The end of the war in Iraq -- seeming imminent last week as U.S. troops moved into Baghdad -- may boost consumer confidence, but it won't necessarily translate into sales gains for the slumping supermarket industry, economists and other industry observers told SN last week.
Frank Badillo, senior economist, Retail Forward, Columbus, Ohio, said he expected retailers -- including supermarkets -- to get "some bounce" in sales, but the economic malaise that has constrained consumer spending is not expected to abate.
Last month, the Consumer Confidence Index, a survey by The Conference Board that measures how consumers feel about business conditions, employment and family income, fell to 62.5 from 64.8 in February.
"A quick and successful outcome in the Middle East conflict would certainly ease some of the uncertainties facing consumers and therefore boost confidence," said Lynn Franco, director of The Conference Board's Consumer Research Center, New York. However, she added, "It is the economic fundamentals that will determine whether a rebound is sustainable."
Badillo noted that retail sales bounced back after the 1991 Gulf War, but only briefly. "It wasn't a rebound," he said. "It couldn't be sustained by increased consumer confidence alone. The underlying fundamentals of the economy have to be able to sustain that. That's why I think this bounce-back will also be brief. The economy is still facing some trouble.
"Consumers still are up to their necks in debt," he explained. "There are questions about the viability of the boom in the housing market. There are still some question marks about the stock market."
Sara Johnson, managing director, global macroeconomic group, Global Insight, Lexington, Mass., also doubted that the war's end would affect retail food sales. "I would not expect a major boost to the industry. This will be a year of very solid growth, but I wouldn't expect that the end of the war will have much of an impact."
Andy Kish, associate economist, Economy.com, West Chester, Pa., said he had also been studying the economic effects of the 1991 conflict, and noted that supermarket sales slowed during the war and picked up afterwards, just the opposite of what he would have expected.
"I'm not sure how much this war's end will have an impact vs. general economic conditions," he said. "I think consumer confidence will definitely improve, but that doesn't necessarily translate into any jump in consumer spending."
Michael Walden, a professor of economics at North Carolina State University, Raleigh, N.C., told SN he thought the end of the war in Iraq will have two effects on the supermarket industry, one negative and one positive.
"It will move some consumer expenditures out of purchasing supermarket products to buying more specialty food products at restaurants," he said. "People will now be willing to spend more eating out because they feel safer and also because they're going to get a boost in their real income from the drop in oil prices."
On the positive side, he said consumers might start trading up to more expensive grocery items.
"Within supermarkets I think there will be a slight shift in spending to more luxury items away from basics, and an increase in spending on higher-priced cuts of meat, higher-priced brands," he said.
The supermarket industry can expect some, but not much, relief from the recent high cost of gasoline, the economists said. (For more on how retailers and distributors have been coping with high fuel costs, see the story on Page 16.)
Mark Vitner, economist, Wachovia Corp., Charlotte, N.C., said, "I don't think we're going to get that much of a break on gasoline prices. They're not just driven by the supply of oil. With gasoline, there's also a lack of refining capacity all over the world right now."
Johnson concluded, "Off-premises consumption, which is essentially what people are buying from supermarkets, grew at an inflation-adjusted rate of 2.6% last year, and we're expecting 3.6% this year and 2.7% next year. Two point seven percent is certainly a respectable growth rate. The population is only growing at about 1%. It suggests consumers are trading up to higher-value products."
