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Todd Hale
Thought Leadership,
ACNielsen Homescan & Spectra
Crude oil prices ignited again this summer, surpassing the $70 a barrel threshold and pushing prices at the pump to an inflammatory $3+ per gallon. Factors like market speculation, refinery capacity shortages and a pronounced decline in spare global oil production converged, leaving cash-strapped consumers scrambling to adjust budgets and spending accordingly.
To gauge the nature and depth of the consumer response to fuel-flation, we repeated a survey of ACNielsen Homescan Panel members that was fielded twice in 2005 (June/July and October/November periods). The objective was to
provide manufacturers and retailers with a window on
consumer shopping and spending habits when they felt
the pinch at the pump.
Think ahead
As with last year’s surveys, consumers geared up for the long haul by doing some advance planning, combining errands and trips to conserve gas. More than two-thirds
(68%) of respondents adopted this tactic, a seven percentage point increase from June/July 2005, maintaining the upward trend from October 2005 results. See chart 1.
Gas gouging really took a bite out of restaurant food sales (39% of respondents said they were “eating out less”) and general entertainment spending (39% said they were “doing more things at home”). These findings proved consistent with published reports about softness in some casual dining restaurants.
Encourage cocooning
Setting politics aside, it is clear that unrest in the Middle East will continue to put a crimp in the oil pipeline, and high fuel prices that convert into higher transportation and home heating/cooling costs are here to stay. Manufacturers and retailers will greet this with mixed reviews.
On one hand, manufacturing, packaging and shipping costs will rise apace, given their reliance on petroleum-based products. On the other hand, when consumers cocoon, dollars once spent dining or playing out will be diverted back to the grocery, club, drug and mass merchandiser channels.
Price pressures
The key will be to hold the line and avoid the temptation of passing along cost increases directly to the consumer in the form of higher prices. Consider the fact that in the span of a single year, 12% more consumers (almost half of all respondents) stated they were reducing spending to either a “small” or “great degree.” Clearly, price sensitivity enters the equation when consumers evaluate spending trade-offs.
Value pricing assumes even more importance in this volatile climate, and promotions touting at-home family fun nights, home-cooked family meals and at-home entertaining concepts accelerate to the front of the strategy options.
Changing habits
Consumers also cited other budget-stretching adjustments to their shopping and purchasing patterns. Among them are patronizing supercenters to buy in bulk at lower unit prices, clipping coupons to capture available savings, and switching to less expensive grocery brands.
Premium and mid-grade gas patrons downgraded to regular. Warehouse club stores and Internet shopping options both benefited from the desire to keep the lid on the gas tank and spending.
Homefront, workfront
A Florida State University professor explored different aspects of the fallout from gas prices, discovering that 44% of the 300 employed consumers surveyed worried about making ends meet; 41% were paying off debt more slowly and 25% had gone without basic necessities like food and heat to conserve funds.
When queried about how changes in their financial picture affected their job, results were alarming. Respondents cited negative outcomes across the board, related to more stress at home. They were less enthusiastic about work and their employer, less agreeable and helpful to others, less productive, more sensitive to daily irritants at work and more depressed overall.
Penetrating insights
Dollar stores, once on a seemingly unstoppable expansion trajectory, actually experienced a two percent decline in household penetration, the sole exception among the “value” channels to lose ground. In a surprising turn
of events, this represents the first decline in dollar store shopper penetration since we first began tracking the
channel. See chart 2.
This is surprising on the one hand, because gas price
increases that affect those on fixed incomes and with
modest means (the prototypical dollar store shoppers), might be expected to drive more consumers toward
dollar outlets. It is less surprising in the context of trip
consolidation, where shoppers try to meet all their needs
in the fewest trips possible. The limited food and beverage assortment and lack of fresh foods at most dollar stores
may be the force behind the decline.
Concurrently, the competing warehouse club and supercenter “value” channels enjoyed two and three percentage point increases, respectively, in the penetration measure. Underlying reasons for the upticks include continuing store count expansion, which enhances accessibility, and a relentless commitment to delivering consumer value.
Trip decay
Trip count results proved that consumers not only talked the talk, they walked the walk and reduced the number of shopping trips in every channel except warehouse clubs, which held steady at 11 trips per household per year.
A review of trip count results by channel suggests that grocery stores might need to re-examine their value proposition. Trip counts sagged by one trip per household at dollar and drug stores, mass merchandisers and supercenters, but the grocery trip frequency declined at twice that rate.
Basket bonanza
Consumer behavior aligned with attitudes again, as bigger basket rings across channels validated the “shop less, buy more” reaction to gas prices. Warehouse clubs were the primary beneficiary of the new consumer spending directive; witness the $6 increase in the average trip receipt, for a total of $93 per trip. See chart 3
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Grocery, mass merchandisers and supercenters each experienced a $3 per basket expenditure increase, raising the average consumer spend per format trip to $38, $47 and $63, respectively. Drug and dollar stores sat at the bottom of the rankings with an extra $1 added to the average shopping tab.
Resilient response
In June 2006, former Federal Reserve Chairman Alan Greenspan remarked that American business “to date has largely succeeded in finding productivity improvements
that have contained energy costs.” However, he raised the specter of continued upward oil price pressure leading to
an observable impact on the U.S. economy.
One reason Americans have been able to absorb price increases to date ascribes to the fact that those who drive the most can afford it. A larger percentage of affluent
consumers drive 200+ miles per week than those living
comfortably, getting by or the poor. See chart 4.
Poor pay more
Unfortunately, rising gas prices will impact the most those who can afford it the least. While gasoline costs represent just 6% of the pre-tax household income for families earning $75,000 per year, they consume double that proportion (12%) for households earning $20,000 annually. See chart 5.
Turning a moment to the rising cost of natural gas and other home heating alternatives, consumers can expect those costs to increase as well. Last year, a mild winter mitigated price hikes, minimizing the wallet wallop. In the aggregate, the implications are obvious for the manufacturers and retailers who target lower income households—get ready
to feel the heat.
Strategic fallout
The thirst for oil will prompt manufacturers and retailers to sharpen their pencils and continuously monitor the consumer pulse to combat the margin squeeze. How will the fuel crunch impact brand and format loyalty? How will
promotional strategies need to be adjusted in response? What services could be added to make a store the winning contender under the single-outlet, consolidation scenario?
Oil price pressures may precipitate any number of market responses in the fast-moving consumer packaged goods world, including:
- accelerated private label product growth;
- enhanced interest in large pack sales;
- broader assortments;
- value-based pricing;
- at-home entertainment focus in advertising and
promotions;
- added convenience store features, positionings;
- increased emphasis on trip capture.
Change in attitude
As a country, the United States will need to wean itself from oil dependency by developing viable alternative fuel options such as ethanol, moving to gas-saving hybrid vehicles like the popular Toyota Prius, and re-evaluating our fundamental relationship with non-renewable energy sources.
As an industry, CPG manufacturers and retailers will need to re-think the retail calculus and factor-in the impact of higher transportation and heating costs on the brand buyer and retail shopper mindsets. Even if the recently discovered Gulf of Mexico oil field turns into a gusher, industry experts predict it will be at least four years before that fuel supply impacts consumers, and it will not be large enough to offset the chronic and increasing U.S. demand. There is a real opportunity for CPG industry leaders to convert a deep understanding of the consumer response to persistent
gas shortages into a strategic lever that will drive sales
and profits.
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