Gas prices are on their way up again, and just as we did in 2008 when a barrel of oil peaked at $147, making pump prices higher than $4 per gallon, we are once again reevaluating our daily lives to see where costs can be cut. Gasoline isn't something that most of us can cut out. We rely on it to get to and from work as well, as fuel our infrastructure. Energy is tough to cut back in a substantial way, and because of that, other expenses have to be cut.
For businesses, higher gas prices decrease profitability, and for those who rely on commercial vehicles as a large part of their business, just a small increase in fuel costs can be detrimental. Some of the companies we all know are adversely affected by rising gas prices.
The first three are Wal-Mart, Target and Dollar Tree. Although rising gas prices directly and substantially affect these companies, there is a larger concern brought about by rising gas prices. Piper Jaffray analyst Mitch Kaiser has noted that when gas prices rise, retail sales fall. He notes that retailers are affected in two ways: First, consumers cut back on their trips to the grocery store, or any other store that carries even the most essential items.
Second, they spend less when they get there. When the price of gas rises just 5 cents a gallon, that's maybe an extra $10 per week. When it rises 15 cents or more, that can translate to $20 each week out of the pockets of many who can't afford to add an extra $80 to their monthly budget.
Why Wal-Mart, Target and Dollar Tree and not the higher end retailers? These stores are often low margin chains which rely on high volume to make a profit, and since the demographic of companies like Wal-Mart are the lower income population, these customers are affected more severely than other stores. (For more, see What Determines Gas Prices?)
High End Clothing & Malls
Aside from the low income families being affected by rising gas prices, there is another category of low wage earners that have a hard time with it: Teenagers. Teenagers, often working for minimum wage or getting allowance from their parents, don't have the extra money to put in to their gas tanks when gas prices rise. Because of this, companies like Abercrombie & Fitch and Forever 21 are two examples of higher end retailers who see a decrease in traffic, when teenagers don't have as much money to spend. In addition, mall traffic sees a measurable decline, since many of the stores in malls are discretionary in nature. (For related reading, see Why You Can't Influence Gas Prices.)
You're thinking McDonald's, right? Add Wendy's, Taco Bell (which is actually Yum! Brands) and the many other fast food style restaurants. The business model of these companies is to entice the on-the-go, errand running consumer to stop in and pick up a burger (or taco) when the hunger strikes. This model becomes a recipe for financial pressure for two reasons: First, when gas prices rise, consumers look for carpooling opportunities. These businesses are built on the idea that most of the time, consumers are driving alone and when hunger strikes, the decision is simple. Certainly, you aren't going to take your car full of passengers to a drive through to get yourself a burger (not to mention that we tend to look for healthier alternatives when we're eating with others). (For more, see Sinking Your Teeth Into Restaurant Stocks.)
The other problem is, of course, value. When money is tight, consumers believe that they can save a significant amount of money by eating at home. Since we all started referring to the nation's money situation as a down economy, 89% of people now say that they eat most of their meals at home and 57% say that they make new meals out of leftovers at least twice per week. In 2010, 22% of those surveyed said that they never visit a fast food restaurant compared to just 18% in 2009. A 4% increase many not seem like much, but in an industry that brings in more than a half trillion dollars annually, 4% is a number getting a second look by restaurant executives. Numbers like these prove that the restaurant industry holds the dubious distinction of being one of the first to be cut when pressure is put on consumers' finances. (For related reading, see Hamburger Economics: The Big Mac Index.)
TUTORIAL: Inflation: Introduction
The Bottom Line
It's easy for all of us to play the victim when it comes to gas prices, but in reality, every sector of the economy is affected when our nation's primary fuel source heads north. (For more, see How Does Crude Oil Affect Gas Prices?)