For many merchants, Thanksgiving Thursday and Black Friday meant more this year than the start of the holiday shopping season. In 2011, Thanksgiving Thursday and Black Friday marked the mass return of U.S. consumers’ return to discretionary spending. Across the board, First Data's SpendTrend macro analysis indicated that consumers were more willing to spend on gifts that are wants rather than gifts that are basic needs. Total retail categories gained 6.3% in year-over-year dollar volume growth on a same-store basis as spending on clothing and accessories, health/personal care and electronic and appliances stores did very well.

Non-retail discretionary merchants also had strong dollar volume growth as consumers connected with family and friends over the holiday period. Frugality finally lost out to family fun as consumers spent more money on holiday travel, leisure, and restaurant visits. All of these discretionary categories posted double-digit increases over Black Friday 2010 when leisure and hotels in particular struggled to regain sales traction with budget-conscious consumers.

There are a number of factors which influenced consumer spending for the two-day period including attractive discounts, extended store hours, good weather and increased credit usage at the point of sale (POS). As a whole, extended store hours and attractive discounts seemed to work in the favor of shoppers. Customers were able to more easily cherry-pick deals throughout the two-day shopping period through the well-publicized promotions, expanded shopping hours, and always-on availability of e-commerce. Near-perfect weather conditions across the U.S. contributed to the success of brick and mortar stores as holiday shopping's mass appeal was not slowed by snow drifts or freezing temperatures. However, good weather did not negatively impact e-commerce sales either, as merchants in this category also achieved strong sales dollar volume growth.

One of the factors that supported the growth of discretionary spending is credit usage at the POS. First Data Advisors first noted the pattern of a return to credit occurring in February 2011, when the dollar volume year-over-year growth in credit cards was higher than the growth for signature and PIN debit cards. Ed Kountz, Director of First Data Advisors, first wrote about this trend in his analysis entitled Rebirth of Credit—Minus the Debt, which was published in June. Since August 2011, consumers have been utilizing their credit cards to make purchases at a strong rate, with the year-over-year growth in credit card usage outpacing that of signature and PIN. For the Thanksgiving Thursday and Black Friday period, credit card dollar volume growth for retail categories was up 7.4% and across all industry categories it saw a low double-digit improvement.

One of the reasons for the credit usage growth is card issuers’ actions to incentivize the use of higher interchange-producing credit cards. According to lowcards.com, credit card issuers improved their reward card offers throughout 2011 to attract more consumers. Some credit-card rewards programs are geared to holiday spending and entertaining, and cash-back rewards are popular as they further add to the value-proposition of a high-dollar purchase which was offered at a discount. These improved rewards, coupled with decreased debit card rewards programs offered by financial institutions, encouraged credit card usage by consumers at the POS.

In the short-run, increased credit card usage had a positive impact on Thanksgiving Thursday and Black Friday shoppers as they were more willing to purchase discretionary goods on these payment products. However, retailers may get bitten by their focus on discounts as the holiday season continues. One of the trade-offs merchants have made in offering aggressive discounts is a reduction in the use of prepaid gift cards as incentives on Black Friday. (An example of a common gift card incentive seen to promote sales is "buy a computer, get a $50 gift card.") This type of offer incentivized shoppers to return to the retailer to redeem the gift card for the purchase of additional items. In essence, it locked in future purchasing behavior at a retailers own locations. On Black Friday 2011, First Data reported a -15.3% drop in gift card activations at the POS. This fall-off in prepaid cards activated for use as incentives may have negative consequences for retailers on two levels:

• It may have contributed to lower average tickets. Think about the "buy a computer, get a $50 gift card" example cited above. The gift card incentive encouraged shoppers to pay a higher price on a computer up-front but is then rewarded for the purchase with an off-setting "free" $50 gift card that can be used on a repeat visit to the same merchant. On Black Friday, we saw some retailers offering higher discounts on goods instead of gift card incentives. This lowers the average sale price of a computer and the overall average ticket for the merchant.
• It requires the merchant to continue to offer discounts to gain repeat customers. Now that a consumer has purchased the desired computer at a discount instead of with a gift card incentive, how does the merchant guarantee future patronage? Will a discount-driven consumer return to a store to pay full price on an item just because they received a "great discount" on a computer there? Pretty unlikely for the post-recession shopper. So how does a merchant earn that return trip? More discounts, which means continued lower average tickets, which means more discounts to drive consumers' eyes and feet to the merchant's website and retail store. When merchants get this cycle going, it is hard to turn off, because now they have trained their customers to seek and expect discounts on every purchase.

Think of this same scenario if a consumer has instead purchased the computer at a higher price but gained a $50 gift card. The consumer now has a reason to return to the store. Even if the consumer does not return to the retailer until January and February to take advantage of clearance prices when redeeming their gift card, the retailer will almost certainly earn additional sales as the majority of consumers who redeem gift cards overspend the value of their cards.

The 2011 holiday shopping season is shaping up to be a memorable one as strong dollar volume growth of retail sales trends in September and October have carried into the early weeks of the season. The lower average tickets earned by retailers due to wide-spread discounting and cherry-picking of deals by consumers requires merchants to compete for foot traffic and mouse clicks in order to sustain their dollar volume growth levels. When merchants stop churning discounts, what's next? The implications for the U.S. economy are significant as the achingly slow recovery from the recession still impacts the buying behavior of all consumers almost two and a half years after its end.