How do rising gas prices impact retailers?

Gas prices are rising to record levels and retailers are feeling the pinch. How can they react to a changing and more demanding world?

According to forecasts from the Department of Agriculture, the price of chewing gum has gone up by 7.1% over the course of the year. Prices are up across the board as the US struggles to cope with inflation which hit 8.5% in March. The rising price of gum, though, is not just about supply chain issues or supply & demand – it’s about the rising price of gas.

Gas prices have hit record highs in the US of more than $4.60 per gallon. Much of that can be attributed to the war in Ukraine, but even before the pandemic, producers were cutting back on investment as profits were coming under strain. While the pandemic caused a sharp decrease in demand, the lifting of lockdowns, especially in large consumer markets such as China, has seen demand outstrip supply.

In theory, the US would have hoped to have been shielded from the oil supply problems caused by the war in Ukraine, as very little of the oil bought by the US comes from Russia. Even so, problems in Russia are pushing up the global commodity price which determine gas prices. Even here in the US, then, prices at the pump are heading to record levels.  

One thing is clear, the recent trend for high prices at gas stations is likely to be here for some time to come and that’s having a massive impact on the economy, and businesses. From obvious issues such as consumers having less money in their pockets to more tangential problems such as increasing costs for those products which use oil, prices at the pump are putting pressure on the economy from all angles. For retailers, the impact is being seen in the number of customers coming through their doors and their profit margins.  

Impact on retail

According to Place.ai retail visits declined by 4.3% over the week to March 7 compared to the previous year. It’s the sharpest decline in retail foot traffic in 12 months that hasn’t been the result of COVID-19 or holiday season trends.

All stores are suffering, from the independents to the major chains. Target saw its share price plunge 25% after poor earnings results which warned about inflationary pressures.

Retailers feel the pinch for a number of reasons. Gas prices is one of the major contributors to the rising inflation which is plaguing economies around the world. High prices at the petrol pump take money from the pockets of customers reducing their spending power and adding to the running costs for companies manufacturing the products on their shelves. Any product which uses oil in its manufacture – from plastics to gum – will also become more expensive.

Retailers will also see their own running costs rise, especially those with large logistical operations. The cost of fuel is seeing domestic and international freight exports rise substantially. Amazon’s quarterly update warned that the cost to ship an overseas container had more than doubled over pre-pandemic levels. In its earnings report, Target warned that higher diesel and fuel costs would lead to roughly a $1bn incremental cost in this fiscal year.

Some of these running costs will have to be passed onto the consumer, but such has been the speed of the rising gas prices that businesses have had to find ways to absorb the costs themselves. That will inevitably put further pressure on profit margins.

Related: How recent supply chain issues are impacting retail

How can retailers respond?

For retailers these additional costs create all sorts of problems. At a time in which consumers are struggling to make ends meet, retailers will want to avoid pushing price increases onto their customers. Higher prices change buying behavior. People will purchase less, will visit stores less frequently and will make savings where they can. Named brands will be replaced by budget and own-brand alternatives. Luxuries will be cut back on with people concentrating only on the necessities.

Higher prices also have a reputational cost for a retailer. Struggling customers are likely to react badly to seeing prices in their local convenience store going up every month, especially if they cannot see a clear reason behind the price increases. They will look around for alternatives, and if they find another store which is finding ways to maintain value, loyal customers could easily start to look elsewhere.

The challenge for retailers will be to find new ways to control prices, manage business costs and to keep the trust of retailers. To do so, they will have to become more agile, responsive and imaginative in their operations.

Technology will have an important part to play. If costs are rising in some areas, retailers can look to reduce them in others. Using software solutions to manage administration and supply chain issues can streamline operations, allowing for better inventory management, automating key administrative duties and reducing overall costs.

Real time data management capacity gives users more visibility across everything from supply chains to finances allowing them to become more reactive to an increasingly volatile and fluid economic situation.

Related: What’s the secret to an agile retail strategy for the future?

Better customer relationship management platforms can help businesses deepen their engagement with customers offering loyalty programs which encourage customers to bulk buy, helping them to get more value for money from their purchases and allowing businesses to maximise the revenue they get from each customer. Data from these systems sheds light on buying trends helping businesses to develop more personalized marketing strategies which can open up more revenue opportunities.

All these innovations can help businesses to boost efficiency and make the most of every opportunity to make money. Businesses which thrive in this environment will be those which can be more cost-efficient, offset costs elsewhere and offer better value for money. Having more control over data and operations will help retailers to do that and avoid difficult pricing decisions which might push customers away.

Maintaining communication

In those cases where price rises are unavoidable, communication is key. Explaining to customers clearly in any marketing information why the business has had to make a decision and the pressures it is coming under, will make customers more receptive. They may not like paying another few bucks for a stick of chewing gum, but they will be more understanding of a retailer’s reasons for changing prices.

Engaging in a more fluid mode of communication enables retailers to be more adaptive and tailor their approach to the challenges and pressures consumers are facing. Sometimes the simple fact of knowing a store understands the problems caused by the rising cost of living, can improve the way customers view a retailer. Meanwhile, more efficient operations and better data insights will help retailers be competitive on price and react to all the challenges coming their way.