Notes on Holiday Retail Spending- Indiana
November 15, 2005
Richard Feinberg - Purdue Retail Institute

The numbers below and analysis represent the best estimates using data from the National Retail Federation, International Council of Shopping Centers and the Purdue Retail Institute.


The retail holiday sales season still is extremely important to retailers. It can account for up to 40% of annual sales but more importantly up to 75% of all profit. All signs point to a weak holiday season for retailers. While 10 years ago double-digit sales increases (over any previous year) were considered normal and expected, now anything over 5% is quite healthy. Last year (2004) was a particularly strong holiday season with sales averaging an 8% increase. This year we expect an average of 2%-4% retail sales increase. This is even weaker because of the significant increase in retail availability – more stores, more retail space and increase in channels available to spend (TV and Internet). So although overall a 2%-4% increase sounds reasonable, the ability of any one store or one chain to achieve the average has a lower probability. About $460 billion is spent by consumers during the holiday season.

Why should we care?

The holiday retail season is thought to influence broader economic cycles. A strong holiday season potentially strengthens and heightens economic performance in the next year. On the other hand, a weak holiday season can negatively impact the economic cycle of the next year. So nationally the holiday season is important economically.

For a retailer a weak holiday season can lead to poorer performance the next year. Retailers need cash to buy the merchandise that will stock the shelves for the next year. Poor cash positions means that a retailer must borrow more money, and that means less merchandise since the more one borrows the more it costs and/or profit margins are lowed because costs are higher. No new merchandise means lower sales … lower sales mean less merchandise ... means lower sales and so on. Lower sales means less hiring … less expansion. So poor holiday sales have a rippling effect towards a downward spiral. Good sales give the upcoming year's economy a boost.

Internet holiday spending

Internet sales are expected to be $26 billion, up from 21 billion last year (22% increase). While a 22% increase is notable, Internet sales still accounts for only 10% of holiday sales. If a store retailer does not have a strong Internet presence, we estimate this can mean 2%-5% less (or more if the retailer has a strong Internet presence) sales for store retailers. This is why it is important for retailers to have Internet and store channels (this is called multichannel retailing). Store-based retailers cannot afford to allow Internet sales to go to someone else. In addition, research at the Purdue Retail Institute shows that more than 50% of consumers are likely to do research and look for products on the website of a store and then go into the store to look and purchase.

Most Internet shopping (Purdue Retail Institute estimates 60%) takes place in the office. The increase in Internet shopping over the holidays may have a negative effect on office productivity. Most Internet shopping occurs during lunch hours (check your time zone) at an office. For Internet retailers, free shipping is the most effective inducement for holiday spending on the Internet.

Finally, the Internet holiday sales season is not the same as the store sales season. For stores, the season traditionally starts the day after Thanksgiving and ends the week after Christmas. For Internet retailers the holiday starts the day after Thanksgiving but only extends until the week prior to Christmas since consumers are concerned about getting things in time. Stores depend on the week following Christmas for up to 17 % of their holiday sales. Internet retailing drops off the map following Christmas, and so Internet retailers must get to their consumers much sooner.

Store holiday sales

The Friday after Thanksgiving (called black Friday because historically this was the day that retailers began to make profits — going from being in the red to being in the black - for the year) is believed by many to be the busiest day of the shopping year. This is a myth. The busiest shopping day of the year is usually the Saturday before Christmas, but this year the Saturday before (Dec. 24) is the day before Christmas. So this probably will not be the busiest shopping day this year. The busiest shopping day will either be the Friday before Christmas – Dec. 23 or the Saturday the week before Dec. 17.

Black Friday Nov. 25 the day after Thanksgiving will be one of the top 10 shopping days of the year …still not bad if you are a retailer. The Thanksgiving weekend will be almost 10% of all holiday spending.

Because Christmas falls on a Sunday and the weak expected holiday retail season, consumers can expect a whole range of very big sales and promotions for the six days prior to Christmas.
Fifty percent of all holiday shopping will occur between Dec. 11-25. The period of most holiday shopping is the week of Dec. 11-17 (24%). Consumers still wait until the last week to shop - 20% of all spending will be in the last week.

The week after Christmas (Dec. 26-31) is expected to account for 13%-17% of holiday sales.

There are two more shopping days from Thanksgiving to Christmas this year compared to last year. This will lead some experts to predict that this year will be a good year. The fact that this year will be a good year for retailers really has nothing to do with the number of shopping days. Research at the Purdue Retail Institute has found no relationship between the number of days in the holiday selling season and total retail sales.

This year's profit outlook is actually better than its sales outlook because labor costs are under control and fewer new stores will eat into cash and increasing costs. Given low inflation, even moderate increases in sales will lead to bigger profits than in previous years.

The big energy cost unknown

The issue is not gasoline prices, which consumers seem to have adjusted to. Indeed, if anything the precipitous decline in gasoline prices over the past two weeks may increase consumer's confidence and help holiday sales.

The big unknown is home heating. It is expected that households will pay 50%-75% more this year than last - about $350-$500 more per month. If the season is colder than normal, retailers in colder locations may face a quickly decreasing and scary holiday sales season. Retailers should be praying that the first big heating bill comes after the new year (the bill for heating in December comes in January). If it is colder and consumers face the shock of a heating bill $300+ more than last year, retailers may face an even harsher cold spell than just the temperature. The good news is that if this happens retailers will mark down the prices to levels even we cannot imagine.

Beware holiday predictions of shopping based on checks and credit card or mall shopping:

1. Check use has declined significantly in the past two years. Thus, check shopping will significantly underestimate shopping behavior.
2. Debit card use has significantly increased and is not tracked by the malls or credit card companies.
3. Mall traffic does not equal sales. A busy day at the mall on Friday following Thanksgiving may be people walking around and entertainment not shopping. Less than 50% of all holiday shopping is in the mall this year, so estimates based on mall sales could be misleading.

Gift cards

Gift cards will have a significant impact on the holiday selling season for the first time. About 5%-15% of all holiday sales for a store chain (up to $25 Billion for the season) will be shifted to gift cards this year (some guess that gift cards account for $50 billion). Seventy-five percent of all gift givers say that they will give at least one gift card as a gift ($35-$50 average per card).

The issue for retail sales surrounding gift cards is that a very small percentage of them are redeemed during the traditional holiday selling season (Thanksgiving to Christmas). Since retailers cannot claim the sales of cards as sales made (until they are redeemed), retailers who have a large number of gift card sales have to wait until after New Year 's to reap the benefit of these sales. So as gift cards increase in popularity, retailers will be benefiting in their first quarter of the new year rather than the holiday season. So some of the expected good holiday retail sales season is actually part of a better first quarter and not the holiday quarter (usually the fourth quarter for retailers).

The nice thing about gift cards is that is you give a $50 gift card on Christmas it is actually worth $100 in the week following as stores lower their prices and have sales.

One of the key things to know about gift cards is that some have expiration dates. Most retailers give consumers 12 months to use the cards. If cards are not used (or money remaining on a card) the money is generally given to the states as abandoned property. A few retailers give the money back to the consumer (it depends on the sate laws). At the Purdue Retail Institute, we estimate that 10%-15% of all gift cards are never redeemed.

Hot items- Just guesses based on trends

Anything Velvet, Xbox 360, Sony Portable Playstation PSP, iPod NANO,

Holiday fun facts

According to the International Council of Shopping Centers…
- Not all malls have Christmas decorations - 89% do.
- Average number of Santas employed in malls- 1
- Only 4% of malls have Kwanza decorations
- Only 11% of malls have Hanukkah decorations
- The average mall Santa sees more than 80 kids per day
- And over the season a mall averages 4,000 pictures with Santa
- Jingle bells is the most frequently played song at the mall
- 62% of malls offer pet photos with Santa