Gas Prices Could Mean Trouble for Retail

Discussion
Mar 09, 2010
George Anderson

By George Anderson

Gas prices are on the rise, as they are just about every year heading
into warmer weather. The question becomes, how high will they go and how
will it affect consumer purchasing in other areas?

The average price for a
gallon of gas has hit $2.75 and is at a high for the year so far. Many believe
that gas will eventually top $3 a gallon this summer.

A number of factors
are combining to drive up the price consumers pay at the pump, including an
improving economy, a weak dollar, and geopolitical factors such as armed conflicts
in oil-producing nations.

Tom Kloza, chief oil analyst at the Oil Price Information
Service, told The
New York Times
that consumers are paying over $1 billion a day to put
gas in the tanks of their automobiles. That figure, he estimates, is about
$250 million more than at this time last year.

"That’s a drag on the economy," Mr. Kloza said.

Recent trading on
the oil market has seen the price of a barrel go above $80.

"It remains to be seen whether we can hold $80, since we’ve failed to
hold it five times in the past five months," Addison Armstrong, senior
director for market research at Tradition Energy, told the Times. "Given
the low level of demand, gasoline inventories certainly aren’t tightening."

Discussion Questions: Are you concerned that gas prices
will rise to the point this summer that it will affect consumer purchases
at retail? How will rising fuel prices affect retail operations?

Please practice The RetailWire Golden Rule when submitting your comments.

Join the Discussion!

15 Comments on "Gas Prices Could Mean Trouble for Retail"


Sort by:   newest | oldest | most voted
Roger Selbert, Ph.D.
Guest
Roger Selbert, Ph.D.
11 years 2 months ago

Looking at 9 years of data collected by the Consumer Demand Index, there is no question that gasoline prices are a good proxy for consumer purchasing intentions. When gas prices head up, buying plans head down. If you are interested in a recent issue or historical data, you can go to http://www.consumerdemand.com or contact me.

By the way, we and our CDI subscribers were not surprised by last month’s drop in the Conference Board’s Consumer Confidence Index. The CDI consistently leads the Consumer Confidence Index by one month and had in January clearly indicated a significant drop was on the way.

David Livingston
Guest
11 years 2 months ago

I would not be too concerned. A couple of years ago gas was $4 a gallon and we got through it. So $3 is still a bargain. The recession is over and the economy is booming again. Perhaps higher gas prices are a sign the economy has recovered. Many households have seen their 401ks increase by hundreds of thousands of dollars over the past year. So I think consumer confidence is high. Sure higher gas prices are a downer, but when people see their net worth increasing, it dulls the pain.

Dick Seesel
Guest
11 years 2 months ago

I think there are mixed messages here: Certainly the last big gas price spike (in summer 2008) put a crimp in consumer spending just before the recession hit with full force. But there is a big difference between $3/gallon gas and $4.50/gallon gas in consumers’ minds. It’s just possible that the slowdown in spending was an early sign of the economic slowdown rather than a reaction merely to pump prices.

You can also make a case that a rise in gas prices is a sign of higher demand and therefore a recovering economy. If people are starting to return to the workforce and do more discretionary travel, they will need to drive more and gas prices will rise accordingly. But these are positive signs, likely to manifest themselves in other ways such as higher consumer spending. Let’s keep our fingers crossed!

Steve Montgomery
Guest
11 years 2 months ago

The impact of fuel pricing on an individual’s purchase obviously depends on where they are on the wage earning scale. The greatest impact is naturally (and unfortunately) on those that have the least money to spend.

Fuel is not a discretionary purchase, in the U.S. for most people it is a necessity. They have no choice but to drive to where they need to go whether that is work, school, etc. We simply lack the public transportation infrastructure. There are some exceptions in cities like Chicago and New York, but these are the exception rather than the rule.

Any significant increase in the cost of fuel means less money to spend on something. The question is what? My expectation is that people are mostly rational and will cut the non-necessary item first. What those items are will certainly differ by person. One thing I believe we have seen is that small indulgences are likely to continue to be purchased.

Doron Levy
Guest
Doron Levy
11 years 2 months ago

Gas goes up, sales go down. Gas goes up, sales go down. Gotta keep the Hummer powered up so I guess I don’t need any groceries this week.

Weary customers are going to slow their driving habits down if fuel prices creep up too much. Retail will suffer but not as much in the past. I think consumers have changed their behavior to match their wallet.

Gene Hoffman
Guest
Gene Hoffman
11 years 2 months ago

Higher gas prices shrink discretionary dollars, fewer discretionary dollars shrink retail sales.

Roger Saunders
Guest
11 years 2 months ago

Not every consumer maintains a budget, but every consumer knows how much they have to spend. When added dollars have to be allocated to gasoline, “something has to give” on the other end. BIGreseach has been listening to Consumers every single month for the past 9 years, as a key question within the Consumer Intentions & Actions (CIA) Survey is:

“How have fluctuating gas prices impacted your spending? (check all that apply)

Consumers, over 8,500 every month, point out their “Behavior” in terms of Big Ticket Purchases, Groceries, Clothing, Travel, Reduced Dining Out, Purchase of Generic products, and several other categories. They can also choose “No major Impact.” The later point has been checked off by 12% to 30% of the Adult population in any given month, over those 9 years.

If prices tick above $3.00 a gallon, and the consumer is telling us in the CIA that they think it will in the next 90 days, retailers will see the consumer making adjustments.

Al McClain
Guest
Al McClain
11 years 2 months ago

So Richard tells us to keep our fingers crossed while Steven identifies that we are lacking in public transportation infrastructure in the U.S. The first is good advice and the second is unfortunately true. The amazing thing is that not much has been done since the recent gas crisis and the Great Recession to fix the core problems: 1. We need better and more public transportation 2. We need alternative fuels.

Unfortunately, these two points all get tied up in right vs. left political finger pointing and not much gets done. At least GM is getting rid of Hummers and the consumer is voting with their feet by buying more fuel-efficient cars. We have to take a longer-term view or keep lurching from one short-term crisis to another.

Jonathan Marek
Guest
11 years 2 months ago

Ah, it’s the time of year for worrying about gas prices. This article did have the good sense to point out that gas prices always go up in the spring (something many major newspapers ignore as they plaster the rising prices all over their front pages every April!).

The interesting thing is that retailers have the data to figure out exactly how gas prices effect their business. Gas prices for several major markets are publicly available through the US government. All others can be purchased.

If you link that data up to a retailer’s sales, and analyze it the right way (elasticity analysis using differential changes across markets), you can measure the effect quite precisely, including understanding how that effect changes by product category, under different macro-economic conditions, and in different demographic and competitive environments. The very best retailers can then make that actionable, testing support programs in the most at-risk markets as prices change.

Doug Stephens
Guest
Doug Stephens
11 years 2 months ago
In the short term, yes, high fuel prices will adversely impact retail sales. And for retailers like Walmart who depend on vast amounts of fuel to transport goods from around the world, it will severely impact the business model. In the long-term however, I think we’ll see positive change come as a result. In his book, $20 Per Gallon: How the Inevitable Rise in the Price of Gasoline Will Change Our Lives for the Better, author Christopher Steiner describes many of fundamental choices and behaviors that will change as a result of escalating fuel prices. Some, like the death of Hummer, we’re already seeing. Shipping costs could go a long way to leveling the playing field for domestic manufacturing, returning jobs and a degree of prosperity to some of North America’s hardest economically hit regions. Everything from where we live to how we to how we grow food and how often we travel would ultimately have to change. The net result could be a vastly more sustainable situation than if gas prices remained at current… Read more »
Mark Johnson
Guest
Mark Johnson
11 years 2 months ago

I agree with the fact that there are mixed messages, both on the level (actual or perceived) of retail sales (increase or decrease), how high (The Wall Street Journal today said that gas will not rise as much as in the past “recoveries”) and how it will impact sales. I think the big piece to look at is the health care debate, the huge increase in government spending and how that will impact the Michigan consumer index and how that will impact spending.

Ted Hurlbut
Guest
Ted Hurlbut
11 years 2 months ago

I think we’re all in agreement that fuel prices impact retail sales inversely, but I’m not as casual about it as others. Gas prices have a real dollar impact on retail sales, but just as importantly, have an important psychological impact on consumer sentiment. That sentiment is pretty fragile right now, and $3.00 a gallon gasoline might be an important benchmark. If gas climbed above that level, (and we’re not too far away from it) that could have a pretty significant effect on consumer confidence, and retail sales.

Mark Burr
Guest
11 years 2 months ago
Ah, our recent memory escapes us. And I continue to wonder what planet Mr. Livingston lives on, but alas, that keeps us thinking, I suppose. In 2008, we saw unprecedented spikes in fuel. Consumers spent right into $3.00 per gallon with the hopes that they would withstand it in their budgets. They could not. Gas topped $4.00 and beyond and the entire wagon tipped over. Consumers have a better memory than we do. This time, they will hit the brakes at $3.00 much faster. And, if they top $4.00 and more at this point the entire barn will burn down. That being the case, the impact to the economy could be fatal and recovery could pass the grasp of our lifetimes. I for one, hope that the lesson learned by the damage done in 2008 will be enough not to test those waters again. We’ve not recovered since. Sadly, history generally does repeat itself. We’ll see. I remain optimistic that what once was the greatest nation in history will not slip into oblivion in a… Read more »
M. Jericho Banks PhD
Guest
M. Jericho Banks PhD
11 years 2 months ago

No, not concerned. We’ve been here before. High gas prices hold no more shock value for us. We handled it before and we’ll handle it again. I’m just irritated that I failed to fill up recently at $2.99 since the price here is now $3.19. Consumers will adjust first by moderating trips, and then return to previous travel behavior after adjusting budgets in other areas. Happens every time. Same deal with food purchases. It’s the first thing adjusted in the family budget when the economy tanks, and then the first to return to previous levels. That’s because both gas and food are immediate consumables. Mortgages, car payments, and credit card balances take time to adjust. Gas and food consumption can be adjusted overnight.

Scanner, good friend, cheer up!

Shilpa Rao
Guest
11 years 2 months ago

Based on past trends, it’s typical for gas prices to rise in the summer with more people going on road trips and lower crude oil inventories since more refineries (many of which are in middle east where the summer temperatures could peak to 130 degrees Fahrenheit) are typically under maintenance. This is a well know fact, which occurs every year. If retailers can hedge this, they can manage to keep the operational costs low.

wpDiscuz

Take Our Instant Poll

What’s the likelihood that fuel prices will negatively affect retail sales this year?

View Results

Loading ... Loading ...