Fuel Prices Changing Consumers' Shopping Choices

Next week marks the beginning of summer, and with it begins travel season.

Regrettably, those planning vacation travel by car will find an unwelcome passenger riding along with them in the form of unusually high gasoline prices. Indeed, fuel prices are testing, if not exceeding, historical highs, on an inflation-adjusted basis. In March 1981 fuel cost $3.31 for a gallon of regular, on average and adjusted for inflation. In many parts of the country, particularly the Midwest, that record has been breached.

As has been reported in this periodical and elsewhere, that is causing some strange results. For instance, Meijer, Grand Rapids, Mich., has instituted a program of notifying interested consumers by means of text messages to their cell phones when fuel prices are about to be increased so they can fill up prior to that. In Wisconsin, the operator of a convenience-fuel store stopped selling gas for a day to focus attention on high prices, as if prices weren't self-evident.

What's behind these wallet-draining prices, and what effect are they having on the food distribution industry? To some extent, the blame for both increased fuel prices and increased food inflation is being placed at the feet of biofuels, such as ethanol. Naturally, all the usual suspects must be considered, but the nation's current push to shift to ethanol in an effort to lessen reliance on imported oil has two strange effects: Gasoline refiners are reluctant to increase capacity, just in case the effort were to succeed. So it's likely consumption will continue to exceed the capability of refiners to produce enough product for domestic use, triggering increases in imported refined product. Moreover, ethanol production is causing dislocations in the amount of corn being produced, and is driving corn's price to historic highs. That is being reflected in higher food and packaging prices, further increasing pressure on consumers. (Much of what's cited above derives from a widely referenced Barclays Capital report.)

Ironically, as was reported in SN on May 21, ethanol may cost more energy to produce than it provides. It takes energy — natural gas or coal — to distill ethanol. Because it's corrosive, it can't be sent through pipelines and so must be trucked to plants where it can be blended with gasoline. The resulting blend must then be trucked to fuel stations. Assuming a strong proportion of ethanol is in the gasoline, fuel stations must have revamped equipment to dispense the product, which can be used only in ethanol-ready autos. Finally, the fuel delivers reduced mileage.

What makes this mechanism of false thrift work? It's the 51-cent-per-gallon federal tax credit for ethanol producers.

So what effect do these starkly increasing costs have on food distribution companies? Apart from increasing operating and product costs for all players, it also causes consumers to make different decisions about shopping choices. Generally, retailers that have a strong price proposition are seeing dollar-volume declines. That's because such stores are geographically dispersed and tend to appeal to shoppers who now must somehow shift discretionary spending from food to fuel. Conventional retailers that target a more affluent customer base are seeing volume increases as shoppers abandon long trips to the stock-up purveyors and instead opt for neighborhood supermarkets.