has also zeroed in on the back-to-school period, specifically targeting college students. For retailers, the shopping season is the second-most important time of the year behind Christmas and is far less promotional. College students alone account for over $45 billion in sales.
Target added 200 products to the seasonal back-to-school sections in more than half of its U.S. stores, including items designed to appeal to college students. To get an early jump on the season, Target launched Bullseye University last July, which live-streamed several YouTube personalities plugging Target products in makeshift dorm rooms.
But analysts widely agreed that retailers still need to compete for holiday sales and that means discounts and promotions. However, the companies are increasingly using technology to create smarter approaches to capturing market share this time of year, said Laura Kennedy, an analyst with Kantar.
One such technique is called "personalized pricing." Retailers can tap their vast customer databases to specifically target groups of customers with strategic deals rather than offer mass discounts to everybody, Kennedy said.