September 28, 2005, 12:00 AM

Fallout from Katrina

The sudden spike in gas prices will depress retail sales, but will boost online shopping as consumers cut out discretionary driving.

From cruising the malls, consumers this holiday season may cruise the Internet for their gifts-high gasoline prices are encouraging consumers to shop online. "Online will be the biggest beneficiary of high gas prices," says Bernard Baumohl, executive director of the Economic Outlook Group.

In the wake of Hurricane Katrina, the price of oil shot up and took the price of gasoline with it, reaching a record high nationwide average of $3.01 a gallon three weeks after the hurricane devastated New Orleans and the Gulf Coast.

A series of bad news

A survey of 1,622 consumers by Shopzilla/BizRate as prices were cresting showed that 40% of consumers plan to do more Christmas shopping online this year as a way to reduce their spending on gasoline. 15% said they will shop online "a lot more" to avoid burning gasoline going to stores and 25% said "somewhat more." The balance-60%-said their shopping habits will not change.

Rising gasoline prices are the latest in a series of bad news, Baumohl notes. "Rising interest rates, gas prices going up all year, people not saving much money, minimal wage growth and now this, which will lead to higher heating costs this winter-something has to give," he says. "One of the things that consumers will give up is non-essential driving. They won’t be going to shopping malls if there is another option."

That option is online shopping, he says. "We could very well see e-commerce sales grow at a rate that we’ve never seen before," Baumohl says. "We could easily see 35-40% increases."

Whether the gasoline prices and the fallout from Katrina will affect the entire economy was not clear several weeks after the tragedy. But consumers are expecting the impact to be significant. A Harris Interactive poll of 2,242 consumers the second week in September showed that virtually all consumers expect Hurricane Katrina will affect the U.S. economy: A near majority-45%-expect the impact to be great. 41% expect somewhat of an impact and 13% a small impact. Only 1% expect no impact. Whatever impact the hurricane ultimately has on the economy, consumers base their behavior on their expectations and so there is likely to be some impact on the economy.

Certainly the influences of the hurricane, coupled with stagnant wages, will harm holiday sales. Baumohl, like many economists, believes the impact will be serious. "Overall retail sales this holiday season will be the worst in the last decade," he predicts. "Retailers will suffer-no doubt about it."

Identify the niche

Trade group the National Retail Federation was quick to note when the August retail sales figures came out from the U.S. Department of Commerce showing a 7.5% rise in sales over August last year that high gas prices are not affecting consumer shopping. But it cautioned that the hurricane hit late in the month and not early enough to affect August sales.

If retailers’ worst fears are realized and total sales don’t rise at all, they still stand to capture some increases online, if they are ready. "Overall spending will be much weaker while online sales will do much better," Baumohl says.

Whether consumers actually follow through with their stated intentions in a survey is an open question. And retailers are well advised not to base their investment plans on the results of a survey, consultants caution. Yet there are ways that they can monitor shopping behavior to see if consumers are responding to gasoline prices by driving less and shopping online more. "The retailer’s job will be to effectively segment for gas-price sensitivity," says Jim Okamura, Chicago-based principal with retail consultants The J.C. Williams Group. "One of the things retailers can do is to test early with creative to see if people respond." In any event, Okamura expects gas-price sensitive consumers to be a niche.

Staying closer to home

The results of the Shopzilla survey follow a trend that has been developing for some time as gasoline prices have risen throughout the year. A year ago, the average price of gasoline was $1.86 a gallon, according to the Lundberg Survey, which has tracked gasoline prices for over 30 years. The average had crept up to $2.63 the week before the hurricane, then shot up 38 cents in just two weeks.

Last spring, consultants Retail Forward Inc. asked consumers in its ShopperScape survey panel if they had changed their shopping behavior as the result of rising gas prices. 67% said they were changing their behavior, with the adjustments spanning a range of options. For instance, 35% said they were shopping at stores closer to home and 44% said they were organizing their shopping trips to be more efficient. While the survey didn’t specifically ask about online shopping, the conclusions are unavoidable. "Gas prices are having an impact on all their shopping," says Nick McCoy, senior consultant of Retail Forward. "Higher gas prices have to lead to more online shopping."

While high gasoline prices will drive more consumers to discount retailers, even some of them will feel the impact of high gas prices. "A lot of people from New York drive out to New Jersey to go to outlet malls," says Kathryn Cullen, principal with retail consultants Kurt Salmon Associates. "They probably won’t want to pay for the gas to drive 50 to 100 miles now to save money at an outlet mall."

Another possible outcome of high gas prices might be a spike in consumer use of local search web sites for offline shopping. They are too new to be having an impact yet, but Okamura notes that if consumers truly want to consolidate shopping trips, use of local search could become significant. "If it helps make consumers more efficient in their shopping, more people could become comfortable using local search," he says.

Collateral beneficiaries

Baumohl adds that not only will online retailers benefit from the shift to online shopping, so will the companies that serve online retailers. "Companies that help retailers build up the infrastructure for e-commerce will do well," he says.

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