Study Examines Impact of Gas Prices on Consumers

With an estimated $535 extra spent per household on gasoline this past year, coupled with rising CPG product prices, U.S. consumers have certainly felt their budgets strain. Yet, the consumer packaged goods (CPG) industry does not appear to have been negatively impacted. According to the latest Times & Trends report, “Gas Price Impact: How Spending at the Pump Affects Spending at the Register,” from Information Resources, Inc. (IRI), a global provider of enterprise market solutions for the CPG, retail and healthcare industries, total CPG industry sales have benefited as consumers shifted spending from luxuries, such as dining out and entertainment. However, consumers have altered shopping patterns, decreasing their number of store visits to conserve gas.

“Across income segments and across channels, consumers significantly reduced shopping trips, accelerating a longer-term trend,” said IRI Global Chief Marketing Officer Andrew Salzman. “The increases in gas prices drove new opportunity, such as strong growth potential among convenient meal solutions and home entertainment categories, and new challenges, including the need to maximize each store visit as consumers were in stores less often.”

Even though gas prices are currently coming down, many analysts believe that trends are simply following the standard cyclical pattern and will rise again in the spring of 2007. The IRI study recommends that CPG marketers consider planning for future periods of gas escalation, which will impact consumer shopping and purchase behavior across stores and brands. For many CPG marketers, gas price cycles are an important input into marketing and merchandising plans that is often overlooked in the planning process.

Impact of Gas Price Trends

Gas and oil costs represent a significantly greater proportion of personal income than at any other time in recent history. Many consumers have covered this incremental expense by reducing spending on dining out, entertainment and vacation, in addition to delaying unnecessary purchases. Consumers are also looking for deals, as nearly one-third report using coupons more, according to some industry estimates.

Rising fuel costs drove up distribution and packaging costs, so many manufacturers opted to implement price increases. As a result, average CPG price increases versus prior year exceeded four percent – further straining consumer budgets. Across categories, sugar, coffee, toilet paper and facial tissue continue to lead with the highest price increases.

If the majority of the fuel-related CPG price increases have been passed through, and average CPG increases begin to stabilize, CPG demand may increase, given consumer cutbacks in other areas. However, if gas prices move significantly lower, and consumers shift spending back to dining out and entertainment, the CPG demand increases may not materialize.

CPG Growth Trends

Numerous consumer surveys and restaurant company earnings statements have revealed that high gas prices drove reduced restaurant spending. As a result, consumers presumably prepared food at home more, which created increased opportunity across several CPG categories, including frozen and refrigerated meal solutions. The IRI gas price assessment found that dollar sales growth across these categories improved markedly as gas prices increased, and volume sales growth, which was in a negative trend, improved as well.

“CPG marketers can tap into this trend during future gas price increase cycles through marketing messages emphasizing the ability to make both quick meals and restaurant-quality meals conveniently and cost-effectively at home,” added Salzman.

As consumers cut back on entertainment spending due to gas-related budget constraints, they were likely entertaining at home more often. According to the IRI study, sales improved across snacks, desserts and beverages as gas prices increased. Marketing that stresses the ability to have fun entertaining at home during high gas price periods is likely to resonate with consumers. In addition, manufacturers and retailers should consider stepping up merchandising activity with innovative displays and promotions across these categories.

Health and beauty care spending does not appear to be directly tied to gas prices. For instance, sales improved when gas prices declined during the fall and winter this past year and continued to improve when gas prices sharply increased during the spring. IRI analysis shows that Medicare Part D, which delivered prescription insurance to millions of seniors, freeing up an incremental $1,100 per individual, appears to have driven sales increases across numerous categories, including several major healthcare categories.

Shopping Behavior

The sustained, steady increase in gas prices, beginning in the spring of this year, appears to have precipitated significant changes in consumer shopping behavior across income groups. Consumers began conserving their shopping trips and accomplishing more per trip in their efforts to conserve gas, which accelerated a long-term trip reduction trend.

For retailers, securing one of those trips becomes much more critical and more challenging. According to the IRI report, there is likely to be increased ad spending and marketing with more pointed messages regarding how stores can help consumers accomplish multiple tasks with one visit. Effective in-store marketing and merchandising will also be critical as retailers seek to compensate fewer trips with larger basket rings.

By the summer of 2006, new consumer shopping patterns had emerged. Consumers increased trips to local drug stores presumably to fill in product needs before the next big shopping trip. In fact, during this time frame, drug store dollar share increased a half point—one of the largest drug store increases in several years. In addition, the shopping trip decline became more pronounced at supercenters and club stores and became slightly less pronounced at grocery stores, suggesting that some consumers were sticking closer to home, even for larger shopping trips.