From the Publisher: Gas pump economics

Consumers are paying more for gas and other energy needs. Sounds like more bad news for retailers. Except there may be a silver lining for grocers.

By Seth Mendelson

It is amazing what a few months can do to a story. Just eight or nine weeks ago, an economist I happened to be sitting next to on a plane going coast-to-coast counseled me that the price of fuel at the gas pump was quickly heading toward $2.50 a gallon. Good times were just around the corner, he said confidently, noting that lower gas prices meant more money in the average shopper’s pocket as well as greater consumer confidence that things are getting better.By late November, the price of gas was quickly heading toward $4 a gallon and I am searching the planet for my economist friend to see what other tricks he may have up his sleeve. All optimism about a rebounding economy appears lost, gobbled up by higher prices that impose additional burdens on already harried consumers.

The fact is no one really knows the long-term direction of oil prices. What we do know is that the higher the price at the gas pump the more reluctant and unable many consumers are to purchase discretionary products at retail stores, including grocery stores.

My economist friend noted that his information showed that for every price increase or decrease of 10 cents, retailers gain or lose an average of 1% of sales. Add that up to a dollar or so jump or decline in the price of a gallon of gas at the pumps and it can make a big difference in how a retailer will perform over the next few months.

The trend, well proven over time, will have a big impact on retail sales if, in fact, gas prices keep rising to the point that consumers have to choose between filling up the tank to get to work or buying that extra product for their spouses, kids or even pets. The bet here is that the gas tank will win nearly every time.

This, of course, puts the grocery retailer in an interesting position. On one hand, tougher economic times and higher energy costs mean retailers have to cut their own costs to help reduce prices on products to their shoppers. Spending, as a whole, slows down and retailers must tighten their budgets and their product assortment to ensure that consumers still see an advantage to shopping the supermarket for their needs. And, all of this has to be done even as their own costs—particularly in transportation and heating—rise.

On the positive side, supermarkets could again benefit from the slowing economy and rising fuel costs. Consumers have shown that one of the first things consumers change during recessions is their eating habits. Cutting out expensive restaurant visits is high on many consumers’ lists of things to nix during bad times.

These same shoppers have to eat somewhere and, often, the supermarket chain that offers the right alternatives to shoppers are the ones that benefit the most.

So watch the fuel pump and, at the same time, start developing some meal replacement strategies that make dollars and sense to your shoppers. It may get you through the coming hard times.

Seth Mendelson can be reached at  646-274-3507, or smendelson@groceryheadquarters.com.

This entry was posted in 2011 12 Article Archives, Columns and tagged , , , . Bookmark the permalink.