Once again, Black Friday ushers in a weekend of consumption.
A significant portion of the population is thronging malls and big-box stores seeking holiday bargains. Harried checkout clerks are wondering when they will get a break. Equally harried marketing executives are poring over data coming in and wondering how they are doing compared with last year and with their main competitors.
All this frenzied activity validates the insight of Josef Schumpeter, an Austrian-American economist who has been dead for more than 70 years.
Among other things, Schumpeter observed that market economies embody processes of “creative destruction.” By that he meant markets spontaneously generate incentives for change and that very change — newer technologies, methods or organizations — drive existing ones out of existence.
Minnesota has examples of this. In 1886, Richard Sears, a railroad depot agent in Redwood Falls, sold some unclaimed watches and pioneered mail-order retailing. What eventually became an international retail conglomerate also drove many traditional Main Street stores out of business and lowered costs to consumers.
In the 1950s, the Dayton family built Southdale in Edina — the first indoor suburban mall. Their Daytons, a traditional department store chain, eventually created Target, a new model for suburban large-store retailing that eventually ate up Daytons. Elsewhere, Sam Walton was starting his competing chain in Bentonville, Ark.
Kmart, Target and Walmart also eventually ate Sears-Roebuck and Montgomery Wards’ lunch, and more specialized mail- and phone-order companies such as L.L. Bean and Lands End thrived. But even Kmart fell by the wayside — partly a victim of the creative destruction brought on by Amazon and its clones. Target and Walmart were forced to adapt.
Southdale-style malls sprang up all over the nation, but eventually lost some tenants to smaller strip malls, while stand-alone big box stores, including DIY building materials firms like Home Depot and electronics vendor Best Buy, took business from existing lumber yards and from Target and Walmart. Buyers’ clubs like Costco and Walmart spinoff Sam’s Club elbowed their way in.
And now, internet-based retailers like Amazon have gained market share by essentially updating the old Sears mail-order model. COVID has now accelerated change. Chains such as Old Navy and Bed, Bath and Beyond, darlings of the market just a few years ago, have seen their stars fade.
And if you want other examples of the destruction-end of the process, think of E.J. Korvette, the suburban discounter par excellence of the 1950s, once on the cover of Time magazine, or Fingerhut, the Minnesota-based, credit-granting mail-order company that was lauded in Fortune in the 1980s. Both are largely forgotten. Ditto for Ben Franklin, Woolworths and S.S. Kresge.
Retailing is “in a dynamic state,” a Vietnam-era sardonic Army term meaning “no one really knows what the heck is happening.” Margins are tight and market shares fluid. A company can have spectacular results for a few quarters and then fall into the profitability toilet a few months later.
On the whole, consumers benefit greatly from such innovation and intense competition — although life-long careers as an employee of one retailer seem a thing of the past. Moreover, retailing is a wonderful example for econ profs in demonstrating that mere size does not confer great pricing power nor business longevity.
Sears and Wards were large, profitable national companies as were Kresge and its offshoot Kmart. Their big footprints gave them a degree of monopsonistic buying power, the analog to the more-common monopolistic selling power. As Walmart and Amazon now do, these big sellers could source merchandise cheaper than most competitors, and pass the discounts on to consumers.
But that did not save them — new store formats, technologies and services such as credit cards, 800-numbers, United Parcel Service and now the internet and smartphones, continuously wrought change.
Consumers have power. Competition drives retailers to run in packs. The “prisoner’s dilemma” of being forced to act against one’s interest because of fear that a competitor will act in a way that will hurt you even more dominates. Once one retailer touts “Black Friday” discounts, all their competitors have to jump in too. Price cuts have to be more extreme.
Black Friday weekend sales can be huge, but they don’t expand overall household spending for the year or the holiday season. These are just concentrated in shorter, more hectic periods.
Moreover, consumers have learned to game the system. Someone offers big discounts now? Perhaps you should buy. But maybe you should wait a few weeks until sellers get even more desperate? Prices are up this year due to inflation? Discretionary spending money limited? Play chicken with the big guys. You don’t have to be a retailing expert to smell fear and desperation in the air right now.
Continued high prices, still-high transportation costs, rising interest rates, overall economic uncertainty, jumpy stock markets, looming crises in crypto, war in Ukraine, economic challenges from drought and dodgy housing markets to China’s re-communizing government — the sources of risk and uncertainty continue to multiply. Retailers are desperate to sell — price-to-earnings ratios hang in the balance. Consumers want to buy, but don’t face the same penalties if they do not.
The plight of the retail firms is an ironic comfort to households. No household has any power relative to big pharma firms or health care managers or airlines. Nor do they in shopping for electric vehicles. Internet and telephone services are a mixed bag.
Yet unless you are shopping for a new kitchen stove or clothes washer to replace one that died completely, consumer buyers have the option of spending today or holding off for a week or two or three. Regardless of how deep the one-Friday discounts, the odds are that no retailer will be raising prices over the next four weeks. The worst downside possibility is that one won’t get even lower prices by waiting. But we know they won’t go up.
It isn’t often that the general public has this much power. Enjoy it while you can.
St. Paul economist and writer Edward Lotterman can be reached at stpaul@edlotterman.com.
