Most Consumers Still Struggling to Afford Basics

Despite rising consumer confidence and strong February same-store sales, don't celebrate the return of the consumer just yet. The findings of a recent study by WSL/Strategic Retail provide some sobering observations.

Michael Blann | Photodisc | Getty ImagesConsumers are coming back, but they have limits, according to a recent study by WSL/Strategic Retail.

Most consumers still feel as though they are struggling to afford the basic necessities.

“Every retailer wants to think ‘Everything I sell is worth it! Shoppers will love it’, but the hard reality is 52 percent Americans feel they barely have enough to afford the basics," said Candace Corlett, president of WSL/Strategic Retail.

Corlett's comments are based on a survey WSL/Strategic Retail conducted of 1,950 consumers in December regarding their shopping habits.

Consumers have moved past the fear that was seen in the firm's 2010 How America Shops survey, Corlett said. However, they are returning to stores, but with limits.

Feeling the Strain

And it’s not just the lower-income consumers feeling the strain. Three groups are experiencing higher rates of financial struggle: those with incomes between $100,000 and $150,000, those aged 18 to 34 years old, and women.

According to this year's “How America Shops” survey, it now takes an income of more than $150,000 to be able to afford the basics, some extras and to save too.

As for the once-coveted 18- to 34-year-old market, it is now the demographic struggling the most when it comes to buying power.

In addition, about 75 percent of women say it’s important to get the lowest price on everything they buy, up 12 percent points from 2008. In this group, 68 percent are using coupons regularly and 45 percent are only buying items on sale.

Since the financial crisis, retailers have employed heavy promotions, perhaps unintentionally cementing these shopping behaviors.

“Retailers have trained women to never pay full price and take pride in being a smart shopper,” Corlett said. “It’s a real struggle to sell anyone anything at full price.”

Because price has become central for decision making, some brand names will suffer, particularly with women shoppers, Corlett said. Some 67 percent of women said that trusted brands are not worth paying for, and they are pausing to consider whether it’s a smart use of their money.

“It’s an income issue, but it’s also a value issue," she said. "We have lost that mindset of we have to buy, buy, buy, buy. . .we’ve built in a lot of push back. Retail sales will be up, but people aren’t buying everything they want, they are buying what they need.”

As a result, retailers need to ask themselves: can they afford to take price increases if they are selling to a shopper that can barely afford the basics?

"Frivolous is out,” she said.

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Consumers Are Saved From High Gas Prices ... for Now

How much rising gasoline prices will pinch consumers has yet to be seen, but energy savings from the warm winter may have already helped consumers avoid some of the pain.

Deutsche Bank chief U.S. economist Joseph LaVorgna crunched the numbers and says consumers may have seen about a third of the recent rise in gasoline prices offset by cheaper natural gas and lower utilities costs this winter.

“To me it’s really more of a usage story than a price story,” said LaVorgna. “The savings is going to be disproportionate to the people that live in the northeast...for those people that it’s impacting, it does add up to lots of dollars.”

Gasoline prices, however, are expected to continue to rise into the spring and are expected by analysts to top out above $4 a gallon, and the benefit from cheaper heating bills will also fade as the spring approaches.

Economists are concerned that the consumer will start pulling back on other spending as gasoline nears $4 a gallon, a level it’s already reached in some areas. Certainly, as prices rise consumers also cut back on spending on gasoline, a bigger trend that has been in place over the past year. Last week alone, demand for gasoline dropped 6.4 percent from last year’s level.

From the recent low in the week of Dec. 19, gasoline prices have risen by 29 cents to an average of $3.58 per gallon, during the week of Feb. 13. Oil prices have risen about 40 percent from their October low of around $75. West Texas intermediate was trading above $105 Wednesday on Nymex as tension surrounding Iran keeps prices high.

“Our standard rule of thumb is that a one-cent increase in gasoline prices increases household energy consumption by approximately $1.4 billion,” notes LaVorgna. So, the recent price jump from December through the week of Feb. 13 means household energy consumption would go up $41 billion.

“The good news is the rule of thumb may have temporarily broken down,” he says.

If consumers this quarter are spending as they did in the fourth quarter, natural gas and utilities consumption could be about $9 billion lower, LaVorgna says. In fact, he notes utilities production is off sharply in the first quarter so far, or down 16.1 percent at an annualized rate, relative to the fourth quarter.

“If we hold this level throughout the current quarter, household consumption of electricity would be down another $6 billion. This means we could see about $16 billion in less natural gas and utilities consumption, effectively offsetting about half of the recent run-up in gasoline prices—assuming gasoline prices remain near $3.58,” he said in a recent note.

LaVorgna said the peak in gasoline is typically in May, and the impact of higher prices on the economy depends on how long and how quickly they rise.

While use is down for heating oil, as well, the price for that fuel is about 20 percent higher than it was at this time last year. So consumers using heating oil may not see a savings.

“We’re behind on degree days by 20 percent. That’s the New York area, but it’s pretty much the northeast,” said John Kilduff of Again Capital. He said there is global competition for distilled products, like heating oil, and that drives up the price, especially since Europe has had a particularly cold winter.

Natural gas prices, meanwhile, are at a decade low and could still head lower, analysts say. LaVorgna says natural gas accounts for just 13 percent of total household energy consumption, and utilities spending is much higher, at 27 percent.

“This rise in gasoline is clearly something we want to watch, and does pose some risk,” said LaVorgna. “I think of all the things in the world now gas isn’t the worst thing if the economy is getting better, which I think it is, and if Europe stabilizes, which I think it is.”

Follow Patti Domm on Twitter: @pattidomm

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