The Price at the Pump Doesn’t End at the Pump: How Rising Gas Costs Can Impact Retailers

The past ten years have brought surging growth in countless areas of technology and communication for US consumers: The number of personal computers, the number of mobile phones, accessibility to high speed Internet. However, there is one growing number whose rise has not generally been welcomed: the price of gas.

Since the early years of the past decade, gas prices have been rising in the US. Yet, as we move out of winter and into spring, another round of gas price increases again besets the US--at historically sharp rates. The week of February 28, 2011 marked the second greatest week-over-week leap in US gas prices since 1990.

At the start of this month, the national average price-at-the pump was currently around $3.39/gallon--a year-over-year increase of 27%, or $0.72. Looking ahead for the rest of the year, the US Department of Energy predicts an overall 2011 average price of $3.15/gallon. This represents a $0.37 year-over-year increase.

This latest uptick does not seem to show signs of slowing any time soon. The same DOE report forecasts prices climbing to a $3.30/gallon average in 2012, with a steady $0.05 average rise per gallon each year for the foreseeable future. There is a 10% probability that prices could “exceed $4.00 per gallon” in the summer of 2011. West Coast states should brace for even higher gallon averages during peak season, by as much as $0.25.

Rising gas prices have complex, difficult to predict outcomes. However, one nearly certain impact will be a shift in driving habits of many Americans--which will in turn impact their shopping habits and, thus, retailers. What should retailers look for, and how should they respond?

Romy Ribitzky, a writer at Portfolio.com, believes that there might be a silver lining to rising gas prices--at least for pure player retailers: “Gas prices put pressure on traditional bricks-and-mortars retailers that online ones don’t have to worry as much about.” The implication is clear: It could reinforce long-term cross-channel shifting of shopping and buying from the real world to the online world. Rising gas prices could also compound and accelerate growing trends of consumer savvy, with even more of the upper purchase funnel--research and browsing--occurring at home, rather than in stores. Conversely, when consumers do make the trip, they may be even more primed to buy once in the store.

For pure player retailers, this builds on a decade-long trend of increasing e-commerce activity. For retailers maintaining both a physical and virtual world presence, this calls for keeping an eye on upticks in traffic to their sites or other signs pointing to a gas-price-driven migration of consumers online--and to plan growth strategies and budgets accordingly.

Yet, many pure player retailers also have a major connection to gas prices: shipping costs. Ribitzky warns in the same article that “when oil prices rise, they take a profit-margin percentage out of the retailer’s equation” as shipping costs increases. This makes free shipping enticements a more expensive offer for the retailer. But, shipping is only the most obvious area of impact for gas prices.

From Uncommon Objects to Zilker Park -- Google Maps bike routes for Austin, TX

With high gas prices here to stay--and, in all likelihood, rising for the foreseeable future--now is the time to reflect upon all the possible ways your business intersects with the real economy. Hyperlocal merchants may have an edge in locations within walking and biking distance. Acquiring retail locations near major public transit routes may matter more than ever. Travel could become more expensive for cars and planes, impacting retailers that depend on tourist seasonalities. At a big picture level, any marketing strategies should follow suit--engaging all the mobile and local advertising products possible.

Yet, there might be a flipside here as well. Local merchants may have to contend with other countervailing trends. Phil Wahba, a journalist with Reuters, reports that “the International Council of Shopping Centers expects February chain store sales to be up 2.5 percent to 3 percent.” Such a shift may hint at an increasing consumer trend toward packing as many purchases into as few trips as possible.

Regardless of size, retailers might consider ad creatives that appeal to the consumer’s desire to minimize fuel costs, with mentions of free shipping, or crafting ad campaigns around the cross-selling potentials of your store. If you sell bikes and helmets, inspire (or entice with special deals) buyers to save a trip and buy both your store. Increased fuel costs may key new segments of consumers into ecological awareness. With the rise of green marketing trends, this could mean new or greater traction for eco-friendly products.

As long as gas prices remain in flux and predictions are difficult even for the short term, many recommendations to retailers can seem contradictory. Every recommendation should be taken with the proverbial grain of salt--and, of course, due consideration of your business’ subvertical, region of the country, history, target audiences, and business model. However, this latest spike in gas prices reminds all retailers to comprehensively consider the impact of rising energy prices.


Posted by Paul Nauert, The Google Retail Team