NEW YORK — Some supermarket operators are well positioned to retain their share of consumer spending as gas prices increase, food retailing executives said in presentations here last week.
“This summer, I think gas prices are likely to be problematic, which spells opportunity because we have over 1,000 supermarket facilities with gas,” said David Dillon, chairman and chief executive officer, Kroger Co., speaking at the Barclays Capital Retail & Restaurant Conference. “We also tie our grocery purchases back to discounts on gas, which helps in that particular situation. So that's why we say [gas-price inflation] is more positive than not.”
As average U.S. fuel prices at the pump approached $4 per gallon last week — up more than $1 per gallon vs. year-ago levels — retail executives said the overall impact on shoppers could be complex and difficult to predict. Convenient locations and discounts tied to fuel purchases weigh in supermarkets' favor, however.
“As gas goes up people shop at more convenient locations, and Winn-Dixie is very convenient,” said Peter Lynch, chairman, president and CEO of Winn-Dixie Stores, Jacksonville, Fla., also speaking at the Barclays conference. Fuel prices are up 33% this year in Florida, he noted.
In addition, rising gas prices also could cause consumers to curtail some restaurant spending, Lynch said, which also benefits supermarkets.
Like Kroger and other supermarket operators around the country, Winn-Dixie also has a gas rewards program that allows shoppers to earn fuel discounts based on food spending. Winn-Dixie launched its fuelperks! rewards program in 2009, “which has been very good for us, and quite frankly very timely with what's going on right now,” Lynch explained, saying the program has “exceeded expectations.”
“You couldn't have a better time to have this program going,” he said.
The fuel discount offering is available in about half the company's stores right now, after the most recent launch in the Miami market. It plans to finish rolling it out to all stores next year.
In an earnings conference call last week, Safeway attributed much of its sales gains in the first quarter to rising gas prices (see here).
“When fuel prices go up, we have the cheapest price compared with branded companies,” explained Steve Burd, chairman, president and chief executive officer. “And when you add in promotional programs that reduce the price per gallon, it all works to our advantage.”
He and Dillon of Kroger Co. both pointed out that while higher fuel prices might be putting more pressure on lower-income consumers, the higher-end shoppers who have been spending more since the end of the recession appear unfazed.
“We still see 25% of customers that don't worry about the recession, and 75% who remain more cautious,” Burd said.
Dillon agreed that the higher gas prices impact the spending power of the lowest-income consumers.
“You start to see that [increased spending on gasoline] come out of their household budget, and it requires, I think, for them to rethink what their purchases are,” he said. “It's hard to predict what those answers will be, because you have millions of households making independent choices.”
Some might choose to dine out less in restaurants, for example, or to trade down to lower-priced items within the store and cut back on discretionary items.
“So it's a little hard to predict where all that comes out, but our net-net belief is that on gas prices, if they go up, it will change behavior, and as it changes behavior that it generally is in our favor, not a big favor, but it's more positive than negative.”
Michael Duke, CEO of Wal-Mart Stores, agreed that rising gas prices are siphoning off discretionary purchases among low-income shoppers.
Based on spending patterns in stores, he said he believes Wal-Mart's core customer is under even more pressure than a year ago, exacerbated by rising gas prices.
“When they pay more money for gas, they have less money for discretionary spending,” he said. “That's the way the math works for our customers.”