GAS PRICE INCREASES SPUR DEMAND FOR CPG PRODUCTS

MARK HAMSTRA

CHICAGO - Spending on consumer packaged goods increased in correlation with the rise in gas prices this year, according to a report issued last week by Information Resources Inc. here.

Although a portion of that increase was attributable to inflation - which itself was caused in part by the rise in petroleum costs for packaging and transportation - consumers also appeared to spend more on at-home dining.

"While volume growth, or demand, was still negative, it improved significantly as gas prices increased," said Sheila McCusker, editor of IRI's Times & Trends report titled, "Gas Price Trends: How Spending at the Pump Affects Spending at the Register."

She noted that had there not been price inflation, demand might have been even greater for CPG products. Inflation averaged a little more than 4% during the period covered in the report, led by double-digit price increases in sugar, coffee, toilet tissue and facial tissue.

According to the report, the average U.S. household spent an estimated $535 more on gasoline in the past year than they did in the preceding year. Consumers compensated for that by cutting back on discretionary purchases and entertainment, making more meals at home, changing their vacation plans and making more use of coupons, according to a study by Boston Consulting Group that IRI cited in the report.

The IRI report found that as gas prices increased, dollar sales growth improved across "convenient meal solutions" categories, which include frozen and refrigerated prepared foods, such as pizza, appetizers and side dishes.

Consumers also appeared to make fewer shopping trips as gas prices increased, but spent more per trip, especially at supercenters. However, as gas prices remained high over the summer, shopping-trip frequency began to pick up a little, the report indicated.

"We definitely saw some trip conservation," said McCusker, adding that she "thought it was pretty fascinating" that a decline in shopping trips actually occurred across all income levels.

"When you have something like a gas price increase, obviously it affects lower-income consumers more directly because it's a larger proportion of their budget, but even upper-income consumers - for this report households with incomes of $55,000 and above - conserved on their shopping trips."

During the period from March 13 through June 25, when gas prices averaged $2.75 per gallon, average shopping trips per week among all consumers fell 4.6%. Those consumers with the highest incomes, however, had the highest rate of shopping-trip decline, at 5.6%.

Supermarkets saw a 3.1% decline in trips per week during that time frame, and supercenters saw a decline of 0.8%. No channel had an increase in average trips per week during that period.

In the following weeks, however, from June 26 through Aug. 6, the decline in frequency abated and even reverted to an increase in the drug store channel, which saw frequency increase by 2% over the same period from a year ago.

"It seems to me that consumers initially kind of cut back across the board, but then we saw drug stores make a rebound," McCusker said. "I think what happened is that consumers started shopping a little bit closer to home. I think drug stores were used more for a fill-in trip in between trips that consumers were making to larger supercenters."

Customers also started returning to supermarkets in that later time frame, the study found. The trip frequency decline was only 1.9% in the supermarket channel during that period, vs. a decline of 1.5% at supercenters.

While consumers were shopping less frequently at supercenters than last year, they were spending more per trip, at least at Wal-Mart, the study found. During the March-June period, consumers reported spending 4.3% more per trip at Wal-Mart than a year ago, while spending per trip increased 3.5% in the following weeks.

Lower-income consumers in particular increased their spending on each visit to the retailer, the study found.

"While lower-income consumers did in fact reduce their trips to Wal-Mart, they increased their dollars per trip," McCusker said. "While total store sales were negatively impacted, Wal-Mart did increase sales of CPG products among lower-income consumers. So these consumers cut back on trips, but they continued to turn to Wal-Mart for low prices on packaged goods products."

She described this a "silver lining" for Wal-Mart's CPG sales because it further solidified the retailer's positioning as a destination for low-priced products.

The report concluded that retailers can capitalize on the cyclical rises in gas prices in several ways. Some suggestions include implementing basket-building promotions such as savings on larger package sizes and emphasizing the convenience, fun and cost savings of at-home dining in marketing messages. The report also suggests that retailers include anticipated gas price trends in the marketing and planning process.

McCusker said falling gas prices in recent weeks could ease demand for CPG products and see a return to more restaurant dining and more traditional shopping patterns.

"But in the spring, as gas prices start to increase again, we expect to see a reversal," she said.

Changes in Spending Patterns in Response to Higher Gas Prices (% of Consumers)

Delay unnecessary purchases 49%

Eat out less 42%

Cut back on entertainment 39%

Changed vacation plans 35%

Use coupons more 31%

Source: IRI/Boston Consulting Group

CPG Categories With the Largest Average Unit Price Increases

Sugar 12.1%

Coffee 10.6%

Toilet tissue10.1%

Facial tissue10.1%

Food and trash bags 9.8%

Bottled water 9.2%

Baby formula/electrolytes8.5%

Cat food 8.4%

Batteries 8.0%

RTD tea/coffee 7.9%

Dish detergent 7.9%

Source: IRI InfoScan Reviews

Average Shopping Trips Per Week (% Change vs. Prior Year)

Supermarkets; Supercenters; All Channels; Gas price (per gallon)

10/24/05 - 3/12/06; 0.0%; 3.0%; -0.1%; $2.25

3/13/06 - 6/25/06; -3.1%; -0.8%; -4.6%; $2.75

6/26/06 - 8/6/06; -1.9%; -1.5%; -3.9%; $2.95

Source: IRI Consumer Network/U.S. Department of Energy