Fashion is used to obsessing over how much consumers are spending to fill their closets.
But the U.S.-Israeli war with Iran is bringing another factor to the fore — the obsession going forward might be how much people are spending to fuel up their gas tanks.
The ramifications of the war are many — from the direct damage and humanitarian fallout on the ground to the reordering of the geopolitical landscape. But it’s the surge in prices at the pump that have most immediately translated the conflict to consumers around the world.
In the U.S., a gallon of regular sold for $3.91 on Friday, an increase of just under $1, or 33 percent, over the past month, according to AAA.
Consumers are getting itchy already.
The preliminary March reading of consumer sentiment by University of Michigan Surveys of Consumers — half of the research for which was conducted after the war started on Feb. 28 — saw confidence dropping about 2 percent to its lowest reading of the year.
“Interviews completed prior to the military action in Iran showed an improvement in sentiment from last month, but lower readings seen during the nine days thereafter completely erased those initial gains,” said Joanne Hsu, director of the Surveys of Consumers. “Gasoline prices have exerted the most immediate impact felt by consumers, though the magnitude of pass-through to other prices remains highly uncertain. A broad swath of consumers across incomes, age, and political affiliation all reported declines in expectations for their personal finances, down 7.5 percent nationally.”
Consumers see the change at the pump and in the number of headlines trumpeting the price of crude.
Oil sold at $109 a barrel on Friday, looking at the Brent future contracts, the standard for market prices.
Oliver Chen, an analyst at TD Cowen, said in an analysis that $150 a barrel was the consumer “demand-destruction threshold.”
“Gas prices act as a near-term tax to consumers, posing risk to traffic and discretionary spend,” he said.
And consumers start to really react when they have to start paying $4 a gallon and then again when prices rise to $5, Chen said, citing survey data from Prosper Insights & Analytics.
On the lower end of the income spectrum, shoppers simply have less ready money to spend and less incentive to get into the car and go to the mall if gas is more expensive. Higher-end consumers will generally have the resources to keep spending, but can start to become more wary of their discretionary dollars and are also more attuned to changes in the financial markets.
Chen said the oil shock was most favorable for value-oriented and grocery retailers, beauty and luxury companies on Wall Street. It’s the discretionary retailers lower down on the price spectrum that are most likely to take a hit, he said, pointing to the likes of Bath & Body Works, Target Corp. and Kohl’s Corp.
In a separate report, Ike Boruchow, an analyst at Wells Fargo, said every 10 percent increase in the price of gas equals $265 in additional household expenditures at the pump, on average.
“The average U.S. household has an annual discretionary wallet of approximately $32,000 and essential wallet of approximately $47,000, or a split of 40 percent discretionary goods and 60 percent essential, meaning that an added $265 of costs translates into a 85 basis point headwind to overall discretionary spending on average.”
Boruchow said if the current gas prices held or increased, discretionary spending would take a 170 to 255 basis point hit.
Looking back at the last four gas price “shocks,” in 2008, 2011, 2012 and 2022, the analyst found that fashion retail’s top-line trended down by 200 to 300 basis points on account of the disruption.
Moving from, say, a relatively solid 5 percent sales gain to a much more tepid 2 percent is enough to wreak bottom-line havoc on almost any retail business plan.
But the knock-on effect of higher oil prices is bigger than that, as petroleum fuels not just cars, but the global economy.
Joseph Brusuelas, chief economist and principal at RSM, broke down how oil prices trickle down.
“We are anticipating the top-line inflation rate to increase to between 3.5 and 4 percent, which will carry with it second- and third-order effects that will be transmitted down to the household over the next six months even if the conflict ends soon,” Brusuelas wrote in an analysis.
“Our baseline when it comes to inflation and the American household since the pandemic has been food, fuel and utilities,” he said. “Those prices are either increasing now, as with the cost of fuel, or soon will, as with food and utilities. While we do not think that the current price of oil will result in wholesale demand destruction sufficient to cause a recession, it will create a drag on growth and another downturn in consumer and corporate sentiment.”
On top of higher energy prices, Brusuelas pointed to increased costs to transport goods by land, sea or air, making supply chains more expensive, and possible food shortfalls given the prevalence of petroleum-based fertilizers.
Although most retailers have not had to weigh in on the impact of gas prices yet, more are going to have to address the topic in their regular calls with Wall Street.
Harvey Kanter, president and chief executive officer of Destination XL Group, told analysts on Thursday that the company’s bread and butter — big and tall — was also among the first categories to get hit by “customer malaise.”
“He does not shop as frequently as the normal men’s customer and certainly not as frequently as a women’s customer,” Kanter said. “When you think about the multiple elements that we’re all living through and the volatility, whether it’s tariffs, whether it’s the impact of GLP drugs, which we do believe is having an impact in terms of the customer’s weight, and they’re going up and down in how they’re thinking about clothing, or the price of gas and especially in today’s environment.
“The gas, while it’s come down, it’s still meaningfully impactful. Food, groceries, going out to eat. All of those variables, we believe, are affecting the sector. And our hope and belief is, he has to come back. He needs clothes. He has shopped for need, not want. He may still be shopping for need, not want for a period of time. But at some point, he needs clothes. He’s wearing them out.”
But the longer the war in the Middle East disrupts the oil market, the more consumers of all stripes are going to ease off on wants to lean in on the needs.
