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ECONOMY, RETAIL LESS EXPOSED TO PRICE RISES AT GAS PUMP?

BY DONNA MITCHELL

The relentless rise of oil prices from January through May sat the U.S. retail industry bolt upright. Even so, experts say, the gas pump seems to be exerting less power over consumers than it may have in the past.

During the last week of May, the average price for regular gasoline hit a record $2.06 per gallon, compared with $1.50 for the same month last year. Yet, the retail industry has been hitting some peaks of its own. May same-store sales climbed 5.7 percent, according to ICSC research, up from April’s 4.4 percent.

Overall, the economy simply isn’t as vulnerable to oil as it once was, says Richard Yamarone, chief economist at New York City-based Argus Research. Though a sustained period of escalating gas prices could certainly pose problems, such as eating into consumers’ discretionary income, it is unlikely to worsen inflation or trigger a recession, as happened after the oil embargo of the 1970s, he says.

The U.S. economy is “able to bounce back from incredible adversity,” Yamarone said. “We are not the smokestack economy we once were, or the energy-dependent nation that we were.”

Not only is the economy more service-based than industrial, but those factories that are still operating can switch between traditional and alternative fuel sources, says Yamarone.

Small piece of the pie

As for distribution costs, gasoline is only a small part of a retailer’s overhead, says Anthony Chukumba, a specialty retail stock analyst at Chicago-based Morningstar.

“The biggest costs for retailers are the products in the store and the labor costs,” said Chukumba. “Any time retailers experience increased costs of doing business, they can eat the costs or pass them along to consumers. My guess is they will do a little of both.”

But consumers have already demonstrated that higher gas prices do not faze them, at least not in the short term, according to ICSC. In an ICSC survey of U.S. households conducted in May, 55 percent of respondents said the gas hikes had no effect on their shopping patterns.

To be sure, lower-income groups seemed to be more sensitive to the situation. Sixty-three percent of households with annual incomes under $25,000 said they became more efficient shoppers — they made fewer car trips and bought more merchandise per visit. But this statistic dropped to 57 percent for those households with annual incomes between $50,000 and $75,000 and to only 37 percent of households with incomes of $75,000 or above.

“Consumers may cut back on travel, but they are not putting off major purchases,” said Scott Krugman, senior director of public relations at the National Retail Federation. Here too, however, income level had some bearing. An NRF survey in May revealed that 52.9 percent of consumers reporting an annual household income above $50,000 said mounting gas costs would influence their buying habits, versus only 38.1 percent of households with incomes under that amount.

The survey also found that 31 percent of consumers planned to scale back travel and vacation plans as a result of gas prices, while 20.9 percent said they would spend less on clothing, 13.6 percent were delaying such major purchases as cars and furniture, and 26.9 percent would cut back on eating in restaurants.

Hopeful signs

But for May, at least, healthy same-store sales encouraged retail executives, says the NRF. Its retail sector performance index was strong in May, with a reading of 59.6 points (based on a scale of zero to 100, with 50 being normal), up 12.1 points from a year ago, and 1.4 points from April’s 58.2. The six-month outlook was 65.4, its strongest reading since the index was created in September 2002. Retailers are also able to sell their goods without heavy reliance on discounts, the federation says. Its pricing index was, coincidentally, also 59.6, up from April’s 58.8.

Shoppers are able to absorb the gas price increases because they are taking home more money, according to ICSC. Though consumers are spending between $7 and $10 a week more on average as a result of the increases, weekly earnings have risen by $13. Thanks to this, gas purchases account for only 3 percent of overall purchases, down from 5 percent in 1990, says Mark Vitner, senior economist at Charlotte, N.C.-based Wachovia Corp.

OPEC’s next move

At press time gas prices were dropping after the Organization of the Petroleum Exporting Countries pledged to raise output to meet demand and help stabilize the market. OPEC said it would increase production to 25.5 million barrels per day in July from May’s 23.5 million barrels. That would rise to 26 million barrels a day effective Aug. 1, the organization said. Shortly after that announcement, the U.S. Energy Information Association, the statistical agency of the U.S. Department of Energy, said the price of regular gasoline declined 1.7 cents per gallon for the week ended June 7, on top of a decline of 1.3 cents a gallon the previous week.

Even so, gas prices remained historically high at press time. They will probably average about $1.91 per gallon through the summer, says the EIA, 35 cents more than last summer. The average price per gallon will average about $1.82 for the second half of this year, the agency says, versus $1.42 for the same period over the past five years.

International events and world crude-oil prices do not bear the entire blame for that five-month run-up in gas prices, says Philip K. Verleger Jr., senior fellow at the Institute for International Economics, Washington, D.C. A greater factor has been the inability of U.S. refineries to build sufficient inventory to meet local demand through the summer. Demand for gas this summer should equal about 9.32 million barrels a day, compared with last summer’s 9.12 million barrels, according to the EIA.

But though the impact on retail sales has been relatively slight so far, retailers should not get complacent, cautions the NRF’s Krugman, noting that the effects of gas prices on back-to-school shopping have still to be seen.

“Psychologically, it is a tax,” Krugman said. “Every consumer has a mental point as to when [gas prices are] too much. What that point is, is hard to say.”