Fuel prices make marketers work hard for their money

Rob Bilancik is in a Bass Pro Shop in Gurnee, IL, shopping for a hunting bow for his 14-year-old son. It’s a late birthday present, delayed mostly because of a family vacation, but partly too because of the fuel crunch.

“I’ve been meaning to get here for a few weeks,” he says, hefting a compound bow set on sale for $400. “I usually try to get here one Saturday a month. But it’s about 50 miles from our house in Muskego [WI], and I drive a Dodge Laredo. Filling that tank a few times costs just about as much as this bow here.”

The same went for buying gas for the bass boat he didn’t haul on a recent vacation spent at a relative’s cabin near a local lake. “I love fishing, but this summer, it was just too expensive to get out every weekend like I used to,” he says.

Like Bilancik, retailers of every stripe — not to mention makers of large cars and bass boats — are waiting to see how far gas prices will drop, and what those costs will do to their fall and holiday shopping seasons.

U.S. gas prices have fallen off from their all-time national high of $4.14 a gallon, set on July 17. They’ve dropped every day for the last month, to $3.73 at press time, according to the Automobile Association of America and the Oil Price Information Service.

But that level is still almost 35% over where fuel prices stood this time last year. What’s more, some of the price reduction seems to have come about from reduced demand: i.e., drivers driving less. A recent MasterCard report showed that U.S. gas consumption during the week of Aug. 10-17 was down 7.8% verus last year.

That supports the findings of a Nielsen Homescan survey in July that found 78% of U.S. consumers reporting that they were combining errands or trips to save on gas — 10 points higher than said the same in June 2007.

Conservation doesn’t do anything for retailers who depend on getting traffic into their stores and buying. The same Nielsen survey also found more consumers reporting that they were dealing with high gas prices by spending less. Nearly two-thirds of respondents said they were cutting back on spending, an increase of 18 points over the same time last year and a jump of 14 points over December 2007.

And of that group reporting a decrease in spending, 26% said that they were “reducing spending to a great degree.”

“With gas prices passing the $4 per gallon mark, consumers are altering their driving and spending habits at dramatic levels,” says Tom Hale, senior vice president of consumer and shopping insights at The Nielsen Co. “While discretionary spending is likely to be a challenge for most low- and middle-income shoppers, even affluent consumers are looking for ways to make sure their dollars go further.”

This behavior bodes well for the superstores that offer lots of staple goods under one roof, Hale says: the Wal-Marts and Costcos of the world. But retailers in nonessential categories — what he terms the “nice-to-haves” — may find that they have to work much harder to earn a trip and a buck from cash-strapped consumers.

Even Target is devoting more floor space to groceries and playing down the design-on-a-budget lines that have made it distinctive, Hale says.

FOOD, LODGING, GAS

Retail’s not the only sector affected by fuel price increases, of course. Over the summer travel season, many lodging chains and travel sites attempted to motivate “staycationers” with deals that take some of the gas pains away. In time for the July 4 holiday, travel site Expedia and lodging Web site Hotels.com offered $25 to $50 gas cards for plans booked through them. Las Vegas clearing house Vegas.com ran a “Cash In and Top Off” promotion offering a $50 gas card to anyone who spent $250 on accommodations on the site.

Some regions in the Marriott chain offered a promotion called “Cars Eat Free,” giving guests who drive in a $25 Chevron gas card. More than 50 Marriott Hotels in the greater Washington, D.C., area took part in the program, intended to entice weekend getaway guests from the surrounding suburbs into town for a two-night stay at a Marriott branded property.

“This was the first year we’ve run the gas-card promotion, and it’s been very well received,” says Mark Indre, a spokesman for the Marriott Hotels of Washington, D.C. “We felt there were plenty of travelers in our drive markets — from Philadelphia to Richmond, VA — who would book with us for some consideration for their cars.”

Indre says the promotion, slated to end Sept. 1, has worked well enough that it will be extended through the end of the year.

Regional grocery chains that operate their own gas pumps — or can ally with local suppliers — are also using gas discounts to draw shoppers. Most of them link to the amount shoppers spend, and some hook into existing loyalty programs or branded credit cards. Last July, Stop & Shop unveiled a discount that awards consumers 10 cents off the per-gallon price of its branded gas for every $50 they spend on groceries.

Kroger Co. had a similar gas discount program in many of its regional divisions, offering 10 cents off a gallon for each $100 in grocery items bought with a Kroger Plus shopping card. In May, the chain, with 2,400 stores in 31 states, combined those regions into a virtually national network, so that customers could qualify for the lower gas price when traveling outside their home region. (A few regions, such as Columbus, OH, and Michigan, are still outside the systemwide Kroger plan, but offer their own deals.)

The Kroger program also gives customers an additional 5 cents off at the pump per $100 at the checkout if they pay for their gas using a branded Kroger credit card.

Of course, grocery chains aren’t the only merchants who can combine food and fuel. Gas retailers are also starting to offer discounts at the pump — for cash.

The thinking is twofold, according to Brandon Wright, a spokesman for the Petroleum Marketers Association of America. First, customers paying cash let gas retailers get out from under the 2% to 3% surcharge they owe to credit-processing companies, so they can offer lower prices to customers while still protecting their slim profit margins.

But just as important, drivers who pay inside often spend inside, on groceries, snacks and convenience items that make up the real profit potential for gas stations. Analysts say fuel sales make up about 70% of revenue at the typical gas/convenience outlet, but only 30% of the profit.

PRICES: WHERE TO?

Marketers shouldn’t rely on seeing customers relax their grip on their wallets just because gas prices have declined from their July peaks. With home valuations in a slump, layoff worries spreading, and wholesale inflation at a 27-year high, just the uncertainty about future pump costs may well be enough to keep household budgets tight.

“We’re now seeing retailers and manufacturers starting to have to pass their own cost increases along to consumers,” Hale says. “In-store inflation is going to continue to rise, probably through the end of this year. So attitudinally, I believe consumers are still where they were when we measured them in June. They told us that they’re going to combat high gas prices by combining trips and not going out, and that’s not going away any time soon. It won’t make for a very happy holiday season for retailers.”

IMPACT OF HIGHER GAS PRICES ON CONSUMERS’ DRIVING AND SPENDING HABITS

A Nielsen study showed that in June U.S. consumers were changing their shopping and spending behavior to reflect gas prices building to an all-time average high.

GM THROTTLES BACK

High gas prices and low, low demand for gas guzzlers are forcing General Motors to re-tool both its models and its company; and that makeover may have a big impact on its promotions, too.

In a July announcement, the automaker said it was cutting back on many elements of its marketing budget that could not be justified by ROI. Some of those underperforming channels: high-prestige hot-rod shows, a celebrity-studded “GM Style” live event to kick off the model year, and big sponsorships at the Oscar and Emmy Awards telecasts.

But the biggest bombshell might have been the news that GM is having second and third thoughts about the $120 million to $140 million it spends annually on NASCAR motor sports sponsorships. That line item could go a long way toward the $2.5 billion in budget cuts GM wants to get by the end of next year.

What would replace sponsorships? Product launches and more highly focused marketing, according to GM North America president Troy Clarke. “There is a tendency to use 30,000-foot initiatives and hope in the deluge of advertising that you touch people who are, in fact, your target customer,” he told reporters. — BQ