Some gas prices top $2 a gallon in Manhattan.

With war, terrorism and the weak economy weighing on consumers, soaring gas prices are now taking more cash from them - and retailers.

NEW YORK — These days, when retailers say consumers are running out of gas, they mean it in more ways than one.

With rising threats of domestic terrorism, the weak economy and the wicked winter, consumers have been beaten down. Now, soaring gas prices are fueling even more angst — and the result is that the economy is losing $1 billion in consumer expenditure for every penny increase in pump prices, according to estimates from Salomon Smith Barney. Americans may still be filling up, but less often, and it’s exacting a toll at the local mall.

This story first appeared in the March 12, 2003 issue of WWD. Subscribe Today.

“The issue is the consumer mentality and that’s very fragile,” said one senior operations executive at a national retail chain. “Some of the biggest issues, like gas prices, we can’t measure the impact it is having on customers. But if they are spending more on gas, it’s taking something out of the general retail market.”

It’s tough to draw a direct connection between traffic in the stores and prices at the pumps, yet retailers acknowledge gas prices are one of several factors that contribute to negative store performances. If gas prices surpass $2 a gallon on a national average basis — as they already have in several urban areas — eventually it could be reflected in increased retail prices.

Then there are internal issues. Retailers have their own trucks to fuel up and stores to heat and it’s all getting more expensive. For now, they say they’re not offsetting higher costs by raising prices. And according to the senior retail executive, with fuel bills in December and January, “there was not a significant blip. We do a lot of things to hedge our bets on energy. There are gas contracts that protect us.”

As far as the potential impact on retail prices, a Wal-Mart spokesman said, “We work every day to protect low prices, and will continue to through these times even with higher gas prices. Our lifeblood is our everyday low price and we will continue with that.” During the first week of March, both the average ticket and customer count were up, he said, adding that any correlation to rising gas prices would be speculative.

“People are shopping and we are seeing normal shopping patterns at this time,” the spokesman said.

Other stores also have yet to see any impact. Cheryl Daskas, co-owner of Tender, a 3,000-square-foot European designer clothing store in Birmingham, Mich., noted that gas has gone up to $1.98 a gallon for super unleaded in Birmingham, and $1.76 for regular. However, her affluent customers haven’t changed their mobile lifestyles. “They drive big cars and big SUVs, and know it is going to cost them money, because you have to drive everywhere here,” she said. “They’re just used to it.”

Jim Westcott, general manager of Somerset Collection, in Troy, Mich., near Detroit, agreed, saying, “I don’t think it’s had an effect yet. Everybody here drives their own cars. Detroit is a lot like L.A. People would be hesitant to defer that. I doubt carpooling is increasing, which would limit individuals getting around, though I would envision people consolidating their shopping trips. But the upscale nature of our center would tend to minimize any effect of gasoline prices.”

At one of America’s most productive malls, Dadeland in Kendall, Fla., south of Miami, Annette Alvarez, marketing director, sees no correlation between shopper traffic in the center and gas prices. “We haven’t really heard of that as a deterrent,” she said. “Right now, we are not at the point where people are changing their habits. The values being offered offset any increased expense.”

She said that traffic has been good recently, but she acknowledged that world concerns, such as probable war with Iraq and the economy, could be affecting purchasing. She also said gas prices could affect store operations, such as shipments. “It will be interesting to see how their costs are going to affect prices, maybe reduce the number of shipments, but I haven’t seen anything directly related to that,” Alvarez said. “The stores are doing such an incredible job offering value. People can save so much, so a trip to the mall is definitely worth it. The gas is minimal. People are still looking for entertainment, and they are still looking for values. While people are still waiting to see what’s going to happen [around the world], right now, I don’t think it’s had a great effect.”

But analysts and industry executives hint it might just be a matter of time before the skyrocketing price of gas means consumers cut back on discretionary purchases, particularly apparel.

“This is an issue that affects retailers in multiple ways,” said J. Craig Shearman, senior director of media relations for the National Retail Federation. “There are transportation costs for merchandise, heating and air conditioning costs. Electricity is a major cost, not too far beyond employee salaries and real estate costs. But I don’t think we are at the point where $2 a gallon at the gas station is keeping customers from making a trip to stores.

“For some people, it may reach the point of affecting discretionary trips. I don’t think it’s quite there yet, but if fuel prices continue up, we could get there very soon. It might be felt first in resort destinations. People aren’t going to cancel a trip to the mall, where the difference between a $1.50 a gallon or $2 a gallon wouldn’t matter that much, but people may decide not to take a vacation where the fuel costs are significant, such as a drive cross-country or to the national parks, or from Washington D.C. to the Jersey shore. For retailers situated in these destination spots, where shopping is a major component of vacation activities, there could be an impact.”

Some retail experts think stores catering to blue-collar markets with lower disposable incomes could get hurt more by fuel prices, compared with higher-end stores. But Shearman disagreed. “Discounters are less likely to be hurt. Those are mostly the close-to-home trips, where fuel prices aren’t going to have a whole lot of impact; it’s the long-term trips where it comes to play — some discounters, such as Costco, sell gas at cheaper prices.” Wal-Mart also sells gas at a small number of its stores.

Shari Schwartzman Eberts, retail analyst for J.P. Morgan, differs. In a report, she cited a “strong negative correlation between same-store sales results and retail gasoline prices, particularly for the discount stores, where gas costs make up a greater portion of the consumers’ disposable income.” She expects that if gasoline prices hold at current levels, comparisons will continue to remain under pressure.

“I think rising gas prices will affect retail sales in general, especially as it pertains to long-distance travel to the regional mall,” observed Robert Vassalotti, assistant chairperson of the department of fashion merchandising at the Fashion Institute of Technology. “People driving 50 miles each way to their regional mall or shopping center will rethink that choice or not go as often. It will decrease the frequency that you make that trip. As far as having less excess cash to spend on retail, it’s going to put a pinch on that.”

According to Salomon Smith Barney, of the roughly $37,000 median U.S. family income after taxes, $4,000 to $5,000 goes toward energy costs, including filling up cars plus heating and lighting homes. Accordingly, a 75 percent year-over-year rise in oil prices and a “severe upward spike” in natural gas prices could have a $4,000 to $5,000 impact on consumer discretionary spending, annually.

The firm also estimates that the rise of just 1 cent in the price of gasoline represents about $1 billion in lost consumer expenditures.

“The ‘shock’ of higher oil prices in the near-term is likely to cause short-term disruptions in spending,” said SSB analyst Deborah Weinswig, in a research note. “While a regression of same-store sales at retailers to the absolute level of fuel prices failed to show a significant relationship due to ‘noise’ such as weather and national events, we believe that the impact is being felt at most retailers.”

Lazard Frères & Co. equity analyst Todd Slater agreed that rising fuel prices would take a bite out of the consumer’s discretionary spending. “People still need to buy daily consumables, but as gas takes up a bigger portion of one’s wallet share, it’s at the expense of discretionary purchases like apparel,” he said.

In an environment where energy costs are rising, he said, discounters will continue to lean on their value proposition and take a greater chunk of the overall retail pie as consumers trade down. Meanwhile, he added, higher-end malls, with a higher percentage of discretionary products, will be hurt by increased fuel prices.

On the plus side, though, Slater described the ascent of fuel prices as “less of a long-term issue than a temporary manifestation of current events.” Historically, gas prices have been far more volatile than apparel prices, rising at greater rates. According to the U.S. Department of Labor’s Bureau of Labor Statistics, from 1972 to 2002, the seasonally adjusted average price of all types of gasoline for all urban consumers has soared 308.5 percent. Over that same period, the seasonally adjusted average price of all apparel for the same consumers grew 99 percent. More recently, as of January 2003, gas prices were 6.8 percent higher than in January 2001, while apparel prices were 1 percent lower. Jessica Walker, economist at Moody’s Investor Service, noted that from January to February, premium gasoline prices increased 13.8 percent, the greatest increase since April 2002. From December through January, prices were up 7.8 percent.

“Fuel prices have been climbing higher than expected,” she observed. “As consumers reallocate their money toward higher fuel costs, it will cut into spending in other places.” She said currently, consumers aren’t as burdened as one might think because low interest rates have eased mortgage payments and other debts. However, if fuel prices climb higher and another interest rate cut fails to materialize, added energy costs could bite into consumer spending.

Stephen Gallagher, U.S. chief economist at SG Cowen, said energy prices have remained on the high side for longer than anticipated. “We expected high prices in mid-February, when prices spiked higher due to an anticipated war with Iraq. While the war didn’t materialize, it did leave prices at an elevated level. Consumers are still buying houses and durable goods, but they are curtailing their discretionary spending to do so. The combination of higher energy prices for longer periods and the cold winter has been a double whammy for the apparel sector.”

The economist pointed out that some firms have passed along some of those costs, at least temporarily boosting prices at the wholesale level. Trucks and shipping firms, for example, are passing the costs on a business-to-business basis. While they don’t want to permanently raise rates, Gallagher said, they are hitting manufacturers and importers with surcharges to compensate for the higher costs.

Some actions could have a more lasting effect on prices. “We’ve been getting warnings from refiners that they are still making home heating oil and haven’t started refining for gas for summer use yet,” Gallagher said. That could mean low gasoline inventory along with higher prices at the time when consumers are gassing up for vacations.

George Magnus, chief economist for UBS Warburg in London, wrote in a report last week that crude oil prices are up 33 percent over the average of 2002 and are up more than 60 percent year-over-year. While the firm’s oil analysts believe they will come down if the U.S. goes to war with Iraq and Saddam Hussein is disposed of, the longer they stay at higher levels, “the greater the risk that the damage has already been done to global growth,” he wrote.

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