||As Gas Prices Climb, Marketers Gird for Tumult at the Tank
With gas prices rising at about a penny a day -- the national average shot from $3.10 a gallon on Feb. 1 to $3.51 last week -- marketers across the country are bracing for a repeat of 2008.
But the difference this time is that marketers and agencies from Ford, General Motors and Unilever to WPP saw it coming, and, armed with hindsight, are better prepared to deal with consumers potentially dialing back spending or shifting shopping habits in response to spiraling oil prices.
"No one can predict what further developments will take place," said Martin Sorrell, chief executive of ad agency holding giant WPP, in an email. But he said that "further increases in the oil price, say at a level of $140 to $150 (a barrel), may stunt economic growth and impact corporate profits and, hence, spending. My view is that even a lower price increase (of $125 to 130 a barrel) might do that."
Oil was about $107 a barrel at press time.
With gasoline prices on the rise, shoppers are likely to consolidate trips, shop closer to home and turn to online retailers. Those are all trends that played out three years ago when gas prices surged. Google data show that consumer searches for stores nearby are up 25% over March 2010. Data also show that search volume for online shopping follows the rise and fall of gas prices fairly closely, a Google spokeswoman said.
"Searches on online shoe shopping and online clothes shopping had their first significant, non-holiday-related spike since 2004 in mid-2008, when gas prices were rising rapidly," she said.
Another concern is a cutback on travel. There have been six domestic airfare increases in the first 75 days of 2011, according to FareCompare.com, with an average increase of 25% in ticket costs. United Continental Holdings said last week that the increase in fuel price will force its two airlines -- United and Continental -- to drop some unprofitable routes, further inconveniencing some fliers.
So far, the driving market seems not to be affected. "The average driver goes through psychological stages when gas prices rise," said Sergio Stiberman, CEO and founder of the website Lease Trader. "During the uptick, concerns and complaints heat up when we pass certain price benchmarks, but widespread behavior doesn't actually change until we reach $4 per gallon."
The auto market certainly bore the brunt of some of that in 2008 when car buyers shifted preferences to smaller cars with better gas mileage. But Ford Motor Co. CEO Alan Mullally told the Associated Press last week that's also why his company is better positioned to handle rising gasoline prices compared with three years ago.
"We thought this was going to happen. We didn't think it was going to happen as fast as it is, but we feel like we're positioned with the right product line now," he said. "We've got the best smaller and medium-size vehicles we have ever had."
General Motors' Chief of Global Marketing Joel Ewanick, too, feels the company has the right mix of product to ride out high gas prices, most notably the Chevy Cruze Eco, a version of the new compact sedan that gets 42 miles per gallon on the highway. He said that Chevy, through both national and dealer ads, is increasingly tagging ads with high MPG ratings. "It's not new for us, but we are dialing it up because we have the right product at the right time," he said. The Cruze Eco and soon-to-be-launched Chevy Sonic both top 40 MPG; its Chevy Silverado Heavy Duty pickup has the highest fuel-economy rating in the heavy-duty category.
Gas prices tend to be cyclical, and that's nothing fast-food marketers aren't already prepared for. "Most quick-service restaurants have multiple campaigns going on at any given time. During times of inflated gas prices, we tend to see more promotion for value-menu offerings," said Morningstar analyst R.J. Hottovy.
Plus, Mr. Hottovy pointed out that gas prices tend to increase in the late spring and summer anyhow.
But rising gas prices add one more hurdle for food companies already dealing with commodity inflation and a slow-recovering economy. William Johnson, president-CEO of H.J. Heinz Co., made this observation at a recent analyst conference: "As gas prices continue to go up, if oil prices continue to escalate -- and who knows whether they will or not? -- the discretionary income available to consumers is really squeezed."
For packaged-goods marketers, who have finally been able to move off discounting and beat back private label as the recession eased, the trick will be now to stay their course -- which is to raise consumer prices in order to offset growing commodity prices. And at least so far, they have been mostly sanguine about doing so.
Procter & Gamble Co. plans to announce price hikes this month across an unspecified range of goods to help offset an estimated $1.5 billion in overall commodity increases. But while he lowered expectations for profit margins, Chief Financial Officer Jon Moeller said the company wouldn't back off investments in marketing or other areas to make short-term numbers, and stood by short- and long-term projections for consumer spending.
One factor that could help brand marketers is that private-label manufacturers don't have the margins or marketing budgets to use as cushions to absorb cost increases. And they were already narrowing price gaps. While volume share for private label overall went down 0.5 points, the value share was up 0.2%, reflecting higher prices.
Unilever CEO Paul Polman said on a call with Sanford C. Bernstein last week that recent movements in oil prices were in line with what the company budgeted earlier this year and said he still believes the company will be able to deal with the issue through price hikes, sales growth and other cost savings. Overall, he said he's encouraged by a rebound in pricing across Unilever's markets.
(Source: Advertising Age, 03/14/11)
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