By Jeff Lenard
One year ago this month, gas prices were pennies away from a record high and analysts, such as Goldman Sachs’ Arjun N. Murti, were predicting a “super spike” for crude oil prices, forecasting they would hit $200 a barrel. By year’s end, however, Gulf CEO Joe Petrowski was saying that $20 oil and sub-$1.00 gas was possible.
The time between these two predictions contained plenty of hysteria about how high gas and oil prices would go — for the record, in July they peaked at $4.11 a gallon and $147 a barrel, respectively — and many folks were discussing how our lives would be fundamentally altered by the high prices.
Of course, things didn’t exactly go as predicted. As 2009 began, gas prices were about half of what they were at the beginning of 2008, and oil prices had dropped even more, prompting Petrowski’s prediction.
Does that mean everything we know about oil and gas prices is wrong? Not quite. But if 2008 taught us anything, it was that anyone with an outrageous opinion and a spreadsheet has a chance of being right — but probably isn’t. In the end, it comes down to what you don’t know — and can’t anticipate — that changes everything. The September 11 terrorist attacks, the Venezuelan oil strike, the second Gulf War, and the economic meltdown all had profound effects on the oil markets over the past decade, and all these events simply couldn’t be dropped into a forecast.
The oil and gas markets are clearly unpredictable over the long term, and the people who buy gas are likely just as unpredictable. But by questioning these consumers on gas-related topics, we can better understand the attitudes that affect their behavior and possibly take some of the unpredictability out of the equation.
This is the third year that NACS has surveyed consumers to learn more about what drives their behavior at the pump, and the findings of the 2009 NACS Consumer Fuels Report* are presented here with a number of industry leaders weighing in to validate key insights.
What do customers have in common? What opportunities are there for retailers? How has consumers’ understanding of the petroleum industry changed? Keep reading to learn more..
Over the past six months, economic conditions have worsened on every level, with housing prices plummeting, the stock market shedding value, unemployment worsening and consumer confidence indicators declining to all-time lows. The lone good news for consumers has been a huge decrease in gas prices — prices fell from $4.11 per gallon in July to $1.61 by December. Despite the historic decrease, the consumers we surveyed still say that gas prices have affected spending behavior more than any other economic concern.
Why do gas prices have such an effect on consumers? “They are conditioned, and we’ve conditioned them,” said Bill Douglass, CEO of Douglass Distributing Co. in Sherman, Texas. “They’ve spent 50 years looking at gas prices on our street corners and price shop every day.”
It also may be less about the price and more about a consumer’s inability to do anything about it. “Other costs — food, home energy costs — you can do something about,” said Douglass. “You can buy different groceries or adjust the thermostat. In the short run, barring public transportation, you can’t change the cost of your commute.”
It’s not news that consumers are price sensitive; it’s a trend that has remained remarkably steady in each of the three years NACS has surveyed consumers.
Consumers still say that they would change their behavior to save a few cents on a fill-up, although to a lesser extent than they said in 2008. To save three cents per gallon, more than a quarter of all consumers would drive 10 minutes out of their way. But would this actually save them money?
Assuming that a car gets a robust 30 miles per gallon at 45 miles per hour, a 20-minute round-trip to save approximately 30 to 36 cents (a typical fill-up is about 10 to 12 gallons) would consume a half-gallon of gasoline, or $1.00 when a gallon cost $2.00. This clearly doesn’t make economic sense, but may be more about feeling good than about getting a “deal.”
For a five-cent savings, more than half of all consumers would select each of the options presented in the chart below, and approximately three-quarters of all consumers (72 percent) say that they would pay cash for fuel if they could save as much as five cents a gallon.
“Traditionally, 20 percent of motorists have been extremely price sensitive, and willing to drive irrational distances to ‘save’ a penny — my Dad was one of them!” said Gary Bevers, founder of the consulting group Bevers & Co. in Houston, Texas. “This percentage has grown over the last decade as prices have risen.”
Douglass concurs, saying that today as many as 40 percent of consumers may be price-sensitive shoppers, and it forces retailers to squeeze margins to drive traffic. “If 50 percent of the people wouldn’t shop with you because of your gas price, your stores would dry up,” he said.
Still, the key is to understand that there is a difference between what consumers say they would do and what they actually do. Most retailers surveyed found the percentage of consumers who say they would use cash discounts to be high, but they were encouraged by the downward trend of what consumers would do to inconvenience themselves for a fill-up.
Gas prices clearly drive traffic at stores, but other things can influence consumers’ gas purchases — and perhaps reduce margin pressures. Retailers know a strong in-store offer is a must, but you better have your facility in order if you expect consumers to venture inside.
Having a clean, well-lit store was important to consumers of all demographics. And while it’s traditionally assumed that a safe, sanitary environment is most important to female customers, males actually identified it as more important, with 20 percent of all males listing it as a draw to go inside a store, compared to 18 percent for females.
“It’s a minimum standard,” said Greg Parker, president of The Parker Companies in Savannah, Georgia, of customers expecting stores to be clean and neatly merchandised
“A lot of our research shows that clean, well-organized stores are very important,” agreed Randall Froeschle, senior market research manager with Kraft’s Immediate Consumption team.
Once you attract consumers with your safe and clean facility, a good foodservice offer can help build loyalty both in-store and at the pump. For example, about one in seven customers who bought coffee while filling up said that the coffee purchase had “a great deal” of influence on their decision to buy gas at a particular store. And, more than half of all customers who bought a sandwich when they bought gas said that the sandwich influenced their decision to buy gas.
And when it comes to morning routines and commuters, Scott Hartman, president and CEO of Rutter’s Farm Stores in York, Pennsylvania believes coffee is a big loyalty driver: “That morning coffee customer is a creature of habit. You really have to do something spectacularly wrong to chase them away.” And by “habitizing” the customer with coffee, you certainly can reduce margin pressures, believes Parker. “Where you buy coffee you do other things,” he said.
Roughly half of all surveyed consumers (49 percent) said that their gas purchase influenced their coffee purchase. But if consumers care about price above all for gas, it comes down to interpretation: Do gas sales drive in-store sales or the other way around?
“It depends on their frame of mind and what ‘hat’ they are wearing” at that specific time, said Hartman. “If they are in a hurry, it doesn’t matter what you do, they won’t come in,” he said.
Retailers have long known that consumers are more price-sensitive when prices are rising. The survey results bear that out: When prices rise, 68 percent of consumers say they shop around for the lowest price, compared to the 40 percent who do so when prices are falling. What’s interesting is that the difference is most pronounced among younger consumers age 18 to 34. When prices rise, 68 percent shop for the best deal; when prices fall, only 19 percent do.
Collectively, consumer behavior numbers analyze broad trends. However, when you analyze the subgroups from the survey, that’s where immediate opportunities emerge for retailers — if they can structure their gas offer for various demographics.
These numbers reinforce why retailers are slow to pass along wholesale price increases and decreases, believes Parker.
Ironically, the upper-income bracket is the most price-sensitive. When gas prices rise, 79 percent of those making $100,000 or more say they shop around for the best deal, compared to the overall average of 68 percent. While top earners generally are older, that doesn’t mean that older consumers shop around to the same extent that top earners do. Sixty-seven percent of those 50 or older say they shop around for the best deal, the lowest rate of any demographic surveyed, which runs contrary to the belief that retirees drive around to save a few cents.
Then there’s the customer who “hedges” gas purchasing, buying more gas when prices are rising, expecting to get a better deal today than tomorrow. One in nine consumers (11 percent) hedge their bets when gas prices are on the rise, with 18 percent of 18- to 34-year-olds hedging their purchases. The hedging instinct declines dramatically when prices are falling, as only 8 percent of consumers say they buy less gas per visit expecting the price to be lower the following day. When prices fall, the 18- to 34-year-old consumer essentially stops hedging, with only 6 percent buying less gas per visit.
Adding to the complexity, those age 18 to 34 are also more likely to buy in-store items when prices are falling. “That’s what we see,” said Parker. “Our in-store sales increase when gas sales go down. They’re shopping [in the store] more often.”
So what do these younger customers want? We’re glad you asked…
More than any other demographic, the younger consumer is swayed by gas prices, and likely to open their wallets if you give them a good reason. While overall, only one in eight consumers said that buying drinks while at a convenience store was important, 27 percent of 18- to 34-year-olds said buying a drink would get them inside the store. With this younger customer, it might be less about your specific in-store offer, and more about the frequency with which they visit your stores. “Younger consumers are more active, and out and about. Your store may be part of their social network,” said Hartman.
And while this age group clearly will buy drinks — especially energy drinks — their real thirst is for healthy alternatives, such as fresh fruit or prepared sandwiches.
Younger consumers are more “self-absorbed,” said Parker, noting that they likely don’t have to worry about kids and retirement plans, which presents a great opportunity for convenience retailers. “Our industry is about indulgence and immediate consumption. And we know that the more immediate the consumption, the more price elasticity you have,” he said.
Even though retailers can capitalize on their younger consumers’ spending habits, don’t lose sight of gas prices. When prices rise, younger consumers are the first to cut purchases — to an even greater extent than those with incomes less than $50,000. “With the less affluent, they’re more likely to just do what they’ve been doing and say, ‘It is what it is,’” when prices rise, said Parker.
Hartman fears that sales to younger customers might be affected this summer, especially if there are fewer summer jobs available for students, and consequently, less disposable income to spend. “It’s going to be eye-opening,” he said.
The good news is that consumers don’t believe retailers are the reason for their pain at the pump — but that doesn’t mean they’re happy. In 2008, gas and diesel fuel prices hit new highs in July, and then consumers faced frustration in September with outages through much of the Southeast after Hurricane Ike pounded the Gulf Coast.
When asked to pick the main reason why gasoline prices increase, only one in 25 consumers said it was gas stations profiteering.
Right or wrong, consumers still blame the major oil companies for high gasoline prices. And although they don’t blame the local gas station/convenience store, consumers still believe that a major oil company owns the local store. But thankfully, that number is declining.
“It tells me that what we are doing as an industry [with advocacy and communications] is working,” said Parker. “The consumer has more knowledge about our industry than three years ago.”
The challenge for branded retailers is to celebrate the benefits of their brand while aggressively communicating that they are independently operated. As with Hurricane Ike, politicians seek the easiest path to success. They often bash major oil companies for supply issues — when the real problem is (duh!) supply — and retailers get caught in the crossfire.
National emergencies may be the biggest opportunity for retailers to communicate the industry’s message. Throughout 2008, media coverage of record gas prices was almost universally thoughtful in examining underlying issues. However, “gouging” allegations seemed to be the rule, not the exception, when prices and supply were impacted by Hurricane Ike. Only 27 percent of consumers think that supply and demand is the reason behind price spikes, while 33 percent blame oil companies. “We’ve got our marching orders,” said Parker. “This is an area we need to work on.”
Education about credit card fees is another bright spot. With the topic increasingly in the news, and gaining more attention among members of Congress, consumers are demonstrating that they understand the issue — or at the very least, understand the exorbitant fees associated with credit card transactions. On average, they believe that credit card fees cost $1.00 for a $30 transaction. This works out to 3.33 percent of the transaction price, only slightly more than the 2.5 percent average per transaction.
What does the future hold for convenience and petroleum retailers? You can look at past trends for some guidance. But while outrageous predictions may get you attention, remember that the Internet may hold on to your incorrect prediction a lot longer than you’d like it to.
Government predictions seem to indicate that little will change over the short term. “Economic contraction in 2009 and lower projected crude oil prices are expected to reduce annual average retail gasoline and diesel fuel prices in 2009 to $1.87 and $2.27 per gallon, respectively,” reported the latest Short-Term Energy Outlook, released January 13, 2009, by the U.S. Energy Information Administration.
“I have no clue,” said Douglass when asked where he sees prices going in 2009. They will hinge on three factors he believes. The first is national and world demand for fuel. The second is how long the current lack of liquidity will keep oil traders out of the market. “Liquidity will bring back price volatility,” said Douglass. The third factor is the significance of the shift to “value” that consumers are making.
With that third factor, Douglass sees opportunity in private label products. “Private labels beat brands at a discount,” he said, citing how Aldi is winning the battle with Walmart for customers in Germany, in particular.
Jeff Lenard is the NACS vice president of communications. He can be reached at jlenard@nacsonline.com or (703) 518-4272.
*Unless otherwise noted, all statistics are from the 2009 NACS Consumer Fuels Report, which was completed January 12 on behalf of NACS by the polling firm Penn, Schoen and Berland Associates LLC. In some cases, totals do not add up to 100 percent because of rounding or non-responses to questions.