Gas Putting the Brakes on Upscale Consumer Purchases

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Aug 22, 2006
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By George
Anderson


It was to be expected that rising gasoline prices would take a bite out of the dollars consumers at the lowest end of the economic ladder would have to spend at retail and foodservice outlets.


Until now, however, there has been little sales evidence to suggest middle-class consumers were letting the high price of gas get in the way of their retail purchases in any substantial way. That, it now seems, appears to be changing.


According to a Wall Street Journal article, retailers such as Starbucks, Whole Food, Williams-Sonoma and Panera Bread Co. have turned in disappointing sales numbers and “the chief culprit is gasoline prices.”


Dustan McCoy, chief executive officer of Brunswick Corp, a boat maker, told WSJ, consumers are spending a larger portion of their income on gas. “The sort of people who boat don’t drive around in compact cars. They drive around in big cars or fast cars,” he said.


P.F. Chang’s Chairman and CEO Rick Federico said sales have not been this off since the first Gulf War and the recession that plagued the country at that time.


“You do have to go back over 15 years to find an environment where the consumer has responded like they are today,” he said during a conference call last month. “We have lowered our expectations for the back half of the year to better reflect current trends in our business.”


Wendy Liebmann, president of WSL Strategic Retail, said there is clear evidence that consumers have gone from trading up to cutting back. More middle-income households, for example, are shopping at mass merchants rather than going to specialty stores to make purchases.


Michael Silverstein, senior vice president at Boston Consulting Group, said middle-income consumers are still trading up but perhaps not as often as in the past. These consumers, he said, are “making much more deliberate choices and being much more tough-minded about what they want.”


Beyond gas, the housing market is said to be having a dampening effect on consumer spending. With the market softening and interest rates having risen, consumers are less able to generate funds for themselves by refinancing mortgages, drawing from home-equity loans or selling properties.


Homebuilders are feeling pessimistic. According to the National Association of Home Builders, its index of builder sentiment has fallen to its lowest point since 1991.


Discussion Questions: Many strong retailers have reported
softer sales in recent weeks/months and/or lowered expectations for the future.
What have retailers done in the past to come through slower economic periods
to become stronger competitors when consumer spending rebounds?


Keep advertising. Numerous studies over the years have
shown that companies that keep the promotional pedal to the metal during slower
or recessionary periods come out stronger on the other end.

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10 Comments on "Gas Putting the Brakes on Upscale Consumer Purchases"


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Mark Lilien
Guest
14 years 6 months ago

When customer traffic slows, almost everyone suffers. Certainly restaurants (Panera Bread, Starbucks) aren’t retail destinations. They thrive on others’ traffic. A mall-based restaurant can’t pull more traffic into the mall. The restaurant can run in-store promotions to increase share of the remaining mall customers. It’s hard to avoid price promotions (The granddaddy of them all: Taco Bell’s dollar menu lifted that company from the depths). Restaurants generally pay the highest price per square foot in malls. They need to examine renegotiating their leases if they believe the slowdown isn’t going to be brief.

Bill Robinson
Guest
Bill Robinson
14 years 6 months ago
Here comes the real test for retail merchants. Gas prices are up 30% or more and likely to rise higher. What impact does that have on your customer traffic…your merchandise mix… your employees? Retailers usually don’t have the business intelligence to know their business well enough to answer these. If you have traffic counters, do you know the average business per visitor before and after the gas price increase? Do you know your conversion rate? Both metrics are probably up with higher gas prices. If your absolute number of visitors is down, have you lost any of your best customers or are they coming less frequently? If so, it is time for some targeted promotions? What are your customers buying? Are your product stars the same as when gas prices were low? Probably not. You need to reevaluate your lead products and your in-store display strategies based on which categories are the biggest contributors in the era of high price gas. How about your employees? Some are spending more than 10% of the take home… Read more »
David Livingston
Guest
14 years 6 months ago
It sure is easy to blame something else when the numbers are disappointing. If it’s not gas prices then its the weather (too hot, too cold, too rainy, etc), or Easter came in the wrong quarter. Giant Eagle has been offering a 20-cent per gallon discount for each $50 purchase until September 6. So basically a $750 purchase gets you a free tank of gas. They have been aggressively promoting the sale of retailer gift cards (Home Depot, Sears, etc) in their stores that count towards the gas discount. Giant Eagle has made high gas prices their friend instead of a lightning rod to blame problems on. At the same time they are helping other retailers by selling their gift cards. High fuel prices threw Giant Eagle some lemons and they made lemonade out of it. They have quietly been increasing their market share as gas prices have risen. What if fuel prices never come down and go to $4 a gallon? Or worse $7 or so like in Europe? Crying and pointing fingers are… Read more »
Mark Barnhouse
Guest
Mark Barnhouse
14 years 6 months ago
Thank you David Livingston and others who cut through the fog of excuses that so many mediocre retailers use when they have disappointing quarters. Yes, gas prices are $3 per gallon. They were that price last September after Katrina, and yet we all survived. This year, gas prices must become the de facto excuse, because the National Hurricane Center has had to revise its hurricane ferocity and frequency forecasts downward. There are still millions of Americans who stop in at Starbucks every day–maybe they just get regular coffee instead of a latte. Whole Foods in the NYC region is wisely advertising the value of its 365 line. Crate & Barrel is now marketing its lower-priced CB2 concept via national catalog mailings. The key is to remain upbeat, and not let the general buzz get you down. Defeat is self-inflicted in rough times or easy times. Ignore the media and focus on your customers and what they continue to need. As the intro pointed out, advertise! This is not to say that everything is rosy. The… Read more »
Doug Fleener
Guest
14 years 6 months ago
You know who is real happy about high gas prices? The weather. For years when retailers didn’t achieve their targeted sales they blamed the weather. The weather rarely got credited for when a retailer hit their sales target, but they sure got blamed a lot when the retailer didn’t. So now the weather gets a breather and high gas prices are to blame. The fact is the whole economy is in the doldrums moving sideways. There’s really no good news or really no bad news. I would agree that it is important for retailers to remain highly visible to their customers. Too often when sales soften retailers pull back on the very things that have made them successful. Instead of cutting back they need to reach out to their best customers and give them an incentive to come back into the store. Just as important is to maximize the opportunities. We’re seeing that as result of the weather, whoops I mean high gas prices, customers are making less shopping trips than in the past. Retailers… Read more »
Ed Dennis
Guest
Ed Dennis
14 years 6 months ago

I thought Starbucks indicated that the reason for their shortfall was the increasing demand for cold, blended drinks that take a little over 4 minutes to concoct versus the two and one half minutes necessary for a hot coffee concoction. Apparently, they did not anticipate this shift and failed to staff up to meet the demand that resulted in long lines and walk offs. If gas is involved here I expect it came from the Taco Bell next door!

George Whalin
Guest
George Whalin
14 years 6 months ago

Isn’t it interesting that upscale retailers like Nordstrom and Neiman Marcus reported robust same-store sales increases in July while other so-called upscale retailers blame their lackluster performance on gas prices. While I agree with other comments here, I believe the definition of upscale stores and affluent consumers has changed. In recent years more middle-income consumers have become disenchanted with the quality of the merchandise and the poor shopping experience in some stores. They have instead, decided to shop in upscale stores because of the quality of the merchandise and a better shopping experience. When the economy begins to slow, gas prices rise and other economic factors touch their lives they pull back and stop shopping in upscale stores. The ups and downs of our industry are nearly always based on several factors.

Kai Clarke
Guest
14 years 6 months ago

This is a poor statistic. We had $3 per gallon gas 6 months ago and retailers didn’t report poor sales then. There are so many factors, including which retailers we measure, which segments we measure, and how we compare these, that this statistic is not a good comparison. Instead, we need to look at how retail sales did compared to gas sales, or durable goods sales, and then compare these quarter on quarter, month on month and quarter vs. year ago. Without this, these numbers are very misleading and do not paint an accurate picture.

Mark Burr
Guest
14 years 6 months ago
I suppose it depends on what side of the fence you sit on in the first place – optimism or pessimism. Last year there was a discussion on Christmas prior to the holiday. The comments were mixed. Just days ago, there was the same discussion again (in August no less!) and the comments were exactly the same – mixed. Today, we see a study, nothing more. The results or comments are based on the retailers surveyed – not all. I don’t think that any real conclusions can be drawn from them. Certainly, it may be possible to draw conclusions to support a particular point of view. Nevertheless, that doesn’t make them so. Just a couple weeks ago, there were dire predictions that gas would go well over $4 due to the pipeline in Alaska. The predictions were wildly speculative and filled with doom. Since then fuel has declined, slowly but steadily. In fact, even part of the pipeline has been re-opened when the prediction was at the time that it would be closed for months… Read more »
Craig Sundstrom
Guest
14 years 6 months ago

“To be sure, the nascent pullback isn’t affecting all retailers equally..” WSJ 08/21/06 P.A6

…Which is to say, contrary to the (unsubstantiated) claim of “growing evidence,” Williams Sonoma’s failure to sell enough $800 espresso machines is probably due to factors other than it costing $2.22 (vs. $2.08 two years ago) to drive to the store.

It’s axiomatic that if people (have to) spend more money on something essential, they will have less to spend elsewhere, but the most likely areas of cutback are pleasure driving and purchases of low mileage vehicles. Hello roadster; goodbye Yukon (and good riddance!).

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