Cyber Monday Saves the Shopping Season

There are reasons to be optimistic about U.S. retail after looking at the Black Friday weekend in total. One measure of online sales on Cyber Monday, weighted toward larger retailers, estimated a 17 percent increase from 2016. Cyber Monday was the standout day in e-commerce this year, unlike a few recent years when more orders went in on Thanksgiving. The extended shopping weekend came earlier on this year’s calendar than in most years and that may have allowed more shoppers to wait until Cyber Monday to place orders.

If a quiet Black Friday was bad news for retail, a quiet Cyber Monday is always good news. This year I did not see any reports of major web store or transaction processing outages on Cyber Monday, something that happened every Cyber Monday as the crush of shoppers pushed the Internet to its limits until that streak was broken in 2016.

Online sales are still a small fraction of retail, so a large increase in e-commerce doesn’t mean retail totals will be up from last year. Retailers are saying we can expect fewer deep discounts, so it won’t be surprising if totals are down slightly from last year, but that would still make this year more profitable at retail than the last two.

Guns were a big part of the shopping weekend. U.S. gun sales are said to have been the highest ever, and by a wide margin, as shoppers bought millions of firearms as Christmas gifts. While that was good news for gun sellers, two incidents of gun violence at malls on Sunday afternoon cast a shadow over the weekend. Injuries were few, but it is easy to underestimate the impact of an active-shooter mall evacuation. More than 10,000 people were directly affected, whether by running for cover, being locked in a store while police secured the building, or having their shopping trip interrupted or canceled by the evacuation and closure. A much larger number, in the millions, were affected by traffic turbulence, hearsay, and news reports. In an era when retailers are already trying to persuade shoppers that it is safe to go shopping, the two gun incidents, coming on the heels of a series of more serious injuries caused by Black Friday fights, provide a significant setback.

Since the weekend, I have seen the usual seasonal increase in lunch-hour traffic at local retail as shoppers look for quick purchases to finish out their Christmas shopping. Cyber Monday might be seen as the finale of the shopping season, but historically, we can expect a two-week lull in stores, followed by a gradual increase in after-work and weekend shopping. There is a risk of a federal government shutdown early in December, though, and if that comes to pass, all bets are off.

Scenes From a Muted Black Friday

I am not seeing anything in my local area, a sprawling suburban area in Pennsylvania, that suggests that the 15-year trend toward earlier, smaller, and quieter Christmas shopping is slowing down. I was out all morning yesterday. Traffic was muted. Some stores were busy, but shoppers were not spending heavily and I never saw a checkout line longer than two shoppers. Other stores were quieter than a normal Saturday. In one shopping center parking lot, the only store that had drawn a lot of cars was a small mid-market department store. In another, the supermarket, warehouse club, and pet store were busy, but there was not much going on at the other 30 stores.

The busiest store I went into was Barnes & Noble. It was crowded enough to make for uncomfortable shopping, but the number of customers checking out was not enough to keep the cashiers busy. I was there to visit the record department, and that continues to be a hit-or-miss proposition. I found the the new Yes album on its release day, and this year’s Styx and Alice Cooper albums, out of stock on an earlier visit, were back in stock — but all three titles were stocked in single copies only, which means that anyone who went to look for them for the rest of the weekend was out of luck. Barnes & Noble’s survival is an annual question, but the store traffic I saw seemed to say that it can expect an above-average season, probably strong enough to keep it going another year. Bookstores in general may benefit from the slow trend toward smaller and less expensive Christmas gifts.

I only drove past Toys ‘R’ Us without a proper chance to view its parking lot, but that retailer is probably the biggest worry at U.S. retail this holiday season. It had been counting on an above-average season to give it a chance to survive bankruptcy, but reports on the early part of the Christmas shopping season suggested that toy sales in general, including Toys ‘R’ Us, were down about 10 percent from last year. The saving grace may be found in reports that online orders at Toys ‘R’ Us were up substantially, which I think means a 10 to 15 percent increase from a year ago. The late online orders can still arrive Monday and through next week, and that could make or break the season. It seems plausible, then, that even if Toys ‘R’ Us has to close all of its stores, it could emerge from bankruptcy on the basis of its web store and a limited number of seasonal pop-up stores.

Published accounts of retailer sentiment say that the lower sales volume is not as bad as it sounds. Retailers say they have been careful not to overstock, which means that much of what they sell will be at regular price or slight discounts. We may not see the storewide deep discounts that sometimes arrive around December 10, and sometimes on December 26. Deep discounts may be a way for a retailer to salvage a weak season, but there is no profit in it. Any retailer would rather have a quiet season in which it makes a profit on every item it sells.

Seasonal hiring has also been lower than usual, with Walmart and others saying they would not hire any seasonal workers for their stores. In my shopping I have seen more than a few seasonal workers being trained, which leads me to think stores are hiring extra workers just for one or two weeks.

I came home with a few good finds myself, which included exercise gear and small kitchen appliances. In total I saved around $60 compared to everyday prices, but in economic terms, that’s not necessarily reward enough to get someone to spend half a day shopping. The shopping experience has to be fun, or people will find reasons to avoid it. The news of multiple incidents of in-store violence, despite the smallest crowds in two decades, may persuade the average shopper that the Don’t Buy Anything movement is on to something and the best Black Friday strategy is the one that involves staying home.

Hesitation on the Keystone XL Pipeline

The Keystone XL Pipeline obtained its last state approval with a route through Nebraska, but the pipeline owner’s reaction is puzzling, sounding more like a party that has lost a ruling than one that has earned the permit it was seeking. The company says it will have to study its options after the approved pipeline route through the state is partly different from the route it had been planning for. The implication is that the approved route might be too expensive to build, even though it is geologically preferable to the previously proposed route, about the same length, and less expensive in real estate terms.

There have been whispers over the last three years that the Keystone XL Pipeline is a doomed project. Analysts say it can’t operate at a profit unless world oil prices are around $80 or $90. That price level for oil seemed a sure thing when the pipeline was drawn up but now seems exceedingly unlikely. 

Contracts probably don’t allow the project to be canceled, so one possible scenario is that the pipeline is completed and operates for a few months or a year until the money runs out. In that scenario the pipeline loans will never be paid back. If you’re leading a doomed project and you don’t have the authority to cancel, one approach you can take is to slow everything down in the hope that circumstances change. Now that approvals are in, it looks like that may be the guiding dynamic for the Keystone XL Pipeline.

Is the Video Game Business Stretched Too Far?

The most unpopular post in the history of Reddit was the one from EA explaining the pricing for Star Wars Battlefront II. It’s a game that isn’t really there when you first install it, consumers complain. You have to go through an initial phase, think of it as a quest, to add the two main characters before the real game can begin. It’s a quest that early players estimated yesterday would take a highly skilled player about 80 hours. That’s 80 hours of grueling and ultimately meaningless play just to get the game started. Would you wait in line 80 hours to see a Star Wars movie? Probably only a hundred Star Wars fanatics would be that dedicated. The rest of us would give up long before the 80 hours were up.

In response to complaints, EA now says it is reducing the level of effort required to start the game. If we can take them at their word, that still means you start the game with 20 hours of meaningless initial play before the real game starts. Even a 20-hour quest to start a game is sure to feel like a punishment or purgatory to most buyers. If you had to wait in line for 20 hours to see a Star Wars movie, would you say it was “just” 20 hours? EA’s pricing adjustment is probably enough to sidestep the consumer fraud litigation that could have followed, but it may not be nearly enough to save the product.

As an alternative to investing 20 hours to create the two essential characters to get the game started, you can buy the two characters, but that would mean paying twice for the same product. That doesn’t feel good either. When you buy a game, you want to play the game. You don’t want someone telling you, “Well, no, you have to pay extra if you want to actually play.”

How did the video game world come to this? The fundamental problem is that games cost too much to make, while at the same time, high prices have driven most of the potential customers away. Game designers face essentially the same conundrum that TV producers have to deal with. Do you make a large investment and deliver a highly impressive product that may draw in the general public, or do you play small, keep expenses down, and content yourself with selling the product to followers of the genre you are working in? Increasingly TV producers and game developers are saying it is hard to make a profit with either approach. The economically correct answer when an entire industry is stretched this way is to stop making so many video games and TV shows, but with the economy being the way it is, the needed adjustment tends not to happen until whole companies actually shut down. In the interim, the tendency is for managers to take greater and greater risks as they try to make ends meet.

The corporate way is to make every product show a profit and I expect that Star Wars Battlefront II will do so too, but at a steep cost to EA’s credibility. Enough players will pay the high purchase price that the sales pay for the cost to produce the game. Most buyers will be disappointed and some of them will then be more hesitant to buy future game releases from EA. Some, inevitably, will be frustrated enough that they give up video games entirely. The loss of credibility and audience makes EA’s challenge that much harder the next time around.

What one would hope is that a company’s managers would say, “We have to stop making this kind of product. The costs are too high, the rewards, too low.” Today, as it scrambles to get its new game out the door, EA is not giving the impression of a well-managed company, so for all we know, it may already be too late. For consumers, though, it’s not too late to avoid the problems of Star Wars Battlefront II. The game in its packaged form might look like a nice holiday gift item, but if you’re aware of the unique hassle and frustration such a gift would mean to the recipient, you can choose to pass over this product and give something else instead.

Counting the Toys at Toys ‘R’ Us

Two months into the Toys ‘R’ Us bankruptcy, it is too soon to say whether the toy retail chain will have a strong enough Christmas season to emerge from bankruptcy relatively intact. Large numbers of toys still could be sold over the next five weeks. Early indications, though, are that toy sales are trending down this year.

There are multiple reasons for a decline in toy revenue, and it is hard to say what their relative importance is. In October manufacturers saw revenue slow from inventory consolidation that resulted from the Toys ‘R’ Us bankruptcy, and that trend could continue through the holiday season as all retailers prepare for a flood of cheap toys in a possible Toys ‘R’ Us liquidation in January or February. The depressing atmosphere of the Toys ‘R’ Us stores is part of the problem, with children and parents alike dreading the thought of being dragged around that dingy old store again. Children are also spending less time with toys as they are drawn more to games, puzzles, books, and touch-screen devices. Toy stores sell games and puzzles but at generally lower prices than toys. Selection may also be an issue with jigsaw puzzles. I’ve been told that toy stores don’t have the best puzzles.

The outlook for toys is so challenging that Hasbro is talking to Mattel again about a possible merger. The timing might not be right for the two companies most closely identified with the bankrupt Toys ‘R’ Us. It is estimated that between half and two thirds of toys sold at Toys ‘R’ Us are from these two manufacturers. I don’t know what fraction of U.S. revenue for Hasbro or Mattel goes through Toys ‘R’ Us but it could not be far below half. A merger would accomplish nothing if the merged company faces the risk of its own bankruptcy in the event of a Toys ‘R’ Us liquidation. Nevertheless the mere fact of merger talks may be an indication of how overextended the toy industry feels after seeing the early returns from this year’s Christmas shopping season.

There is another, more bizarre indication of stress around the toy sector. A new EA video game has a pricing scheme so bizarre that “a developer is apparently getting death threats.” The video game sector has been under pressure almost since the release of the iPhone ten years ago, and that kind of financial stress can lead to pricing schemes that make customers feel insulted and in the worst case, seen now with Star Wars Battlefront II, can lead to open rebellion among previously loyal customers. The stress in video games seems similar to the stress that toys are now facing, even though video games don’t provide much revenue for most toy stores.

When considering the outlook for Toys ‘R’ Us, it is important to remember that its most prominent competitors have already closed. The reduced competition has allowed Toys ‘R’ Us to keep going but has not put it on a path to profitability. So few toy stores remain that Toys ‘R’ Us cannot plan on any future boost from competitors closing.

Toys ‘R’ Us went into bankruptcy without a plan, and it apparently will not be drawing up a plan until Christmas sales are counted. As in the last four years, managers appear to be pinning their hopes on an above-average Christmas season. Everything seems to point to a down year for toys, though. The bigger the decline, the more stores Toys ‘R’ Us will have to close.