The spike in crude-oil prices experienced last week, and in other recent weeks, is sure to make a difference to supermarket retailers.
Depending on retailers' exact situation, it could put pressure on them -- and their distributors -- to increase prices. In marketing areas where there is intense price competition, though, that may not be an immediate option, which suggests margin pressures will build.
Also, there could be an upside to the scenario in some instances, namely local supermarkets could see a sales boost if consumers become increasingly reticent to travel great distances to patronize discounters.
The price of crude approached $50 a barrel last week, the highest price ever.
At Penn Traffic Co., Syracuse, N.Y., "we always try to buffer the consumer from feeling any cost increases by holding the line on prices while cutting costs in other areas or looking for more efficient ways to buy," spokesman Marc Jampole said. "But after a while, we may reach a point where we can't do it anymore, and then we'll have no choice but to raise prices."
Penn Traffic operates retail stores and has a separate wholesale business.
"When vendor costs go up, whether or not we can absorb those increases or for how long depends on what's going on in the marketplace -- and we operate in a lot of markets, some of which are more competitive than others," Jampole said.
Chuck Cerankosky, an analyst with McDonald Investments, Cleveland, also said competition is likely to determine if or when retailers may have to raise prices. "It becomes a matter of which markets see price increases and how quickly retailers in general can pass costs along," he explained.
"In the long term, fuel cost increases must be passed along for everyone involved to see a profit, but that doesn't have to happen quickly," he explained. "If employment and income levels are up in a particular area, then it's easy for retailers to push prices up, but in more competitive areas, any increases would probably be passed along more slowly."
Several wholesalers told SN they have imposed surcharges on delivery costs.
Associated Grocers, Seattle, imposed a fuel surcharge in 2003 based on a baseline fuel cost in 2002, and the amount of the surcharge changes each month depending on how much AG paid for fuel in the prior month, "so it never covers our costs completely because we're always a month in arrears," Bob Hermanns, president and chief executive officer, told SN.
He said AG has no plans to alter the original baseline at this point, "though that will depend on what happens in the market going forward."
Another problem caused by increasing fuel prices, Hermanns pointed out, is the growing number of freight carriers who have gone out of business, "which raises freight prices and also makes reliability of getting goods on time more complex."
Rich Parkinson, chairman and CEO of Associated Food Stores, Salt Lake City, said his company imposed a fuel surcharge five years ago. The surcharge, which he declined to pinpoint, is fixed, so as fuel prices rise, the percentage of the surcharge stays the same, "and retailers have to pass it along, though most have done it slowly."
With the latest increase in fuel prices, Parkinson said he expects retailers to try to absorb the difference as long as they can before raising prices.
He acknowledged that fuel increases help supermarkets to some degree "because people are less inclined to travel longer distances to get to super discounters."
Jerry Davis, chairman and CEO of Affiliated Foods Southwest, Little Rock, Ark., said his company imposed a fuel surcharge of 0.15% earlier this year. "That was intended to be a temporary measure, but after looking things over, we've determined that fuel prices will not be coming down anymore, so we're looking at bumping the surcharge up to 0.25%."
Given the ongoing escalation of fuel prices, Davis told SN, "we're still spending $600,000 to $800,000 more per year on fuel than we did, even with the surcharge, and reducing our year-end patronage dividend to accommodate the increases."
Most of Affiliated's customers have found ways to pass through the surcharge to consumers, he said.
At the consumer level, increases in fuel prices have changed some shopping habits, Davis noted. "Retailers in smaller towns are telling us a lot of people who used to drive long distances to shop at a Wal-Mart are now shopping closer to home more often," he said.
Consumers across the country may have to make a similar choice, Jonathan Ziegler, principal in PUPS Investment Management, Santa Barbara, Calif., told SN.
"On the one hand, it could be a plus for supermarkets that are more conveniently located because they could pick up business from consumers who don't want to drive long distances to big boxes," he said. "But on the other hand, the big boxes could draw more traffic if consumers decide they can save on gas by making one big shopping trip to take advantage of lower pricing, despite the increased driving distance.
"At this point, there's really no clear answer on which way consumers will go, but the more people put in their tanks, the less they'll have to spend on putting food in their mouths," he said.
Andrew Wolf, an analyst with BB&T Capital Markets, Richmond, Va., said rising fuel prices may force some consumers to trade down.
"Demand for fuel will remain relatively inelastic, so people spending more on necessary items will spend less for other things, and that could mean some trading down in food," he pointed out. "But with manufacturer processing and delivery costs increasing, the prices retailers pay are going to rise -- at the same time consumers have less disposable income.
"So the dilemma retailers will face is, do they raise their prices or maintain their pricing and crimp margins?"
Gary Giblen, senior vice president and director of research for C L King Associates, New York, said he doubts manufacturers will be able to pass through to retailers all their increased transportation or processing costs, noting supermarkets are already pressuring major suppliers to absorb any cost hikes.
"Retailers faced with increasing utility costs and increased costs of putting gas in their delivery trucks are trying to push the pain back to the CPG companies, and they've been succeeding to this point," Giblen said. "As a result, I would expect any additional increases from spikes in fuel prices to continue to be absorbed by the manufacturers at the same rate."
Not all increases in fuel costs can be passed on to consumers, Giblen added, "because customers will resist and switch to alternative formats that offer lower prices, and that will continue to hurt supermarket margins."
But any price increases that are reflected at retail could be a positive for supermarkets, Ziegler pointed out, "because it could boost same-store sales. But if it isn't passed on, then the whole channel will be squeezed on margins."