Why Retailers Shouldn't Fear $3 Gas

Fuel Prices May Be High, but Little Slowdown Seen in Consumer Spending

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BATAVIA, Ohio (AdAge.com) -- Will gas prices finally drive a spike into the heart of the consumer economy now that they're over $3? Don't count on it.
Wal-Mart's promos mention gas prices.
Wal-Mart's promos mention gas prices.

Yes, the signs are sobering. The Department of Commerce revised estimated first-quarter gross-domestic-product growth downward May 31 to just 0.6%, edging perilously close to zilch. The GDP deflator, the broadest gauge of inflation, rose a higher-than-usual 4%, raising (if ever so faintly) the specter of '70s-style stagflation.

And, yes, Wal-Mart Stores and Zales recently blamed high gas prices in part for disappointing results. The International Council of Shopping Centers-UBS Retail Chain Store Sales Index showed a 1.5% decrease in same-store sales the week ended May 19, followed by flat sales the week ended May 26. The ICSC in part blamed gas prices too -- even though its showing was still 2% to 3% ahead of a year ago.
But retailers' high-gas-price excuses are beginning to take on a "dog ate my homework" tone, much like the weather and the Easter Bunny, acknowledged Wendy Liebman, president of WSL Strategic Research, a New York retail consultancy. After all, Costco and Dollar General handily beat Wal-Mart's same-store-sales numbers last quarter.

"This quarter, everybody is worrying about continuing rising gas prices, which in theory hurts us a little bit," said Richard Galanti, VP-finance of Costco in a conference call with analysts May 31. "We haven't seen it yet in terms of the hurt."

Ms. Liebman believes that at $3 plus, gas may finally crimp even wealthier consumers, who have driven much of the 21st-century spending spree. WSL's Pulse newsletter reports that as gas costs pass $3, half of consumers say they'll drive less, and 40% say they'll spend less in stores. That's the most bearish consumer outlook in WSL's surveys since October 2005, just after Hurricane Katrina struck. Consumers said they'll spend less on magazines, home d├ęcor, coffee, eating out and movie tickets, among other things.

Wait a minute, movies? The studios were heading for a record month in May on the backs of the killer threes -- third installments of the "Spider-Man," "Shrek" and "Pirates of the Caribbean" franchises.

Wishful thinking
Ms. Liebman acknowledged consumers don't necessarily follow through on their intentions. And she said high gas prices could even be helping Costco, citing an admittedly small sample of well-off friends who've joined Costco to save money on gas, then left the store with carts bursting with $200 worth of other stuff.

Technomic's recent research also cites gas prices as the No. 1 concern of restaurant patrons, large numbers of whom say they'll spend less at restaurants. The only problem, said Technomic exec VP Robert Goldin, is that survey respondents said the same thing a year ago, when restaurant sales grew nearly 6%.

"People are spending like drunken sailors," Mr. Goldin said. And apparently answering survey questions the same way. But he warned that gas prices can't keep rising forever without having an impact.
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