Will Rising Gas Prices Derail Retail Recovery?
By Al McClain
With retail sales for the just concluding holiday season expected
to be well above those of last year, it would be nice for retailers to be able
to take a breather and enjoy the feeling of a job well done.
But, unemployment
remains high, the housing crisis has not abated and the average price of a
gallon of regular, unleaded gasoline has now topped $3 per gallon for the first
time in two years. Gas prices, according to a McClatchy
Newspapers article
published on The Seattle Times website, have risen 42 cents over
the past year.
At least one expert, former Shell Oil president John Hofmeister,
is predicting $5 gas within two years, which would drive up the cost of many
goods. Services could rise as well.
Others, such as James Williams, an analyst
at WTRG Economics, do not expect to see prices go too much higher in the next
year. Mr. Williams said the Saudis have a vested interest in not derailing
the recovery.
Meanwhile, the University of Michigan’s Consumer Sentiment Index
for December reached its highest level in six months and U.S. consumer spending
has increased for five straight months, according to a Reuters article
appearing on ABC
News/Money. The Reuters analysis notes that with unemployment
still high, consumers are focused on paying down debt, at least between
shopping seasons, and that successful retailers are engaging shoppers with
frequent promotions and mobile apps.
Discussion Questions: Is the economic recovery strong enough to handle further
rises in the price of gasoline and oil? What strategies/tactics should retailers
employ to keep shoppers spending as gas prices rise?
- As gas prices top $3, worry rises over effect on recovery – McClatchy
Newspapers/The Seattle Times - Analysis: Consumer Spending Back to Normal? Not So Fast – Reuters/ABC
News - Rising
oil prices poses another problem to recovery – Connecticut Post - In 2011, $5 Gas, Tea Party Power And E-Book Boom? – NPR
Consumers always seem to find money for what they want. For instance, the rising tax and cost of cigarettes was expected to reduce smokers. There are still a lot of people smoking!
Retailers will need to promote more. Give consumers an incentive to get out. Join hands with other non-competitive retailers and do joint promotions. For instance, Kohl’s, a restaurant, a movie theater. Spend your Friday night with us! Think out of the box and save consumers the increased price of gas.
If gas prices hover at $4 or below (let’s hope not), the economic recovery can withstand it. In fact, you can make a case that rising demand for energy is a sign of economic health.
It’s all about the drop in unemployment…if and when it starts to happen. There is going to be just as much inflationary pressure based on the cost of raw materials — in particular, cotton and other commodity prices have already spiked dramatically and it’s only a matter of time before wholesale costs convert to higher retail prices. The question for 2011 is whether the apparent rise in discretionary spending on apparel will continue in light of these higher commodity prices.
Like it or not, gasoline is a necessity in this country. It is not a want to have, it is a must have. True, if you are fortunate enough to live in a city like Chicago or New York, there is plenty of public transportation but that is not true for the vast majority of workers.
Because it is not a discretionary spend, people will need to allocate more of their income to fuel on a personal basis (hitting those with the lowest income the hardest) and it will impact the cost of all other goods. Most transportation companies will be forced to raise their rates (many have built in clauses in their contracts with defined increases based on the price of fuel).
This dual impact will certainly have a dampening effect on the economy. Let’s hope the governments (federal and state) don’t add to this by levying increased taxes on fuel to solve their budget issues.
It’s terrific to see the retail community enjoy a strong and profitable Holiday season. As the article states, however, the underlying drags on a real recovery (intractable high unemployment, falling home values, unaddressed toxic assets on banks’ balance sheets) are still in place and don’t seem to be going away anytime soon.
Add to this a basic math problem. When the government creates and pumps $trillions into the economy, you get inflation. That’s not an opinion, it is a demonstrable fact. My sense is that in a year or two, we will be back to double-digit inflation ala the Carter years. This will occur as Gen Y enters its acquisition years and the boomers increasingly rely on fixed incomes. $5 gas will be a relatively minor problem.
To remain viable, retailers simply need to identify their target market, provide superior products and serve it better than anyone else. Nothing different than it’s ever been, only more extreme.
I agree with the above. We all find money for what we want. And unemployment will probably drop off when the extended benefits run out and people opt back into the workforce. Five dollar gas is something we are prepared for. We will gripe about it at first and then forget about it. Retailers will play their gas games like they have in the past. Then slowly ease away from them.
Many people have yet to feel the positive effect of a recovery. Unemployment and underemployment will continue to keep a lid on consumer spending. It’s too soon to say that a recovery has taken hold.
Has there been some good economic news? Yes. Are there many factors that could derail a recovery? Yes. Gas prices, the economic problems in Europe and unstable political situations in many of the world’s hot spots could all negatively impact the economy in 2011.
I think Americans will pull back on spending in 2011. The Michigan consumer survey is up, it must be the contrarian sentiment. Every other sentiment I read in the WSJ recently has been down. Unemployment is up. Today it is stated that at the current rate of growth, it will take 15 years to get the unemployment rate back to the 6% range.
We have a growing dichotomy in the US – those who can and do purchase versus those who can’t and don’t. Yet with the unemployment benefits reimbursed by the fed at 99 weeks, there is not much incentive to find a job. Also, with housing prices low, new construction falls and interest rates rise, so this should slow the housing “recovery.” We are already in a double-dip. The number of people “walking away” from the mortgages in default will also rise in 2011.
Should make for an interesting year….
This is a great question and should be a huge opportunity for retailers, especially grocery chains that already have gas rewards programs in place. If you don’t have a program in place get one. Make it meaningful and tie it to other areas in your store that help benefit you including your Private label brands, produce, bakery, butcher and fresh seafood departments. This way you can drive traffic to your stores with a strong Gas Rewards offer and at the same time build the parts of your store that keep them coming back when prices go back down (if they ever do).
Historically as gas prices go up, consumer spending goes down. The recovery is not all that strong. As consumers pay down debt, they have some free funds to spend. Higher gas prices will eat into these free funds. There is also a wake up gas number of $4.00. Should gas hit this number, consumers will wake up and change buying patterns.
We are likely okay up to $3.25, but after that we could see some buying changes starting with the middle and lower income groups. This could be a great year for having a gasoline program.
NO! Americans are definitely not prepared for $5 per gallon gas. The unemployment data plays “games” with the 9.8% estimate which, in reality, is closer to 14% in many states.
Don’t underestimate the millions of folks who are currently UNDER-employed in part-time jobs or positions that are paying far less than they were earning prior to being furloughed.
I agree with Richard Seesel’s comments. A marked increase in gas prices WILL reduce disposable income and close to 17-million Americans will have to manage their budgets accordingly. Gas in the tank… heating oil in the tank…food on the table… prescription meds… and HOPE there is enough to cover auto insurance, and pay the rent/mortgage.
Families with kids of an age where they are going to pre-school and grades K-12 also have to budget for many activities. Don’t lose sight of the fact the many public schools are now requiring parents to pay for extra-curricular and sports activities.
Also bear in mind that approximately 40% of our oil supplies come from Canada. The Federal Government’s anti-oil policy with regard to restrictions on exploiting our domestic reserves to the fullest extent is our nation’s “Achilles Heel.”
Policies designed to channel auto buyers into “hybrid” and electric vehicles costing $30K and more are all well and good, up to a point. Presently, other than electric/gas powered combo vehicles, they do not address the average mileage distances required here in the USA.
Retailers now have three distinct consumer categories: 1: The growing legion of have-nots; 2)The middle ground of “we’ll maybe buy IF the price is right; 3) Those whose incomes enable them to be indifferent to any price increase of gas.
Gasoline at $3.50 to $4.00 a gallon will have a major impact on the economy. Every one of the comments above have said it is a necessity and that is true. So the money to pay for gasoline has to come from somewhere and the only place that the consumer has control is over what they spend. Spending will slow down and the economy will falter.
I agree that we, the consumer, always find a way to travel if there is something attracting us to the store or event we want to attend. Yet, why do we keep trying to raise the bar on gasoline prices at holiday times? Now with key economists and industry leaders forecasting upwards to $5.00 a gallon, we are looking for new ways to attract the consumer as a business and as a consumer; looking for ways to afford it.
Why do we have to be so hooked on gas prices and refuse to offset the rising prices by not driving as much? Stay home and enjoy our families more than going to the mall is an example. But we will not do that because we do not believe we are going to reach the $5.00 level, do we? What if we are wrong? What if we do reach the $5.00 mark? How are we going to afford the extra $2.40 rise from the point it began to go up? Who is playing with us? There is a group somewhere in Washington (on Capital Hill) that can do something to help the people who elected them if they were not so concerned about their personal interests. We can start with the “talking heads” in both parties who think they represent the people. If they do, then represent us and not your personal interests.
Let’s do some easy math: if we drive an average of 250 miles a week, which is an average of 37 miles a day or 18 miles for one round trip and get 25 miles to a gallon; we are spending an additional $24.00 a week out of our budget. This equates to over $1,200.00 a year. Frankly, I have better uses for that $1,200.00 and think you do too.
There is no doubt that global demand is causing a bidding war that is inflating oil prices, but it is extremely unlikely prices will reach $5 a gallon, at least for a decade or longer. The Oil Price Information Service (OPIS) anticipates prices will range from $3.50-$3.75 per gallon heading into the summer driving season and that sounds more in line with what consumers can expect. If $5 a gallon prices ever happen, it won’t be until after 2020. A lot can happen between now and then.
The magic number for prices at the pumps tends to be $3.50. That’s the number where we hear the most consumer complaints, and where spending inside convenience stores tends to dip.
This threshold aside, fuel is one area that motorists cannot avoid. While spending in some areas, like entertainment, electronics, apparel, etc., will inevitably go down, spending in other areas will go up. For example, as we saw in 2008, more people took vacations closer to home and opted to drive rather than dealing with higher airline costs. As a result, more dollars were spent locally sustaining small businesses through tough times. People may also hold off a year or two buying a new car, but will require more repairs and maintenance on their current vehicles.
Also, it should be noted that Hofmeister is the CEO of a grass-roots group called Citizens for Affordable Energy, which is heavily pushing energy alternatives. He is likely an investor in some alternative energy project like harnessing wind or solar energy, or some emerging technology that will reduce the nation’s dependence on oil. In fact, the name of his new book is “Why We Hate the Oil Companies,” a peculiar title for a former oil company CEO to say the least, which just raises my suspicions about his motives.
Regardless, he is correct in stating that the nation needs to develop energy alternatives to deal with global demand, and lawmakers are coming around, albeit slowly. Hofmeister is doing his best to sound the alarm. His prediction is surely embellished, which is unfortunate, because the message is an important one.
Apparently we have short memories. True enough–we do. The economy weakened at $3.00 just a couple of years ago. It stalled at $3.50 and it crashed at $4.00. Don’t believe it? Go back just a couple of years ago and track it.
Gas slowly rose into the holiday season while consumers had already spent the majority of their discretionary income for the season. They are now facing regret.
The ‘so called’ recovery, unseen in my region, is unable, just as before to withstand $3.50–let alone $4.00. If we really want to see the ‘worst recession since the Great Depression’, just wait for $5.00. And, by the way, that occurred in the early ’80s, not the past 2-3 years.
With zero growth in employment, uncertainty in health care costs, and fear of increasing fuel costs, 2011 will be interesting to say the least.
Yet, I have real optimism that the third year of promised laser focus on the economy could actually have an impact. I’m told it’s all tied to the sales of the Chevy Volt.
Anyone who doesn’t believe another $4.00+ per gallon of gas won’t have a dampening effect on the economy has their head buried in the sand. Personally, I believe the “tipping point” for most consumers has been lowered from the crisis of 2 years ago.
Unemployment, under-employment, and general belief that “things are not good” with the economy have contributed to this sentiment. Most people having learned they can survive by doing without over the last two years, will begin to make buying decisions at the $3.50 point.
For me, the household budget will take a monstrous hit vs the current soft blow now if we reach $4 per gallon. I drive several thousand miles a month. So, my calculations end up at the $2,500 per year level. That’s over $200 per month!
I can’t stop driving; it’s a critical part of my livelihood.
For the country, my belief is that it would thrust the country into the double-dip recession we are all dreading. Although, I am not sure we actually came out of the first one.
My PC this morning seems to have picked up transmissions from some alien planet where “people always find money for what they want” (though in the past few years, with debt running amok, it seemed to be true). A person’s income – at least in the short term – is fixed: increased spending on one thing (e.g., gas) must necessitate either reduced savings or less spending on something else. As some here have noted, in the long term, people may modify their driving habits, but in the short term an increase, particularly a large and rapid one, will impact spending elsewhere (particularly on discretionary items).
There are many excellent and realistic comments on this subject here today. The theoretic recovery can be written about until the cows come home — but until regular people start seeing genuine job opportunities where they live, and stop feeling like they have to watch every penny going out their household’s door, and believe they might be able to sell their home should they want to relocate, we’re going to be in a deep funk upon which $4.00 gas will put the exclamation point! Yes, retail sales will be derailed.
There will always be a need for oil, even after other forms of alternate energy are developed and utilized. Those who demonize oil and are preventing further exploration will have a lot to answer for if/when gas goes to $4-5. And think of the impacts to the costs of air travel and import/exports via air.
On a similar note, the vast and highly touted wind farms of Scotland “unexpectedly” froze last week in winter’s chill and were able to produce at only a mere fraction of necessary capacity. The Scots needed to import power produced by the French nuclear plants in order to keep their population in electricity, and also needed to use gas powered machinery to thaw out the frozen wind rotors. A very costly and telling undertaking, indeed.
High gas prices will be devastating for the already horrendous economy. Many folks are tapped out now, and will continue to trade down, which will not benefit the independents. Instead it will continue to bolster the dollar store chains, club stores, Walmart and Target. With a ZERO energy policy in this country, all of us are going to get gouged, until somebody wakes up and allows us to produce more of what we need (GAS).
I am already seeing delivery charges added on to all of our deliveries, and how do you pass it on??? Only in retail can we sell stuff and not create a surcharge for our services. Airlines, utilities, delivery companies, lodging, entertainment, hospitals all add on some stupid fee. Maybe it’s time we had our own version: a nuisance or aggravation tax added to all of our transactions only to be refunded to the customers who are nice to us … Probably not, but hey, no harm in dreaming up new ways to increase the bottom line. Just venting … Happy New Year to all, and keep up the good fight.
So if you’re to believe their was an actual recovery considering we have an artificial economy with 10% unemployment (which is really 20% & some say 30%) plus real estate industry that is decimated, then the answer is yes, gas prices rising will indeed destroy what’s left of a weak recovery.
Obviously the “recovery” isn’t strong enough to handle any weakness and we have much more weaknesses than just gas prices–such as coming inflation, real estate market about to tumble another 10 to 20 percent and unemployment that can’t be propped up with benefits forever.
I, as well as many others here, WANT the so-called recovery to be real but history tells me I’m hoping for gold at the end of the rainbow–nice story but it’s not going to happen.