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By Don Longo, Editor-in-Chief
The combination of rising gas prices, falling home values and tightening credit markets has many economists predicting a recession for the U.S. economy.
One Wall Street hedge fund manager was quoted recently as saying he was "worried about a recession. Not a normal one, but a very bad one. The worse since the 1930s."
The technical definition of a recession -- two consecutive quarters of negative growth -- hasn't been reached yet, but that milestone could occur at the end of June.
For convenience and petroleum retailers, it's important to know how reduced consumer spending will affect their business. Virtually no business or industry is totally recession-proof. Most goods and services will feel some impact from a slowing economy. "A good business in a recessionary period is one that has a good balance sheet with minimum debt loads, high gross margins, good cash flow, and is selling goods and services considered consumer staples," economist Maureen Maguire, president of ThinkResearch, said recently.
C-stores are somewhat recession-proof because gasoline is considered an "inelastic" good -- demand for it is not highly responsive to changes in price. "People need gas to get to work, to drive the kids to school, to do errands. They may conserve in the number of miles they drive by combining shopping trips, or switching to the car that gets better gas mileage, but people are still going to buy gas," Maguire said.
Retailers have already seen a tradedown to lower grades of fuel due to price sensitivity. What's yet to play out, in a big way, is the impact on in-store product categories.
According to consultant David Bishop, managing partner at Balvor, consumer purchasing intent will determine the degree to which various categories are affected by recessionary times. "Categories with high purchase intent, like cigarettes, are already feeling the impact of downtrading by the consumer," Bishop said. But, the categories that will be most affected by tighter consumer spending are impulse categories, like snacks and candy, he said.
Tobacco is almost as "inelastic" as gas. Consumers will look for value-priced multi-packs of premium brands or consider trading down to discount brands. Carton buyers will also be forced to downsize their purchases to single or multi-packs, which could result in more frequent visits to the store and higher margins for the retailer.
Coffee is another planned purchase that should perform well at convenience stores during a recession. "With Starbucks raising prices, this may be a good time for c-stores to promote their coffee more heavily," Maguire noted.
Foodservice at c-stores should also perform well during a recession. Restaurants are already suffering as consumers cut back on eating out. In most cases, c-stores' foodservice is priced lower than quick service restaurants. "Relative to other foodservice retailers, c-stores are not as exposed as Starbucks or even McDonald's," Bishop said.
Crafts and imports have dominated the buzz in beer category the past few years, but Bishop said beer drinkers have already begun trading down. "We're already seeing a shift back to mainstream beers, which are showing positive growth compared to the previous year," he said.
In contrast, the snacks and candy category is highly impulsive. "The higher price of gas takes money right out of the pocket of these cash and carry consumers," noted Bishop, who added that downtrading opportunities in these categories is limited.
It's most important to remember that during a recession, consumers are extremely price-sensitive. Sacrificing a little margin now for increased sales will pay off in the longer run. Difficult economic times are a golden opportunity for a strong retailer to expand market share, increase total sales and position itself as the customer's first choice when the inevitable upturn occurs.
For comments, please contact Don Longo, Editor-in-Chief, at (646) 654-7489 or [email protected].