Insights

Rising Gas Prices, Declining Dollars
Article

Rising Gas Prices, Declining Dollars

Todd Hale, Senior Vice President, Consumer & Shopper Insights, The Nielsen Company and Carman Allison, Director Shopper & Industry Insights, The Nielsen Company

Just when some positive economic reports and improving consumer confidence news are picking up, rising gas 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. With ongoing political unrest in the oil-rich Middle East region, gas prices are edging back up to 2008 levels when they topped over $4.00 a gallon in the U.S. and $1.40 per litre in Canada. While there are some similarities between 2008 and 2011, much is different.

In 2008, increased demand drove gas prices up during the heavy travel summer months of July and August, topping out in the U.S. at $4.11 during the week of July 7. Today, with summer still months away and with prices in the U.S. already nearing the $4.00 mark at some locations, it is possible that gas prices may surpass 2008 levels. In Canada, these prices translate to about a 30 percent increase over the U.S. prices. The difference between now and 2008 is that gas prices are not rising from demand, but rather from political instability abroad.

Household Budget Impact

Consider this: in 2010, there were 2.1 cars per household in the U.S. Assuming that each car is driven 1,000 miles per month and achieves 20 miles per gallon of gas, 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 litre translates to a $30 additional monthly outlay; $65 with a 25 cent rise and $124 with a 50 cent increase.

WebsiteChartingTemplate_AMS

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 we 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 back-up 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. 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.