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Rising Gas Prices, Declining Dollars

Nielsen: Expect more trip compression, value consciousness, coupon use
NEW YORK -- Just when some positive economic reports and improving consumer confidence news are picking up, rising gasoline prices in North America could take a toll on consumer spending power, shifting consumers back to staying at home and shopping for value until prices subside, according to a new Nielsen report.

With ongoing political unrest in the oil-rich Middle East region, gasoline prices are edging back up to 2008 levels when they topped over $4.00 a gallon in the United States and $1.40 per liter in Canada. While there are some similarities between 2008 and 2011, [image-nocss] much is different.

In 2008, increased demand drove gasoline prices up during the heavy travel summer months of July and August, topping out in the United States at $4.11 during the week of July 7. Today, with summer still months away and with prices in the United States already nearing the $4.00 mark at some locations, it is possible that gasoline prices may surpass 2008 levels. In Canada, these prices translate to about a 30% increase over the U.S. prices.

The difference between now and 2008 is that gasoline prices are not rising from demand, but rather from political instability abroad.

Consider this: in 2010, there were 2.1 cars per household in the United States. Assuming that each car is driven 1,000 miles per month and achieves 20 miles per gallon of gasoline, a price increase of 10 cents per gallon translates to an increase of $10.50 per month in household expenditures. As prices increase, households could be paying an extra $52.50 with a 50 cent increase, $105 with a $1.00 rise and $210 if prices jump by $2.00. In Canada, similar assumptions can be made: a 10 cent increase per liter translates to a $30 additional monthly outlay; $65 with a 25 cent rise and $124 with a 50-cent increase.

Commodity prices are also increasing. While most manufacturers are looking for opportunities to raise prices, unlike 2008, many retailers are talking about holding the line on prices for fear of alienating shoppers. The net result, however, is that retailers should expect consumer reactions to mirror historic trends: Increased trip compression. Less eating out. More value-conscious shopping alternatives. Increased use of coupons.

The impact to consumers is real and wallets will continue to be squeezed. Household wages are not keeping pace with inflation, so in the end, consumers will need to dig deeper into their pockets to pay for "everyday" things. The coping mechanisms consumers applied during the recession will be their backup plan as we head into the summer. Trip capture will once again be paramount and there are opportunities for retailers and manufacturers to convert a likely decline in out-of-home eating and entertainment into spending for at-home options.

"We would urge manufacturers and retailers alike to actively engage their consumers and shoppers on this front and not simply sit on the sidelines," said Todd Hale, senior vice president of Consumer & Shopper Insights for The Nielsen Co., New York. "Value messaging will be important, but also think about the emotional connection with messaging that reflects the fun and enjoyment to be had with family members and friends."

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