Thursday, December 11, 2008

Fuel prices - the secondary market for most consumers second-most valuable property

A condensed version of this analysis was originally done for Gerson Lehrman News and posted 12/11/08
Original Article: Advertising Age

1) After a home, the auto is the second most expensive item most people own.
2) The up and down volatility in fuel prices is lowering demand, regardless of price
3) Fuel prices do impact mid and lower-mid income earners most dramatically

On October 20th the EIA (Energy Information Agency) listed the average retail price for regular unleaded at $2.914/gallon, and it had been on a downward trend for 6 weeks or so at the time.

In it's report released on December 8th, the average price was $1.699/gal. In 49 reporting days, (7 weeks) the price went down $1.215/Gal, or 41.6%, and it wasn't even a primary economic headline.

The CSP Daily News is reporting as of December 9th that the savings at the pump aren't translating to dramatically increased inside sales at the convenience store portions of the fuel outlets. What is going on with the consumer?

Wal-Mart (NYS:WMT) may very well be getting those savings as increased holiday sales. In late summer, when $4.00/gal fuel was being sold, the discussion being had about people needing to trade down from SUV's and minivans to hybrids and smaller vehicles was a laughable argument. Most families purchase their vehicles with consumer credit, and if you were 2 years into a 5 year loan on a SUV or pickup truck, you couldn't just adjust what vehicle you chose to drive on a daily basis.

The secondary market of vehicle costs, fuel prices, is much more volatile than the vehicle market itself. That’s why demand didn’t decrease more than it did; people were forced to drive what they owned, regardless of the cost to operate it. And having seen the automaker bailout play out over the last two weeks, there wasn’t enough alternative and hybrid production to accommodate that vehicle demand, in any case.

Fuel demand is going to adjust lower, as people have been shocked into realizing how vulnerable to energy costs their personal finances and their lifestyle actually are.

Credit was already tightening up, and the average mid-level consumer felt we were in a serious economic slowdown, even if they weren't saying it. You just bit the bullet, filled the tank to keep your transportation means on the road, and hoped prices would eventually come down. Well, now they have.

Fuel prices do impact the mid-level and lower earner most dramatically, and they are using the “savings” to 1) try and recoup some of the budget damage done to them this summer, and 2) get through the holidays without accruing too much additional debt.

The average consumer is worried about the direction of the economy as a whole. "Flash for Cash" is so last year! Wal-Mart shopping was never a stigma for the average consumer, and people "trading down" are learning what lots and lots of people have known for years. Value never goes out of style.

Friday, December 5, 2008

November retail sales drop shouldn't be a surprise to most retailers.

This analysis was written for Gerson Lehrman News and published December 5

1) Credit restrictions are going to inevitably lead to lower retail sales.
2) Economic news and what they experience has consumers nervous
3) Sales made at discount prices reduce top-line revenues, and"Super-Specials" on Black Friday create expectations of better sales.

The news is brutal everyday...Country in recession since beginning of 2008. (That wasn't news to the average person). General Motors(NYS:GM) looking at bankruptcy protection. Circuit City(NYS:CC) and Linens N Things in bankruptcy. Auto dealers closing all over the country. Foreclosure crisis. Global Economic slowdown.

Even the breathtaking decline in energy prices and commodities in general are a sideshow to the unrelenting economic gloom.

The US government seems to making up the "Bailout" or "Recovery Package" as they go along, as each measure they enact seems to have negligible effect on the overall problem of a severe economic slowdown.

While we're all sure that everyone at Treasury, Commerce, the Fed and all the worldwide authorities are doing their best, the overall impression to most people I know is the world governments and agencies don't have a clue as to how wide and deep the problems are.

That being said, the fact that overall sales in US retail are down in only single digits should be a positive, not a negative, sign that the US economy is more resilient and the US consumer tougher and less risk-averse than the institutions that are the causing the pain.

If there's no consumer credit, car sales will suffer. Even more importantly, if the credit score criteria for getting an auto loan stay the same going forward, the ready pool of automobile buyers will be smaller, leading to a smaller new car market.

Each and every step of this process shouldn't be reported as a fresh "disaster". It's a systemic problem.

If the average consumer can't get credit readily, home furnishing and large-ticket electronics purchases are going to fall. It's not a problem with the retailers or offerings, it's a matter of the mechanism most people use to purchase larger-ticket household items is broken. As much as US homeowners love flat-screen TV's, they love eating and caring for their families more.

So, when earnings for furniture retailers and manufacturers come out, it's not a new story of another category falling apart; it's just a continuation of the consumer credit crisis, same as the auto sales drop.

Jewelry companies are reporting lower sales, again, no surprise, just another manifestation of shrinking consumer credit. So when strip centers and malls start losing retail tenants and commercial mortgages become the next crisis, it's still the same story.

The US consumer should be congratulated for what they've been able to accomplish, even in this very tough economic time. They are trading Macy's( :M) for Wal-Mart(NYS:WMT), auto parts chains should be picking up business while the dealers starve, the "Rent-to-Own" businesses (Aarons, Rent-a-Center) will be busier than the Rooms-To-Go or the Ethan Allen(NYS:ETH) store.

The consumer will adapt and survive, but it's time for a real, comprehensive program that people can have confidence in.

Monday, December 1, 2008

Sell More Gasoline !!!

Well, here it is…Unleaded Regular under 2.00/gal in most of the country, diesel back under 3.00/gal, the rapid drop in prices as unexpected as the rapid run up to the 4.00/gal.+ range over the spring and summer. As I write this on the afternoon of December 1, 2008, I see Crude oil under $50.00/bbl, and NYMEX RBOB under $1.12/gal. What year is it, anyway? The last time the benchmark WTI crude was priced at this level was in the third quarter of 2004. Ahhh, the good old days!

Most of the operational and management employees at firms we’ve either operated directly or consulted for know the three words we’ve driven to success in the past…”Sell More Gasoline!” (Fuel).

It’s hard to be pumping good gallonage and not do well on inside sales, you have to do a notably bad job of convenience retailing in order to not have the corollary of “Increased Gallons pumped = increased inside sales” not ring true.

As we have designed and operated units and chains over the years, this has been our guiding principle:”To use the strength of the constant traffic flow that a petroleum outlet provides to drive the enhanced revenue flow and operating margins that a Convenience store (and/or fast food outlet) outlet achieves.”

This simple philosophy is the reason that gasoline retailers have sold additional items since before Standard Oil was broken up. While we’re not advocating any “price wars” breaking out on hotly competitive corners, we certainly believe that fuel pricing can again become a major driver behind store merchandise and foodservice volumes and subsequently, increased location profitability.

Condevco has an affordable solution that services your individual sites, and that allows for fuel pricing that drives traffic to your site, while still maintaining competitive and better margins on fuel. Contact us for details.