Retail Not Reaping Full Benefit of Consumers’ Savings at the Pump

By Stephen Metivier, TD Bank



Oil prices are down, in part due to OPEC’s failure to reach an agreement on production curbs, and are expected to remain low through much of 2015 because of the abundance of supply in relation to demand. Naturally economists, lenders and retailers conjectured late in 2014 that the dropping gas prices would lead to an increase in retail spending because consumers would be saving money at the pumps, leaving them with more disposable income. Additionally, in the fourth quarter, with the stock market performing well and unemployment at its lowest since 2008, economic indicators pointed to a positive environment for spending.



The assumption has not proven to be true, especially when considering the situation of the typical consumer. For many Americans, the savings at the pump are being directed towards savings, the reduction of debt, increased housing costs and medical expenses. We all know, medical expenses are increasing, forcing more of our income to be put towards those expenses. This is what makes the current retail environment unique when compared to previous periods.



In my 20-plus year career working with retailers, when sales do not meet forecasted expectations, gas prices and the weather are always the factors retailers point to for explanation. Oil prices are low and are expected to remain so for the next two quarters, so why haven’t we seen robust spending? For the first time I can recall, a decrease in gas prices does not immediately equate to an increase in consumer spending. As mentioned above, there are multiple factors at play here.



Weather

Weather is always a major concern for retailers. Prior to mid-January, the Northeast had a relatively mild winter. Temperatures were not initially as severe as last winter and into December, you would occasionally hear New Englanders comment on the balmy winter we were having. Of course, Mother Nature is fickle and the cold (and snow) quickly piled up in the back half of January into February.



For retailers, inventories are built around cold weather purchases from October on, consequently a mild winter means consumers are not buying the cold weather accessories and equipment that typically sell during this time. Because winter weather came so late into the season this year, retailers have been able to sell off some of the remaining cold weather gear. However, the “late” winter means that most retailers were likely to have already taken “hard” markdowns on this inventory – up to 40% off – which reduces gross margin and, more importantly, the profitability of the retailer. The impact, however, is not limited to regional retailers because national retailers have exposure to states with inclement weather as well.



Consumers’ unwillingness to pay full price, which has become part of the “new normal” in the U.S., is having a lasting impact on retailers’ inventories as well.



What growth we have seen in the retail industry has been driven by two key factors: the continued spending power of wealthy consumers and an apparent increase in spending on groceries, restaurants and technology. Although lower gas prices are estimated to save American consumers $220 billion over the next 12 months, the savings is only achieved "$10 to $15 at a time," which may be one factor limiting the ability to spend savings on big ticket items. It appears households are focused more on purchases that improve the quality of their day-to-day lifestyle, like dining out and vacations, as well as technology to keep them better connected, like smartphones and tablets. Economists believe we’re likely to see spending maintain a 3% increase pace throughout the year driven by these factors.



Online sales

Internet sales continue to be a main focus for retailers, particularly while gas prices are low. According to the National Retail Federation, last November and December saw a 6.8% increase in Internet purchases, and overall, online purchases accounted for approximately 9% of consumer spending in 2014.



With a significant number of purchases taking place via Internet, free-shipping offers are becoming the status quo for retailers. Pure online retailers like Amazon have established an expectation among consumers that free shipping is included once a certain price point is reached. This tactic is now prevalent across online stores and is considered part of the discount retailing approach, an adjustment to meet the “new normal” where consumers are not willing to buy at full price. Although retailers may not see an uptick in consumer spending due to gas prices, they will be able to see the benefits, particularly as it relates to free shipping, as those costs decrease in the supply chain.



With the amount of increased consumer spending not guaranteed, it’s likely that in 2015 retailers will focus less on following gas prices and more on improving their entire store base and website. We expect to see credit utilization creep back up to its pre-recession levels at 35%, compared with less than 20% over the past few years, due to the investments in new stores and upgrading infrastructure.



Needless to say, it’s an exciting time for the retail industry with a lot of opportunities ahead as retailers adapt to the “new normal” of customer expectations and take advantage of the current positive economic environment.

Stephen Metivier is head of asset based lending retail finance at TD Bank.