Christmas, an annual festival where people celebrate the birth of Jesus Christ and the joys of a family reunion. To commemorate this special occasion, tons of money will be spent for gift shopping, food, travel expenses and much more by individuals and households. Firms and businesses will increase their investment in Christmas marketing to gain a large amount of profit from this festive season, anticipating the economy to go well. However, does Christmas shopping boost the economy as well as we expect?
The Deadweight loss of gift-giving
According to Joel Waldfogel, a professor at Yale University back in 1993, he disagreed that Christmas is efficient for the economy due to the deadweight loss from the gift-giving practice. He quoted that, “between a tenth and a third of the value of holiday gifts are destroyed by gift-giving” and predicted that in 1992, (Waldfogel, 1993) the deadweight loss of holiday gift-giving was $4 billion to $13 billion. Due to Christmas, many people spend a huge amount of money and time brainstorming on buying gifts for their friends and family. However, buyers tend to assume the perfect gift through their perspective instead of putting themselves into the shoes of the recipient. As the person receives the gift that he or she does not prefer that much, they will value the gift less compared to the purchasing price of it. A survey was done by Mr. Waldfogel back in 1993. Family and friends had paid an amount of $438 on the recipients’ total gifts. However, the 86 recipients that were involved in this survey stated that they were willing to pay only $313 on average for the same gifts which shows an inefficient gift-giving .For example, parents purchase kids with socks to keep them warm during the winter holiday but the kids rather receive toys as presents. This will generate more quantity of socks produced compared to what the society actually wants.
Thus, this caused a deadweight loss to the economy.
Chart 1: The graph of Deadweight Loss of Christmas
(Source: Google Image)
Deadweight loss is defined as a cost to society created by market inefficiency and it can be applied to any deficiency caused by an inefficient allocation of resources. In this scenario, a present worth $40 will be efficient if it is similar to what the receiver would want for a present that he or she is willing to pay that price in cash. The difference between the worth and satisfaction between the cash and gift will only cause a deadweight loss if the gift is inefficient.
Normally, unwanted gifts will always end up returned, sold, or re-gifted. The dissatisfaction of consumers on the gift will cause an oversupply in the market and ends up having a deadweight loss. In a 2016 European online survey, 15% of people were unsatisfied about their gifts and 10% of them had forgotten what they had received. A 25% of them re-gifted their presents to someone else, 14% sold it, 10% returned the gifts to the store and 5% returned it to the giver. Usually, seniors send their unwanted presents to charity, while youngsters just simply get rid of them.
Based on Joel Waldfogel’s theory, gift-giving does not really help out much to the economy despite the spirit of gift-giving during this holiday season. Instead of gifts, cash and gift cards are a better substitute for it. Though it might not be the best gift, it does increase the value and utility of the person having the gift he or she truly enjoys, leading to a decline of deadweight loss in the economy.
The difference between Christmas and other times of the year economically
The term Christmas Creep was originally from the mid-1980s and it started to get more concern in the year 2008 after the recession in America. It is a merchandising phenomenon where retailers are desperate to advertise their Christmas related products or sales by having early Christmas shopping seasons such as having Black Friday sales to take advantage of Christmas related shopping. This term was not used in the United Kingdom and Ireland, but instead it was known as the “golden quarter” as in the last 3 months of the year, the retail industry was booming and businesses were making significant profit. Not only does the “holiday creep” expand the selling interval for retailers to maximise their profit, but it also gives consumers a fresh start for the holidays.
United States of America (USA): Black Friday
In recent years, Black Friday, the Friday after Thanksgiving which is also known as the start of the Christmas shopping season, is being implemented early by many retailers to boost up their sales like giving promotional deals. Despite Black Friday not being a holiday, it is considered “The Day After Thanksgiving” in California and some other states in the United States, making it an official day off for state government servants, non-retail workers and school. Therefore, it increases the number of potential shoppers for early Christmas shopping.
Chart 2: Sales between Black Friday and Christmas
(Source : BRC- KPMG Retail Sales Monitor)
The Christmas Market
Christmas Market usually starts a month before Christmas. It is said to date back to the late Middle ages in some parts of Germany, France and Switzerland between late 1290s and early 1300s. In recent years, the Christmas Market is quite popular in many European countries. However for this year, the cancellation of the Christmas market in some places due to the lockdown in light of the new variant of the Covid-19 virus had impacted many of the local or small-sized businesses which are struggling to stay afloat and are forced to shut down due to this pandemic.
Despite having pre-Christmas shopping holidays like Black Friday, at least 40% of consumers still choose to shop right before Christmas specifically from the 21st of December to the 24Th of December, according to the report of NRF’s Annual December Holiday Consumer Survey. This could be due to consumer behavior — the simple fact that people are quite laid back and tend to end up buying gifts in the very last minute.
The Retails Sector
As mentioned previously, gift-giving is still a Christmas activity that people still love doing despite the economic deadweight loss. Based on the growth of retail sales in the US during Christmas from the year 2000 to 2020, there is a rise of retail sales during Christmas after the recession in 2008. Since then, there has been fluctuation among the later years and there is a slight decrease in 2020 due to the covid-19 pandemic.
Chart 3: Year-over-year growth of Christmas holiday retail sales in the United States from 2000 to 2020
(Source: National Retail Federation ; US Census Bureau)
Retailers’ Christmas Survey 2020: Australia
Due to the Covid-19 pandemic, the Australian government has implemented lockdown rules since July for the second wave. As a result, Australia is one of the countries that has the lowest cases of the virus. This has prompted the nation to step out of their bubble and shop for the holiday season. Based on the survey, 39% of retailers expect a 5% boost during the Christmas sales while 24% of them state that there will be a decline of more than 5% in revenue as consumers are choosing to shop online.
Chart 4: Survey on the changes of revenue by retailers
(Source: Deloitte Retailers’ Christmas Survey 2020)
The polarization of the market occurred as many travel agents had shut down due to the pandemic and that caused an inconvenience in the trade between local retailers and consumers that spend most of their time in the outskirts. According to the data, it will be a challenge for retailers to figure out new tactics and ways to serve the customers such as the usage of QR codes and pick up stations to comply with the social distancing measures during this period to gain some revenue from existing customers. As a matter of fact, sales of houseware, electronics and hardware did increase as consumers spent their money mostly on their homes, in their homes. Throughout the whole year, Australian retailers heavily relied on shoppers coming out of their homes to shop in store.
Besides, E-commerce such as Amazon, Argos, Shopify etc. have been really useful over the years. 50% of the retailers are quite confident with their delivery capabilities and many of them are ploughing money into technologies that are able to track and trace, perform dynamic routing and carry out automated deliveries. This investment provides an effortless experience to consumers and 32% of them stated that these digital processes have helped them boost their sales as their delivery capabilities are the essence of E-commerce during Christmas and any other time of the year.
The Margin expectation is a little different from the sales polarization. The majority of retailers expect a margin drop of more than 2% in 2020, but it remained almost the same as the previous year. Though stock availability was highlighted as an issue, the margin may still remain even if sales are not going well.
Chart 5: Survey on Margin expectations by retailers
(Source: Deloitte Retailers’ Christmas Survey 2020)
In conclusion, this survey has presented the impact of the pandemic on Australian retailers. Retailers have been receiving mixed economic signals over the past few months from rising unemployment rates, consumer behavior and other factors. However, they are still hoping that the holiday season will bring some improvement to the economy and with the right strategies, there will hopefully be a positive start for 2021 for retailers in Australia.
Impact of BREXIT on Christmas
The term BREXIT has been a hot topic over the past couple of years as the nation of the United Kingdom is concerned as to what kind of changes will be implemented from its occurrence. The effect of BREXIT has impacted any different aspects, especially the Economy in the UK. Christmas is no exception, as there will be some changes that come along with it.
As stated earlier, the Christmas market is one of the main events before the festive holiday. The stallholders are usually from the EU and many of them have to stay during this period in the UK. The arrival of BREXIT has caused many difficulties to them such as the two-year exit negotiations, paperwork and costs. Also, due to the previous 31 October BREXIT deadline, a lot of traders had brought in their products earlier into the UK and were compelled to pay an expensive storage fee as reported by BBC News on the 29th of October 2020. With such hassle, it has caused many European sellers to quit trading in the UK. However, this will help to create more job opportunities for British businesses and hence decrease the unemployment rate in the UK.
No-deal BREXIT leads to 0.2% of drop in Christmas Spending
According to recent research, there will be a 0.8% rise this year in Christmas spending due to the uncertainty of BREXIT. However, a no-deal BREXIT will cause a 0.2% drop in it. Based on the research of Voucher Codes and the Centre of Retail Research (CRR), Christmas spending was predicted to increase from 79.72 billion GBP in 2018 to 80.27 billion GBP in 2019. However, the increase of 0.8% is against the spike of 1.2% from last Christmas which economists believe was due to the impact from BREXIT which caused lower consumer confidence. This can be explained by the fear of the economic impact caused by BREXIT instead of sudden changes in price or shortages in supply. BREXIT has made an effect of muting the excitement of shoppers to shop for Christmas which is supposed to be a busy shopping period. Despite even the no-deal BREXIT scenario, retailers do still hope for a mild increase in sales but not for businesses as they might have to expect a delay if they are to cash in on this festive period as much as they can.
This article has touched on a few topics about the economy during Christmas from the three main agents: individuals and households (efficiency of gift-giving), firms (retail sector) and the government (impact of BREXIT). Each of these show a different perspective of the economics of Christmas and provide some economic insights to consumers and traders in coping with the economic inefficiency in the market. This year, the pandemic has caused many businesses to go bankrupt and consumption on non-essential goods to decline, causing an economic downturn globally. Hopefully with the right strategies and economic knowledge, the Christmas season will be able to bring a more positive impact to the economic world.
Researcher: Yeoh Yi Ying (Janice)
Reviewer: Millen Lau
Editors: Hui Zhen Tay, Stella Teoh
Download the article here: The-Economics-of-Christmas-1.pdf