Double trouble for retailers: Higher gas prices, shipping woes

According to AAA, the national gas price for the US on Thursday is $3.67 compared to $3.47 a month ago. In addition, freight rates are still elevated after issues in the Red Sea earlier this year disrupted shipping. How much has this impacted consumer sentiment and overall consumer spending?

Yahoo Finance Reporter Brooke DiPalma breaks down how the higher gas prices and shipping disruptions have impacted retailers and consumers alike.

For more expert insight and the latest market action, click here to watch this full episode.

This post was written by Nicholas Jacobino

Video transcript

[AUDIO LOGO]

JULIE HYMAN: A double-edged sword is coming for retailers. Higher gasoline prices could take a toll on consumer spending power. And at the same time, freight rates are still elevated this year after disruptions in the Red Sea caused a spike back in January.

Joining me now, senior reporter Brooke DiPalma. And Brooke, let's talk about the first edge of the sword, if you will, which is the effect on consumer spending. So what are we seeing there?

BROOKE DIPALMA: Yeah. Well, typically when gas prices tend to increase, we see an impact on consumer spending. And that's what we're seeing happening right now. We're seeing gas prices see an uptick compared to a month ago. They're now sitting at $3.67, which is actually in line with where we were a year ago but, like I said before, a slightly higher than a month ago.

And when gas prices go up, consumer sentiment starts to go down, the way that consumers feel about their spending power and about the overall US economy. And Morningstar's senior analyst David Swartz telling us that this is now seeing a clear impact on consumer spending. Higher gas prices will then crowd out spending on other things, like apparel, accessories, home goods, makeup, jewelry, things that necessarily are not necessities.

And so, who will that impact the most? Well, that will impact younger consumers as well as low-income consumers, those that tend to spend a higher percentage of their income on these higher gas prices. And keep in mind that these income-- that these different cohorts are also dealing with higher rent prices, higher insurance prices, especially that auto insurance that we saw uptick last month, as well as college tuition and loans.

Now, when you think about retailers that could then be hit or rather be boosted because of this. If you take a closer look at Dollar Tree-- Dollar General, rather, well, one analyst telling me that they could feel a boost from this because people need to buy essentials, and so they'll go to Dollar General because they tend to cost less.

But retailers, I could see a pullback to higher gas prices, include those that are exposed to lower income audiences, like Coles in addition to Target that has a broad spectrum of consumers, as well as Walmart, which could be a bit of a mixed bag here because, although they are exposed to that lower income, we have seen them gain those higher income consumers because of that grocery business. We know because of last quarter that makes up about 60% of total US sales for Walmart.

JULIE HYMAN: So, affecting the demand side while, at the same time, the supply side, the cost side, the cost of doing business, has already been going up, right?

BROOKE DIPALMA: Yeah, and that's largely because of the Red Sea crisis that we saw impacted broadly back in January. And what we really saw there was freight rates, the cost to ship goods really did see an increase there. And it soared during the pandemic, as you see in that early part of the chart, but then it tended to move again higher in January.

And what's really driving higher freight rates include the cost of dual price, in addition to seasonality and those black swan events, like this Red Sea crisis that's causing or leading retailers to then use alternate routes, which takes longer, then they have to use more vessels to ship the same amount of items.

And then they're paying even more because the spot market, even if they're locked in, and we're hearing from companies like Levi's that say that they're keeping a close eye on, they have long-term contracts. So at this moment, they're not feeling that pressure, but it's certainly something that they're going to keep watching very closely as this freight rate market really is volatile here.

JULIE HYMAN: Yeah, definitely. All right, Brooke. Thank you so much for all of that. Appreciate it.