PRINT THIS STORY:

CHANGE TEXT SIZE:

GASOLINE PAINS

Retailers and developers gauge the impact of rising fuel prices

By Joel Groover

Outside a Wal-Mart in the Atlanta suburb of Marietta, Nancy Elder pushes her shopping cart back to her car and jokes that her stress level goes up as the needle on her fuel gauge goes down. “I’ve got half a tank,” she said, “so I’m not as stressed as I could be.”

The sign at a nearby BP gas station underscores Elder’s point: Its plastic letters read $2.95 for a gallon of regular unleaded, a once-unthinkable price in Georgia. The hike is no small matter for Elder, a working mom who lacks health insurance and faces a stack of bills from her husband’s recent hospital stay. The family has no choice, she says, but to spend less and take shorter trips.

A few miles away at a Kohl’s department store in affluent East Cobb County, however, retirees Carol and DeForest Gould say their shopping and driving habits have changed little in recent months, notwithstanding sky-high gas prices and the near panic at some Atlanta pumps in the days after Hurricane Katrina. “In fact, we’re taking a big trip by car next month to New York and Canada,” said Carol Gould.

If the key difference between these shoppers is discretionary income, a key question for the shopping center industry is whether most U.S. consumers have enough of it to keep spending at a healthy clip. In an economic environment where gas prices are part of a raft of pressures — along with high levels of consumer debt, low levels of personal savings, rising home-heating costs and looming interest rate hikes — the unscathed Goulds may well represent an exception to the rule.

A recent ICSC-commissioned survey of 1,000 households showed that 59 percent were spending less on such items as clothes, shoes, jewelry and electronics, and paying fewer visits to spas, restaurants and beauty salons. The results are in line with a similar poll conducted by the Gallup Organization.

The numbers appear not to reflect temporary jitters caused by Hurricane Katrina — a pre-Katrina ICSC survey showed that 58 percent of consumers were cutting back their spending. “That is the real worry,” said Michael P. Niemira, ICSC’s chief economist and director of research. “It is not a Katrina story. It goes well beyond that and will linger well beyond the impact of Katrina as well.”

The effects of today’s gas prices also extend beyond lower-income households, says Niemira. “More middle-income households are being affected,” he said. “That is the new wrinkle.”

Several chains that cater to budget shoppers, among them Big Lots, Dollar General, Dollar Tree, Fred’s and Wal-Mart, have already mentioned high gas prices in conjunction with disappointing earnings reports, says Kenneth Perkins, president of Retail Metrics, a Swampscott, Mass.-based research firm. “Their core customers are getting hurt,” Perkins said, “and Big Lots said they’re also feeling it on the price end — in their margins — because their freight transportation costs are going up. It’s a double squeeze.”

Retailers that target moderate-income consumers and above will feel the pinch next, says Perkins. “My sense is that we’ll see this trickle up to the JCPenneys and Kohl’s of the world, and maybe even to Federated Department Stores and apparel retailers that have been struggling a bit, like Gap and Limited,” he said. (Indeed, J.C. Penney Co. Chairman and CEO Myron E. Ullman III recently expressed concern about gas prices during a conference call with investors.)

Lowered earnings forecasts are one reflection of such concerns, Perkins says. “We track about 140 retailers in our retail metrics earnings index,” he said. “Third-quarter growth expectations were for about 15.6 percent growth at the beginning of August, but we saw three percentage points shaved off throughout the month, to 12.5 percent. That was a huge downward revision that early, before retailers were even close to reporting their third-quarter earnings in mid-November.”

But not all retailers were slamming on the brakes. In fact, a slogan for the luxury sector might well be, “What higher gas prices?” Seattle-based Nordstrom, for example, reported a 9.5 percent year-on-year total sales increase in August, with a same-store sales increase of 8 percent for the month. In September the Dallas-based Neiman Marcus Group reported a whopping 67 percent jump in its fiscal fourth-quarter net profit.

This might be great news for stockholders with investments in luxury retail, but for some people it is an ominous sign of the declining fortunes of the middle class — the traditional driver of the U.S. economy. “The divide is becoming even greater between the people who have a lot of money to spend and those who are managing their money day to day,” said Gary Ruffing, a retail consultant at Southfield, Mich.-based BBK, an international business advisory firm. “You either shop at Wal-Mart or you shop at Nordstrom.”

Income disparities are growing, says a recent report by the Washington, D.C.-based Economic Policy Institute, a think tank that studies the economic conditions of low- and middle-income Americans. In 1979, for example, the average income of the wealthiest 1 percent of Americans was 33.1 times that of the lowest 20 percent.

By 2000 the average income of that top 1 percent had ballooned by 55.4 points, to 88.5 times that of the bottom fifth, the institute said.

This summer the U.S. Census Bureau said the number of Americans living in poverty grew by 1.1 million last year to 37 million, the fourth year in a row in which poverty had increased. Meanwhile, global market information firm TNS Financial Services reports that the number of U.S. households with net worth of more than $1 million, excluding primary residences, grew by a record 8 percent to 8.9 million as of May. This was the third consecutive year in which the number of such millionaire households has increased, the firm says.

Gas prices alone may not force vulnerable middle-income consumers to abandon specialty stores, say, or to “shop down” in groceries from Kroger to Wal-Mart. But other potentially troublesome trends on the horizon have more than a few analysts feeling nervous.

“We haven’t seen the second leg of the energy story yet — that is, when the home-heating bills start rolling in,” said Niemira. “We’re looking at a winter projected to be colder than normal, and [home-heating] prices are expected to be up about 50 percent from last year. That means more downward pressure on consumer spending.”

Furthermore, given the ongoing efforts of the Federal Reserve Board to stave off inflation by raising interest rates, some economists have been predicting that the long-anticipated housing slowdown will materialize before the end of the year. The painful reality of higher interest payments on credit card debt or popular adjustable-rate, interest-only mortgages could drive millions of consumers to shop even less.

That would also mean an end to the refinancing boom, says Gwen MacKenzie, CLS, senior vice president of retail investments at Irvine, Calif.-based Sperry Van Ness. “So many people have lived for the past couple of years by using refinancing dollars,” she says. “They refinanced the house, took more out and had a lot more discretionary income. That opportunity will be gone.”

Hurricanes Katrina and Rita’s effects on gas prices were short-lived, but MacKenzie wonders about the emotional and psychological toll on consumers. One early sign is the University of Michigan’s consumer confidence index. That monthly indicator of shopper inclination to spend crashed to near-record lows after the hurricanes — lower, even, than after the Sept. 11 attacks. “Consumers feel a lot of concern and caution right now,” said MacKenzie.

Clearly, many retailers and developers can relate.

© 2008 ICSC. All rights reserved. | Terms and Conditions | Privacy Policy | Contact ICSC | ICSC Home |