Why low gas prices are not helping retailers
Gasoline prices will remain low in 2016, but that doesn’t mean retailers can count on a big windfall from the extra cash left in shoppers’ wallets and there are three key reasons why.
The limited benefit of low gasoline prices to retailers — especially food and mass retailers — is the result of three key factors shaping household spending behavior:
Demographic differences
• Baby Boomers who once would have spent their leftover gas money are now saving it — with looming retirement and medical bills in mind. This is especially the case for poorer Boomers, who are becoming a bigger majority of that generation.
• Millennials are increasingly the exception and the opportunity. As they benefit most from job gains, they are spending more (as are Gen X households). But their spending is skewed toward non-traditional retail categories and channels. So their spending boost to retail is difficult to see.
Benefits to discretionary goods — and services
• Select discretionary categories are getting some boost from the falloff in gasoline prices, although rising incomes are the biggest driver. It’s just that those categories — such as new trucks, leased autos, and food services tend to be outside of traditional retail channels. Others such as furniture, music, tech gadgets, and sporting goods are mostly growing online or at specialty stores. Younger households are often driving the growth in these categories.
• Health-and-wellness goods and services are the other faster-growing categories — driven partly by older households. These categories include: prescription drugs, personal care services, health care, and medical and other insurance premiums. Older households are also contributing to strong growth in certain goods categories such as books, magazines, newspapers, and stationery.
Double price drags on consumable goods
Consumable goods categories and channels are where the missing gasoline windfall is most evident. That’s because growth is being depressed by low food price inflation — in addition to the lack of a boost from low gasoline prices.
• A year ago, grocery retailers were seeing sales propped up by food inflation that was running more than 3%. Now, a dropoff in food inflation of about 2 percentage points is having a nearly corresponding effect on dollar sales gains — making sales gains nearly flat in some cases.
• Also keep in mind that a disproportionate amount of the spending in consumable goods categories and channels tends to come from those older, poorer households who need to save. So that reinforces the consumables-focused weakness.
The outlook
This mixed picture of growth and weakness will remain the pattern to expect into 2016. Overall, the growth will outweigh the weakness to produce ongoing modest growth for household spending on the whole.
For store-focused retail categories and channels, however, that overall modest growth will remain out of reach. That is, unless they can leverage the growth in select discretionary goods and services — and meet the changing needs of the younger or older households driving the growth in those categories.