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Suzy Davidkhanian (00:00):

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(00:24):

Hi, everyone. Today is Wednesday, April 15th. Welcome to EMARKETER's weekly retail show, Reimagining Retail, an EMARKETER podcast made possible by Verve. This is the show where we talk about how retail collides with every part of our lives. I'm your host, Suzy Davidkhanian, and on today's episode, we're focusing on the ripple effects of the energy shock, and why this moment is just as much about headline inflation as it is about the second- and third-order impacts on consumer behavior. Joining me today is podcast regular analyst Rachel Wolff, who's sitting with me in our new studio ... hi, Rachel ...

Rachel Wolff (00:56):

Hi, Suzy.

Suzy Davidkhanian (00:57):

... and principal analyst Zak Stambor, joining us from Chicago.

Zak Stambor (01:00):

Hi, Suzy. Hi, Rachel.

Suzy Davidkhanian (01:01):

So this week we're talking about the economic ripple effects of the war and what it actually means for retail, because on the surface, things looked pretty stable. Coming into the year, we were forecasting about a 3.4% growth in retail and 6.7% growth in e-commerce, with inflation easing and the consumer holding up. But then, now we have to layer in an energy shock. Gas prices are up over 30% in just a month, and suddenly this isn't just another inflation story. Retail might look okay on paper, in part because of the higher gas prices lifting top-line sales, but underneath, the consumer is starting to shift. Energy touches everything. It acts more like a tax on fixed costs like fuel and utilities, leaving less room for everything else.

(01:44):

So today, we're not going to rehash the headlines. We're going to unpack the ripple effects, the ones that are easier to miss, and what they actually mean for retailers. Because even with the potential end to the conflict, these kinds of shocks don't unwind overnight, and the ripple effects tend to play out over time. So with that, before we really get into it, Zak, tell me what's one ripple effect from all of this that you're still thinking about and that you think is being underestimated right now.

Zak Stambor (02:10):

I've been thinking a lot about plastic. Plastic is everywhere. It's in the Lego bricks that you buy your kids. It's in the packaging that the Lego bricks are packaged in. It's in the packaging that the Lego box is sent in to your house. It's in the shopping bag that you take the Lego brick box home in, and then there's all those other areas that you don't even think about plastic playing a role in. It's in the manufacturing components. Actually in some brands of chewing gum, there's a type of plastic. In menstrual products, and some toothpastes have some plastic products. And so it's just everywhere, and so the impact of the rising price of oil, I think, is really pronounced and something that we just don't think about that much.

Suzy Davidkhanian (03:10):

Absolutely. Everyone's thinking about the gas pump, but there's so many other things. What about you, Rachel?

Rachel Wolff (03:14):

So I am zooming out a little bit, and I think that companies aren't thinking enough about how the war could fuel negative sentiment toward U.S. brands. I mean, a lot of recent reports have talked about growing anti-U.S. sentiment and also growing intent among global consumers to boycott U.S. brands, and I think that's an issue that a lot of companies haven't thought deeply enough about.

Suzy Davidkhanian (03:36):

That's a really good one. Mine was a little bit more akin to Zak in terms of so specific, but it blew my mind when I heard about how fertilizer is impacted. And everyone's like, "But everything is going up," but fertilizer, the impact is second-order because it's not just farming now. The cycle is already over. They already have their fertilizer. It's the next cycle where the fertilizer will be expensive. It'll enter the food system in terms of the crops that animals are eating, never mind the delivery costs and everything else that goes with our fresh food, and I'm very worried about that piece. I guess time will tell and we'll see.

(04:13):

It does bring about a different inflation to what we saw last year, right? Energy-driven inflation shows up differently for retailers than it would with tariffs or broader price increases. What does that look like?

Zak Stambor (04:24):

Yeah, I think that's so true. Last year or in the last inflationary cycle, there were all sorts of levers that consumers could pull. They could trade down, they could switch brands, they could switch retailers. But when the price of gas rises or the price of natural gas rises, there's not much you can do about it. There isn't a private label natural gas brand you can go to, and so what do you have to do? You just have to adjust your budget. And that's tough, because what that means is those dollars have to come from somewhere. And so it just means that there's going to be less discretionary dollars that consumers have to spend.

Suzy Davidkhanian (05:02):

Right. It's a squeeze on the purchasing power. And to your point, there's only one kind of gas that you can really buy, but it's also that it's a fixed cost for most households. And so there's less for them to play with after for all the things that retailers are selling, like food or textiles or home goods.

Zak Stambor (05:20):

Yeah. And when you look at where consumers spend their dollars, just in terms of the household budgets, it's like 33 to 35% goes to housing, 15 to 20 goes to transportation, and 12 to 15 goes to food. And so if you're looking at where the prices are rising, the transportation costs are rising. And then, to your point just a few moments ago about food prices, well, that's going to be rising as well, and so all the rest of the budget is going to be squeezed.

Suzy Davidkhanian (05:50):

Right, and your utility bills. It's like this energy shock hits us everywhere all at once, which then leads me to ask around what behaviors are you guys seeing in terms of consumers shifting away from that's not showing up just yet in the top line?

Rachel Wolff (06:05):

I think it's a little tricky to tell, because one factor is that a lot of households still have tax refunds that they haven't spent, which could be cushioning the blow at least in the short term. But one nugget that I found that was interesting ... and this is from a Jefferies analysis of some March spending data ... is that more consumers are breaking up purchases, so especially lower-income households. So that could indicate that they just don't have the flexibility to handle those rising costs.

Zak Stambor (06:29):

I think what you're saying about lower-income consumers is important, because we can't look at consumers as one mass, one entity, but we have to look at the different consumer segments. And the lower end, and even the middle-income consumer, was feeling kinda squeezed before this, and then you layer on the rising price of natural gas and that they're only going to feel more squeezed, so they are probably going to have some smaller baskets. They're probably going to make fewer discretionary purchases, and they might trim back their travel plans as well.

Suzy Davidkhanian (07:03):

And one of the things we were talking about earlier was they're going to consolidate their baskets. So they're going to make fewer trips, but do we think they're also going to shift to a different channel? So if they were buying from Whole Foods, potentially they're going to go to a different? I was just in Toronto, so it's like they have Food Basics, which is by default a grocery store that is slightly on the lower end versus the higher-end brand in that umbrella of brands. Are we going to start to see that happen here too?

Zak Stambor (07:32):

Yeah. I think the warehouse clubs in particular have a real big opportunity here because they're so closely aligned with the notion of value. And as consumers become even more sensitive to pricing, they're going to look for opportunities to save, and those warehouse clubs provide that opportunity.

Rachel Wolff (07:51):

And I think there's also a similar dynamic with, obviously, Amazon and Walmart. We talk about them constantly, but especially with their membership programs, right? The idea that you can get all these things on demand and not have to pay extra or pay those higher gas prices to drive to the store. I think that would be a big boon for them as well.

Suzy Davidkhanian (08:07):

Until they pass that cost off. But I want to hold onto that, because I feel like there's so many different ways we can be talking about this, now and the next order of effects. And Zak, you brought up this interesting point around the customer is a little bit more ... I'm putting a word in your mouth ... fragile. We have been talking about that for a long time, right, but this time it feels a little bit different. Are there certain categories where we're going to see the change in behavior show up first?

Rachel Wolff (08:34):

I think definitely discretionary categories, restaurants, travel, are going to feel the impact most immediately. There is a Black Box Intelligence report that said that once gas prices hit $3.50 on average, then restaurant traffic starts to decline. Well, we've blown past that pretty considerably, so I think it's not a stretch to say that restaurants are going to be feeling the immediate impact. Similar thing with travel. I mean, intent to travel has fallen significantly as airline tickets, gas prices, have risen.

Zak Stambor (09:02):

Yeah. I just saw a survey that 33% of consumers say they plan to cut back on travel this year because of rising prices, and I think that's only going to grow the longer this conflict drags on, and it's like one thing when airfare rises. Consumers can drive, but when gas prices also rise, people are just stuck at home, and so maybe we'll see more staycations this year.

Suzy Davidkhanian (09:27):

Well, it's interesting because that reallocation of budget becomes harder when transportation costs increase by so much. But for me, it still feels like, when I'm reading the news, that there's like sentiment is falling but household spend is still relatively okay. It's like this weird disconnect that we've seen several years in a row, and I just wonder if now it's going to be even more because it's gas prices.

Zak Stambor (09:50):

Yeah. I think that disconnect has been around quite a while, because it's been so hard for so many years for consumers to be able to afford a car, to be able to afford a house, and that's not changing. Mortgage rates are rising because of this conflict. Car prices are through the roof. And so I think we're going to see continued low sentiment numbers for the foreseeable future. And again, the longer this drags on, and the longer just things seem uncertain, the more that's going to weigh on consumers and perhaps their spending behavior as well.

Suzy Davidkhanian (10:30):

We're definitely seeing the economy is splintering, and there's volatility everywhere. And as the market continues to be volatile, it's really impacting every household income tier, and we have some forecast numbers around it.

Rachel Wolff (10:42):

Yeah. So we have our new Sustained Energy Shock Forecast, which assumes that oil prices stay above $100 a barrel for an extended period of time. And I think what's interesting in this scenario is that if you look at the top-line numbers, they're much higher than our base case. So in the sustained energy shock scenario, we have a 4.8% increase in retail sales, but our base case is for 3.4%. But if you take out auto and gas, the picture is very different, right? Our base case had a 3.7% increase in retail sales without auto and gas. Our new energy shock scenario, 3%, so that really tells you how spending is shifting in the event that oil prices stay elevated.

Suzy Davidkhanian (11:20):

And there is a mental math people are doing, right? They're recalibrating their spend, and it's not just retail. We've already skirted around this, but there are second- and third-order effects that could come back and surprise retailers, things like travel. What are some of the other ones, you guys, that we should be thinking about as it impacts retailers?

Zak Stambor (11:40):

I've been thinking a lot about the gig economy. So there's the part of the gig economy that you're very well aware of, the DoorDashes of the world, and they're taking steps to subsidize fuel and trying to keep their supply of drivers steady. But then there's also the other end of the gig world universe, like the Amazon Flex drivers. And the Amazon Flex drivers, they fuel the same-day delivery model. And so if people decide, "Gas is too expensive, I don't want to do this," what does that do for companies like Amazon that rely on these workers to get packages to consumers' doors quickly?

Suzy Davidkhanian (12:24):

And then they'll have less disposable income if they're not working as many hours, right? And so then less money to spend back into the economy.

Zak Stambor (12:31):

Exactly. So you could see higher delivery costs, you could see slower fulfillment, you could see just overall capacity constraints. And so there's like a whole slew of different challenges that that could present.

Suzy Davidkhanian (12:44):

Yeah, the downstream effect, which is also in airlines, right? Yes, the ticket will be more expensive, less people will go. The visiting cities will have less money that will flow into those cities. The airline surcharges, I don't know which one last week was saying how they were going to do a short-term surcharge for baggage.

Rachel Wolff (13:02):

At this point, I think it's easier to list the airlines that don't.

Suzy Davidkhanian (13:04):

That are not? Yeah, you're totally right.

Zak Stambor (13:05):

Right.

Suzy Davidkhanian (13:07):

Which is probably none.

Zak Stambor (13:08):

Yeah. We've seen Delta and United and I think JetBlue and several others all move in that direction.

Suzy Davidkhanian (13:15):

And the home industry is not looking like it's getting a cut. No break for them, for the last I don't know how many years.

Zak Stambor (13:21):

Right. I mean, mortgage rates are rising. We thought they might fall this year, but instead they're heading in the opposite direction. And home improvement and housing-related retailers have been counting on mortgage rates to fall, because they need housing turnover to build a market for people to buy furniture and various home furnishings, and it's just not looking like it's going to happen.

Suzy Davidkhanian (13:45):

Speaking of challenges, I think retailers need to think about what costs do they absorb versus which ones do they pass through, and it feels like retailers make different choices depending on the "tax" that's happening. And last week, Amazon said that it was going to start as a surcharge, temporary surcharge. It'll start in April with one pool of marketplace folks and then it'll move into May. It'll be expanded. Are we at a point where retailers can't absorb all these extra costs and now they have to pass them over?

Rachel Wolff (14:15):

I think part of it is just that it's such a large shock. And so companies obviously aren't prepared for this in the short term, and so they need to take these measures. We saw similar things happen in 2022 when Uber and Lyft passed on certain surcharges to their customers.

Suzy Davidkhanian (14:30):

And so if we think about passing it on, at what point do we think these become sticky and stay, and reshape how and what people are expecting from retailers and how they should be shopping versus going back to what we once called normal, but now I'm not even sure what that means? It's been so many years of all these disruptive things happening that are shocking our system.

Rachel Wolff (14:50):

Do you mean changes as in changes to shopper behavior or what retailers should do?

Suzy Davidkhanian (14:54):

All of it. Shoppers are probably going to buy more private label, I would assume. And then once they are happy with a private label that they've found, even when times are better, will they switch back to a national brand? For airlines, if for long enough of a period of time we're paying even more to check a bag ... though nobody should be checking bags ... but if you are, will you be so used to it that you won't even think twice about it, and so the airlines will just leave it in?

Zak Stambor (15:19):

Yeah. I think the near-term challenge is this increased price sensitivity. Over time, I imagine that wanes. But to your point, I think the preferences that develop when consumers are price-sensitive for a private label, for a particular retailer, those can hold if consumers like what they're getting. And that can pose a real challenge for the retailers that get left behind, that don't have that sharp value proposition.

Suzy Davidkhanian (15:48):

Right. It's almost like if we don't snap back to what we used to do, let's call it 2019, then retailers really need to adjust to the new behaviors.

Zak Stambor (15:57):

In 2019, I mean, that was so long ago, it feels like.

Suzy Davidkhanian (16:01):

Well, and to put it in perspective, the forecast that Rachel was talking about, in that scenario of the extended shock, it's not until 2029 where we forecast that things will start to normal out again.

Zak Stambor (16:13):

Right. So that's a decade after 2019, which really was the last bit of normal.

Suzy Davidkhanian (16:21):

Yeah, totally. Absolutely. So with that in mind, what should a merchant or a marketer be thinking about and looking at in the next six months? What is one thing that they should be keeping an eye on?

Rachel Wolff (16:33):

So one thing that I think that merchants, marketers, everybody should be looking at is consumer confidence, but more specifically the confidence levels among the affluent consumer, because they really are the ones that are driving spending. And there have been some recent indications that maybe their confidence is slipping, which could have a pretty significant effect on whether we have retail sales growth this year versus an economic downturn.

Zak Stambor (16:56):

Yeah, I think that's such a good point. I was just looking at what Delta and United and various other airlines are doing, and everything they are doing is focused on that affluent consumer. But if the affluent consumer or the businesses that they work for and that are doing business travel decide, "We're spending a little bit too much here, we need to pull back," what does that mean for these businesses? Because that's what's driving the growth, and there really isn't much growth elsewhere.

Suzy Davidkhanian (17:30):

I mean, for me, I think it's also, in addition to paying attention to the different cohorts, whether it's household income or age cohorts, it's important to internally as a retailer think about what's more important to you to maintain margin or to drive sales, and whoever your near-end competitive set is, to keep an eye on that, because you need to know how to compete. And as things continue to be uncertain, you are directly competing with that group that you think are your cohort, and so it's really critical to keep an eye on what they're doing.

Zak Stambor (18:01):

Yeah. I had a similar thought. I was thinking, are you providing opportunities for consumers to trade down or are you losing those sales to your competition? Because I think you do need to broaden your mix to provide consumers that opportunity to feel like they're saving and getting some value here, because if you don't, they're just going to go elsewhere.

Suzy Davidkhanian (18:23):

I think that's a great place to end. If you don't provide value for your consumers, they're just going to go somewhere else. Thanks, Zak.

Zak Stambor (18:29):

Yeah, thanks for having me.

Suzy Davidkhanian (18:31):

Thanks, Rachel.

Rachel Wolff (18:32):

Thank you.

Suzy Davidkhanian (18:32):

And thank you to our listeners and to our team that edits the podcast. Please leave a rating or review, and remember to subscribe. I'll see you for more Reimagining Retail next Wednesday. And on Friday, join Marcus for another episode of Behind the Numbers, an EMARKETER podcast made possible by Verve.