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Dreaming of a Blue Christmas?
As gas prices hit new levels, will retailers discreetly pass along the costs to consumers?
August 18, 2005: 1:56 PM EDT
By Parija Bhatnagar, CNN/Money staff writer
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Airline carriers, utility companies and even pizza deliveries are imposing additional charges to consumers.
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NEW YORK (CNN/Money) - Consumers are pinched. Retailers are squeezed. Who'll get bruised first by higher fuel prices as the countdown to the holiday shopping season gets underway?

Some analysts say retailers will avoid passing along the higher costs of running their business to consumers.

Others aren't so sure.

"Between warehousing, utilities and transportation costs, retailers have been paying unprecedented premiums for their supply chain," said Burt Flickinger, consultant with the Strategic Resources Group. "Therefore shoppers will be seeing substantially higher prices by year's end."

In their companies' earnings calls this week, both Wal-Mart's CEO Lee Scott and Lowe's CEO Robert Niblock said escalating fuel prices have bloated their utility bill and made it costlier to transport inventory to distribution centers and stores.

The American Automobile Association (AAA) reported that prices at the pump surged to yet another high Thursday, with the nationwide average price of a gallon of regular unleaded at $2.58 or up 72 cents in the last year, or 39 percent.

No doubt, a pullback in spending is an immediate concern for retailers. However, a longer-term worry is that retailers have been absorbing gas price gains for months and will probably be forced to keep doing so if prices don't cool down.

"This is a double whammy for retailers," said Paul Bingham, transportation analyst with Global Insight. "Their sales are vulnerable and they're facing the relentless pressure of energy prices on the back end of their business."

"At some point companies will have to take action to offset the squeeze on their profit margins, especially if prices stay sustained at these levels," he said.

What he means is that consumers could be paying more for products and services, maybe even by Christmas.

At some retailers, the mark up in prices will be obvious. Others may hike what industry watchers refer to as the "hidden cost" to consumers.

The hidden cost would manifest itself as either fewer promotions during the crucial fourth-quarter shopping period or lighter discounts off the base price.

"As a rule of thumb, retailers will avoid passing the higher costs to customers unless they absolutely have to," Bingham said. If they do, he assumes it will be on high-end products, fashion apparel and consumer electronics.

Retailers in surcharge shock

Many trucking companies tack on fuel-related surcharges to retailers as a buffer against rising fuel costs, especially hurting retailers with far-flung distribution networks.

"Most retailers made major mistakes of putting their distribution centers at greater distances from each other when energy prices came down and stayed stable in the 80s and 90s ," Flickinger said. "Retailers are long-hauling freight anywhere from 300 to 700 miles. With 50 cents a mile for a 20-ton diesel freight truck, it adds up."

Bingham explained that trucking companies can vary the surcharges weekly according to fuel indexes.

"With the fuel surcharge, retailers feel the full brunt of the price increases," he said.

Diesel fuel accounts for between 20 to 25 percent of a trucking company's costs, second to the cost of labor, according to Tavio Headley, economist with the American Trucking Association.

"The national average of diesel currently is about 41 percent higher than it was a year ago," said Headley, who estimates that fuel price inflation could cost the industry about $10.6 billion more on a year-over-year basis.

Retailers can hedge the risk a little bit by waiting to hire carriers until fuel prices are lower, but if they do, inventory might not get to stores in a timely manner.

Transportation prices aren't the only way oil prices hit retailers. Higher costs to heat and cool stores place additional pressure on their operating costs.

"Retailers are really getting squeezed especially in the largest retail sector, which is the supermarket sector," Flickinger said ."In the discount sector, Sears and Kmart would be at significant risk."

Alone among retailers, department stores have lower costs, thanks to the dropping of tariffs on goods from China. "They buy so much of their inventory from China. With the high-end goods, their costs are going down as a result while their profit margins are going up."

"I suppose retailers could use the airline model and try to pass along costs to consumers," said Wendy Liebmann, president of WSL Strategic Retail. "The difference here is that people have plenty of other places to go shopping where they can save money."

Eye on the ports

The National Retail Federation (NRF) reported earlier this month that volume was up and congestion down at major U.S. ports. Retailers should be relieved as they prepare to enter the peak of the shipping cycle for the holiday season.

"We have more cargo coming in than last year, largely because of the end of textile and apparel quotas, but it's flowing much more smoothly from the ships to the stores than we saw in 2004," NRF's International Trade Counsel Erik Autor said in the report.

However, Art Wong, spokesman for the Port of Long Beach, California, which handles one-third of all U.S. imports, said inbound volume trends have been "relatively weak" over the last few months.

Inbound container traffic was up only 2.7 percent in July at the Long Beach port. At the Port of Los Angeles, America's busiest port, inbound volume declined 2.5 percent in July.

Said Wong," It could be that after last year's congestion problems, retailers decided to have cargo arrive at some of the other smaller ports. Historically, we've also seen weaker volume during period of economic uncertainty. With the higher fuel costs, retailers could be holding off on holiday shipment to tightly control their inventory."

Jay McIntosh, director of retail and consumer products with Ernst & Young, agrees that retailers will be very disciplined with inventory this year.

Consumers could see fewer sales in some categories like luxury products and household furniture, but he thinks its inlikely that retailers will skimp on discounts on clothing.

Said McIntosh, "Is it a risky strategy for retailers to have both tighter inventory and fewer promotions over the holidays? Yes."  Top of page


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