Key insights
- Rising gas prices are squeezing lower-income consumers, potentially leading to demand destruction in the retail sector. Higher diesel costs are increasing freight expenses, which could further fuel inflation and pressure corporate earnings. While high-income consumers are more resilient, a sustained rise in gas prices to $5/gallon could trigger broader psychological impacts and economic slowdown.
Americans are growing increasingly worried about the surge in US gas prices (RB=F), as signs at the pump are now approaching a national average of $4.00 per gallon.
Citi Director of retailing/broadlines & hardlines Steven Zaccone comes on Market Catalysts to discuss how gas price pressures are hitting both all-tiers of US consumers.
this demand destruction that could fall out from gas prices. How concerned are you and who could this hit the hardest?
You know, I think demand destruction in the near term would be most pronounced lower income consumer customers, right? Like that's where a larger percentage of your wallet goes towards gas. Um I think the the second thing that was a was discussed there previously was, you know, higher diesel costs, right? And we've been talking to a lot of our management teams, talking to investors.
I think the concern in the, you know, over the next one to two quarters is, you see higher freight costs trickle through the P&L. What does that do to inflation? That also gets passed on to the consumer. So it's, you know, it's a slight concern right now what we're seeing in terms of higher oil prices and gas prices.
Steve, you did mention in your note that you did go to William Sonoma's headquarters and you spoke with the CFO there and you said that the higher freight from higher oil is a key item to monitor, similar to what you just had mentioned. When you think about sort of who can withstand this, what are some names that you're looking at and is William Sonoma one of them?
Yeah, I mean I think I think who has exposure to a higher income consumer, that kind of insulates you. Right? So when you think about the near term in terms of immediate demand destruction, higher income consumers should be able to handle $4 gasoline, right? When it gets to $5, it's much more of a psychological level for the consumer, but higher income exposed retailers, that's where you'd be you'd be better off.
I think from a from a longer-term perspective, the concern is if a prolonged conflict exists, I think the risk of a broader economic slowdown, maybe rising recession risk, then it's it's really, you know, a bigger concern for the overall consumer, right? We've seen some equity market volatility here. You know, we're off high single digits from the high on the S&P 500.
Our group in particular is off, you know, more than 10%. But, you know, if you see that sort of persist longer into fears, I think that would be a concern for all of the consumer backdrop.
Interesting, interesting point there. Are you necessarily saying Steven that maybe investors have more tied up into the stock market right now than than previous geopolitical risk times?
Well, I think when you look at the last couple of years, you've had really strong, you know, asset price return, whether it's housing prices and the equity markets, right? So a theme we've talked a lot about is the wealth effect amongst the consumer and how the middle to upper income has really helped a lot of our consumer companies, right? You've probably talked about we've talked about the K-shaped economy, right? That middle to upper income is really doing the best.
So, if you see the equity markets kind of pull back, you see some of the concerns spread out, that's that's a change in sort of consumer confidence amongst that higher income consumer. The low income is really where you've seen more of the pressure, you know, more of a focus on value. I think if you see that spread to the higher income consumer, that would be a change.
Steven, one uh one branch is is wholesale. We've been talking so much about how value plays tend to do well in this environment. What's your take on that and what sort of traffic have you seen to places like BJ's, like Costco, especially in this environment where everyone's looking to get cheap gas?
Yeah. Warehouse clubs set up really well right now. We had both of the management teams from those companies, BJ's and Costco's at our conference uh three weeks ago in Miami. You know, big theme is we provide value in terms of gas prices in a local market. Typically, you'll see a customer who comes in for gas will cross shop at the club. So we really like the positioning of both the BJ's and the Costco right now. We have a preference for BJ's. That's our buy rating within the sector.
much more attractive from a valuation perspective than Costco.