The Impact Of Gas Prices On Retail And Restaurant Sales

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by: Elephant Analytics

Summary

Gas prices have fallen 23% from 2012's average price.

Average household can potentially save $670 per year in gas, if consumption remains the same.

Lower gas prices result in increased driving and increased purchase of premium gas, so gas expenditures don't fall as much as gas prices.

Estimated 2% increase in retail and food service spend from a 23% decrease in gas prices.

Restaurants are likely to benefit more than average.

Gas prices have fallen considerably since July, and there has been lots of discussion about how this puts more money into the pockets of consumers. This article intends to look at the potential impact of lower gas prices on retail and food services sales, as well as which categories would benefit most from the lower gas prices.

Savings From Lower Gas Prices

The average U.S. household spent $2,912 on gasoline in 2012. This represented approximately 4% of before tax household income. The average 2012 price was $3.64 per gallon for regular gasoline.

Regular gas prices averaged $3.18 per gallon in October 2014. According to the AAA, the average price for regular gas (for November 26) has now fallen to $2.81 per gallon. This represents an approximate 23% drop from the 2012 average.

Assuming that factors such as average driving mileage per household and average fuel economy haven't changed significantly since 2012, at current prices, the average household would save approximately $670 per year on gas (or $56 per month) compared to 2012. This represents approximately 0.9% of before-tax household income.

Potential Effect On Retail Spend

Gasoline represented approximately 11% of retail and food services spend in 2012. The current decline in gasoline prices would result in enough savings to increase other retail and food services spend by approximately 2.8%. Retail spend includes groceries, restaurants, clothing stores, department stores, motor vehicle purchases, electronics and drug store spend, among other items.

Here's a table outlining various gas prices and the potential effect on retail and food services spend. At $2.44 per gallon gas, the savings would result in a potential increase in other retail and food services sales of up to 4%.

Potential Effect on Retail + FS Sales

Regular Gas Price Per Gallon

2%

$3.04

3%

$2.74

4%

$2.44

5%

$2.14

However, those calculations are based on gas consumption staying constant. Gas consumption is affected by gas prices, and it appears from September and October data that people are driving more and more frequently purchasing premium gas as gas prices go down.

The following table shows spend at gasoline stations in millions of dollars.

Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sept

Oct

2014

$42,010

$40,011

$45,592

$46,338

$49,450

$47,893

$49,060

$47,876

$44,745

$44,342

2012

$41,068

$41,887

$47,972

$47,280

$48,824

$46,140

$46,339

$49,855

$46,910

$48,818

Source: U.S. Census Bureau - Monthly Retail Trade Report and Advance Monthly Retail Trade Report

The following table shows average gas prices for regular gas (per gallon).

Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sept

Oct

2014

$3.31

$3.36

$3.53

$3.66

$3.67

$3.69

$3.61

$3.49

$3.41

$3.17

2012

$3.38

$3.58

$3.85

$3.90

$3.73

$3.54

$3.44

$3.72

$3.85

$3.75

Source: EIA

From the above tables, we can estimate that the number of gallons used (based on regular gas prices) in May 2014 was roughly 2.9% higher than May 2012. Meanwhile, gas prices in May 2014 averaged $0.06 per gallon less than May 2012. As we can see in September and October, there seems to be a significant correlation between lower gas prices and increased usage. Just as a very rough estimation, it seems that a $0.10 change in gas prices affects consumption by 1%.

2014 vs. 2012

Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sept

Oct

Gallons

104.4%

101.9%

103.6%

104.4%

102.9%

99.5%

100.8%

102.5%

107.8%

107.3%

Price Per Gallon

-$0.07

-$0.22

-$0.32

-$0.24

-$0.06

$0.15

$0.17

-$0.24

-$0.44

-$0.58

There's probably some limit to how much consumption increases with lower gas prices. However, assuming the relationship of a 1% increase in consumption for every $0.10 per gallon decline in gas prices holds true, we'd end up with the following table. So I'd estimate that at current gas prices, the potential effect on retail and food service sales would be approximately 2%.

Potential Effect on Retail +FS Sales

Regular Gas Price Per Gallon

1%

$3.20

2%

$2.81

3%

$2.45

4%

$2.12

Expectations By Category

Early indications show that restaurants have benefited from the drop in gas prices so far, with seasonally adjusted sales increasing 0.9% month-over-month in October. This was one of the strongest categories, behind only sporting goods and Internet sales.

This makes sense, as restaurants previously faced a double-hit from high gas prices. In addition to having less disposable income, consumers were less inclined to burn gas to get to restaurants. With retail stores, consumers could just do fewer trips but purchase more per trip. With restaurants, fewer trips just means less spend.

Clothing and department stores have so far seen a limited effect from the decrease in gas prices. Clothing stores were up 0.5% in October, after being flat for several months. Department stores were flat in October. Some of this appears weather-related, as warm fall weather delayed the purchase of heavier clothing items. As well, some consumers may be waiting until the start of the holiday shopping season to begin shopping in earnest.

Retailers are currently cautious on the impact that lower gas prices will have on spending, though. Macy's CFO Karen Hoguet mentioned that there was a correlation between lower fuel prices and spending, but believed the bulk of the extra spend would go towards healthcare, electronics and home improvement.

Conclusion

Lower gas prices are putting a large amount of money into the pockets of consumers. However, the lower gas prices are also resulting in more driving and increased purchase of premium gas. Therefore, it appears that at $2.81 per gallon gas, the potential effect on retail spend is approximately 2%. Restaurants are likely to benefit by more than 2%, while department stores expect a more muted impact. Lower gas prices are also likely to benefit stores and restaurants with a higher proportion of low-income consumers.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.