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Will rising gas prices hurt retail sales?
Minneapolis-St. Paul Star Tribune


May 24, 2007

With gasoline prices and consumer-debt levels at record highs, retailers are bracing for one of the slowest summer sales seasons on record.

Nearly three-quarters of U.S. consumers said they have cut back their spending in response to rising gas prices, while 40 percent said they are making fewer shopping trips, according to a survey this month by consumer consulting firm Bigresearch.

Many retailers - big and small alike - fret that consumers will start curbing purchases after the Memorial Day weekend, when the full impact of rising fuel prices begins to sink in. Gasoline surged Wednesday to a record nationwide average of $3.22 a gallon, vs. $2.88 a gallon a year ago.

Americans are spending $1.28 billion a day at the fuel pump, up 55 percent from $826 million in February, according to the Oil Price Information Service.

Target Corp. confirmed fears that many consumers are in a spending funk, with first-quarter revenue that fell slightly shy of expectations.

It blamed that in part on soft sales in seasonal categories such as sporting goods, seasonal clothes and lawn and patio equipment.

Roberta Bonoff, president of Creative Kidstuff, a chain of toy stores based in Minneapolis, said she believes that many families have delayed difficult spending decisions until after the school year.

"I believe people with kids in school are in the throes of trying to finish the school year," she said. "Once it stops, and people sit back and try to figure out what they're going to spend the rest of the year and how, they might decide not to spend as much."

Consumers are cutting back in a variety of ways, primarily by forgoing items they don't need. More than 55 percent of shoppers are spending less on magazines, eating out, movie tickets and coffee, and they're also cutting back on more impulsive purchases such as clothes, fashion accessories and home decor, according to a survey of 1,491 consumers by WSL Strategic Retail, a retail consulting firm in New York.

"Shoppers have become much more reticent about buying what they don't need to have," WSL President Wendy Liebmann said.

Signs that consumers are no longer so exuberant emerged May 11, when the U.S. Commerce Department reported that retail sales fell 0.2 percent in April over the previous month. Then a string of big-box retail chains began reporting disappointing first-quarter sales and profits. Wal-Mart Stores Inc. reported that sales at its discount stores open at least a year fell 0.1 percent in the first quarter. Lowe's, the nation's second-largest home-improvement chain, reported a 6.3 percent decline in same-store sales.

"We've seen energy prices marching upward for two years now," said Scott Anderson, a senior economist at Wells Fargo & Co. "There may be a sense that higher gas prices are a permanent feature of the economy. And if that's the case, consumers are going to adjust their spending."

Money spent on servicing household debt, as a percentage of income, hit a record 14.5 percent in the fourth quarter last year, according to the most recent data available from the Federal Reserve.

For retailers such as Target, the critical measure is foot traffic, said Jeff Klinefelter, a retail analyst at Piper Jaffray. So long as people keep coming into its stores for food and other staples, Target has shown that it can "upsell" them higher-margin products such as clothing and home decor. Target said Wednesday that it is rolling out a broader assortment of food, including self-service delis, to hundreds of its stores nationwide.

"Shopping is a sport in the United States," Klinefelter said. "If gas prices are bothering people to the point where they reduce the absolute number of shopping trips they make, then that's more risk that Target won't be able to upsell them."

Creative Kidstuff's Bonoff said that gas prices came up Monday at the company's weekly staff meeting. The company is looking for ways to appeal to budget-conscious parents by offering more discounts and emphasizing sales.

"It costs $75 to fill a tank of gas," she said. "Our customers know that. We know that. ... The challenge becomes: How can we make our customers' discretionary income go further?"
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