How long will gas prices stay high? We do not know, and that’s a problem. | Photo: Shutterstock.
The consumer has been pulling back for some time now, but early this month it looked as if things were getting better. Traffic at restaurants had shown real progress, outside of weather-related problems. Consumer sentiment surveys had shown improvement.
Early in March, surveys for the University of Michigan’s monthly consumer sentiment index had suggested that improvement continued.
And then the U.S. bombed Iran.
The bombing has driven up oil prices and with it gas prices. And with it, consumer sentiment has come back down. Preliminary data from the University of Michigan found a 2% decline in U.S. consumer sentiment in March. Globally, consumer confidence declined 0.6%, the first decline in a year, according to Ipsos.
I spoke about this with Technomic Senior Principal Rich Shank for this week’s episode of the A Deeper Dive podcast.
Gas prices are up by a third over the past month and are now at just under $4 a gallon. Diesel prices are up 43%. That latter number is crucial, given its potential impact on food costs.
To be sure, gas prices are still more than 20% lower than their peak in 2022, when the war in the Ukraine led to a $5-per-gallon national average. That, last we remember, did not result in a recession.
But it’s worth remembering that the consumer was a bit more likely to shrug off the impact of gas prices because many were still working from home and they still had some cash from pandemic-related incentives.
This time, the consumer has been cutting back after having been battered by years of inflation. Restaurant chains are already in a fight for traffic, with discounts at levels not seen since the Great Recession.
But maybe the bigger problem is the uncertainty of it all.
We simply do not know what is going to happen the rest of the year. How long will the Iran War last? How long will oil prices remain elevated?And how bad will it get? According to the CEO of Blackrock, a prolonged war that drives oil prices to $150 a barrel would have “profound implications for the world economy.”
Economists are already warning that the chance of a recession is increasing, with some now placing the chances at close to 50%.
All of which makes it difficult for anybody to plan more than a few weeks out. We don’t know what the end of April will look like, let alone the end of the year. Many restaurants are already squeezed by the conflicting challenges of rising costs and a need to put discounts on the menu.
To get through this period, the best strategy for operators is to focus on what you can control. On balance, the industry can do fine in any economy, even if a recession tends to expose poor financial strategies.
Don’t cut corners. Make sure the restaurants look good and that people are getting good value for their money. Do that, even in the face of a difficult market, and customers will reward you in the long run.
