Are retailers being helped or hurt by low gas prices?

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Discussion
Mar 04, 2016
George Anderson

During a recent stop at a convenience store, I asked a manager if low gas prices had been good or bad for business. The answer I received was “both.” Low gas prices had resulted in more frequent shopper visits, with people spending more on purchases inside the store even if rings at the pump were down. I’ve heard similar stories from c-store execs I’ve asked the same question.

An article published on MarketWatch echoed some of this view albeit in a somewhat less positive tone. True, according to the piece, low gas prices have been good for consumers. On the other hand, chains including Costco and Kroger posted lower gas sales as a result.

It should be noted that lower gas prices weren’t exactly business killers for the two chains even if Wall Street overreacted this week when the they failed to meet analysts’ expectations on certain metrics.

Costco, reported gas sales were down 0.8 percent. While the chain did fall short of expectations, it should be noted that same-store sales in the U.S. were up slightly while Costco struggled outside the domestic market with sales down seven percent in Canada and three percent in other countries. One benefit of gas being a smaller portion of overall sales was margin improvement. Costco reported a 0.1 gain year-over-year in gross margin.

Kroger reported record profits of nearly $2 billion in the last fiscal year. CEO Rodney McMullen cautioned that price deflation would provide “a headwind to sales” in the coming year. The company’s stock took a hit, falling more than nine percent at one point after Kroger reported a same-store sales increase of 3.9 percent (excluding gas) for the quarter. Kroger’s target range was between four and 4.5 percent.

The MarketWatch article asked if lower gas prices should deter Walmart from opening its own stations. The piece pointed out that Walmart announced in February that it was uncoupling its relationship with Murphy Oil to begin opening its own gas stations. The goal was for Walmart to squeeze out profits wherever it could find them.

DISCUSSION QUESTIONS: On balance do you think that lower prices at the pump are good or bad for retailers with gas stations? If you were Costco, Kroger, Walmart, et al would it be full steam ahead in opening new stations or would you hit the break?

Braintrust
"For many seniors living off income from the stock market, this is a concern. High gas prices mean higher returns and more spending dollars while lower gas prices means less income from a lower market. It’s always something!"
"They are bad because this is a product the retailer cannot control, at all. With other products, retailers can negotiate pricing based on volume or quality of product. With gasoline, retailers are out of the decision making."

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10 Comments on "Are retailers being helped or hurt by low gas prices?"

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Frank Riso
BrainTrust

Since the use of company-owned gas stations is directly related to their loyalty program, the lower prices are truly both good and bad. Good in that they keep customers shopping to save even more money on gas and bad in that the total sales figures are lower than the increase in merchandise sales. Everyone knows that gas prices will increase sooner than later, so opening or continuing to sell gas is still the right direction for these retailers. The only issue is, when will gas go back up? And for many seniors living off income from the stock market this is a concern. High gas prices mean higher returns and more spending dollars while lower gas prices means less income from a lower market. It’s always something!

Bob Amster
BrainTrust

They are bad because this is a product the retailer cannot control, at all. With other products, retailers can negotiate pricing based on volume or quality of product. With gasoline, retailers are out of the decision making. What they can make in one year, they can lose in the next. Having a gas station may be a convenient attraction to potential customers. Owning that gas station is a different question.

Steve Montgomery
BrainTrust

The rationale behind the addition of fuel to a club store, supermarket or super store is two-fold. The reason fuel was first added to these sites was to increase store traffic. Research showed that the addition of fuel to these sites has increased inside traffic and sales. With that knowledge more and more locations had fuel added or were built with fuel in mind.

The second, and initially ancillary, reason was to hopefully make money. These traditionally non-fuel retailers discovered that that money can be made on the fuel revenue stream. This is especially true at the volumes that these sites can generate.

Jerry Gelsomino
BrainTrust

They are bad for retailers as they are for all gas distributors. I would not proceed if I had other sources of profit.

Ralph Jacobson
BrainTrust

As long as there are fuel category product “affinities,” that is, the cross-category product purchase relationships are driving overall top-line and bottom-line growth, then it makes sense to keep pushing the fuel availability at stores.

Ed Rosenbaum
BrainTrust

If we gave ourselves the choice, would we prefer higher or lower gas prices? No question we prefer the lower prices. My guess is gas prices may bring lower gas sales to retailers, but the overall business is improved. Why? Because we are feeling better about jumping in our car and traveling to a shopping destination. Once we get there we will spend the dollars we were not spending when gas prices were higher. For me, I am hoping we see the prices go even lower.

Michael Day
BrainTrust

Good for all retailers. Some better than others. Lower gas prices mean more disposable income available for impulse purchases, etc.

Those retailers who know best how to optimize AIM/Aggressive Item Merchandising with data-driven personalization are positioned better than those who do not yet leverage the data or are not yet agile enough to drive a truly customer-centered merchandising sensibility, etc.

For those retailers with gas stations: When it comes to driving growth, more higher-margin merchandise sales can easily make up for lost (lower price per gallon) gasoline sales.

Christopher P. Ramey
BrainTrust

Shifts in the marketplace, such as lower gas prices, create opportunities for smart merchants. It’s a stagnant market that we should all fear.

David Schulz
Guest
David Schulz
4 months 26 days ago

Enough others have pointed out that low gas prices allow consumers to have more money in their wallets when they enter the store. That’s good for retailers. High gas prices pretty much help only fuel-intensive retailers who have an opportunity to play with margins and volume. The retailing of commodities is always tricky.

Naomi K. Shapiro
Guest
Naomi K. Shapiro
4 months 26 days ago

Lower prices at the pump are good for retailers with gas stations as it brings customers to their door, literally, in a better mood, with more cash available to spend in the store. They don’t need to go full stream on opening new stations, but can hit the brakes until they pass the threat.

wpDiscuz
Braintrust
"For many seniors living off income from the stock market, this is a concern. High gas prices mean higher returns and more spending dollars while lower gas prices means less income from a lower market. It’s always something!"
"They are bad because this is a product the retailer cannot control, at all. With other products, retailers can negotiate pricing based on volume or quality of product. With gasoline, retailers are out of the decision making."

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