Rising Gas Prices Buoy Retailers' Summer Outlook

SN STAFF

Jim Buchanan, president of London, Ky.-based Laurel Grocery Co., got a firsthand look at how rising gas prices are impacting consumers last week.

While Buchanan was checking into a West Virginia hotel on a business trip, another would-be guest called to cancel his room reservation, saying the price of gas had risen too high for him to make the trip from Ohio.

Although that scenario might not bode well for the tourism industry, Buchanan said it's a good omen for local food retailers. “I think [rising gas prices] will impact the retail stores positively, from the standpoint that customers won't be driving longer distances to get to the mass merchandisers,” he said. “Consumers will be staying at home and doing more shopping close to home than they previously had.”

Last week, U.S. gas prices jumped to an average of $3.218 per gallon, 32.6 cents higher than at this time last year, and 11.5 cents higher than the preceding week, according to the U.S. Energy Information Administration. The Midwest is seeing the biggest sticker shock in terms of a relative increase, reeling from average prices of $3.326 per gallon that jumped 56.9 cents from year-ago levels.

Although the American Automobile Association predicted that the increased prices would not deter people from traveling, Buchanan said he was not so sure.

“I don't care what AAA and all those people are saying, I think people are going to be making shorter trips and fewer trips,” he said.

Last year when gas prices spiked, supermarkets seemed to benefit both from their more convenient locations and from a decline in restaurant spending as shoppers apparently sought to save money by eating at home more often.

Supermarkets' fortunes during times of rising gas prices often run counter to those of other retailers, including those of Bentonville, Ark.-based Wal-Mart Stores, which this month cited rising gas prices as being among the top three concerns of its low-income customers.

Jeff Noddle, chairman and chief executive officer, Supervalu, also recently cautioned that customers of the company's limited-assortment Save-A-Lot chain also tend to be impacted by rising gas prices.

Last week, the International Council of Shopping Centers issued a report citing rising gas prices as contributing to a 1.5% decline in sales for the week ended May 19, compared with the preceding week. In addition, 60% of consumers surveyed said they would reduce their discretionary spending as a result of rising gas prices — the highest such figure since October 2005, according to ICSC and UBS Securities, which contributed to the report.

TRADING DOWN

According to a separate survey by the National Retail Federation, in order to conserve fuel, more than 40% of consumers said they would take fewer shopping trips, and nearly 40% said they would shop closer to home. More than 23 percent are using more coupons, and nearly a third are looking for sales.

“Consumers are entering the summer season with a cautious view of increasing gas prices,” said Tracy Mullin, president and chief executive officer, NRF. “To offset the effects of higher prices, more consumers are giving their wallets a little extra cushion by cutting back on discretionary spending or choosing to frequent retailers closer to home.

John Runyan, president and CEO, Associated Grocers, Seattle, agreed that high gas prices favor local retailers, including the members of his cooperatve.

“Certainly, we've seen more people cooking at home, and that's good for us,” he said. “And when they are shopping, they are buying more per trip. That plays well for independent and regional chains, because we're very well located close to where our customers are.”

Runyan and other retailers pointed out that rising gas prices have a negative impact on their operating costs, however, and can also inflate product costs — already high this year because of increased demand for grains to produce ethanol.

“Certainly, if rising gas prices continue, we expect to see increased costs on the supply side, especially in terms of produce coming from the West Coast,” said Paul McGillivray, vice president of sales and marketing, Roche Bros., Wellesley Hills, Mass.

TRADING DOWN

Mona Golub, a spokeswoman for Price Chopper Supermarkets, Schenectady, N.Y., noted that shoppers may trade down in the store as their expenses for fuel increase.

“People will prioritize more as time goes on, and they'll decide if they want to eat a steak, hamburger, canned tuna or grow more vegetables in their backyards,” she said. “It's all about priorities.”

As Buchanan of Laurel Grocery said, “There are only 100 pennies in the dollar, and [trading down] is one thing they can do when dollars get short.”

He said a new warehouse the company opened this winter in Dennison, Ohio, serving about 75 customers in Ohio, West Virginia and western Pennsylvania, should reduce trip length and help the company weather this summer's gas price spike.

At AG-Seattle, Runyan pointed out that the company takes a close look at distribution efficiencies when gas prices rise, taking advantage of route consolidation opportunities and more efficient truck loads.

Golub said Price Chopper, which is self-distributing, “looks to increase efficiencies by filling out as many trucks as we can, consolidating orders, carefully planning order delivery from store to store with partial loads.”