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Rising gas prices and the great traffic debate

Surging gas prices this spring could jeopardize Walmart’s tenuous same-store sales recovery as consumers have less disposable income and opt to shop at outlets closer to home. At least that was how the situation played out in the recent past when gas prices surged above $4. Are things different now?

Rising gas prices negatively affect all mass market retailers, so Walmart isn’t unique in that regard. However, the situation isn’t as straightforward as assuming that higher gas prices will equate to a directly proportional sales decline at Walmart even though that tended to be the case in the past. What’s different now is that in-stock levels have improved, product assortments have been restored and the company’s low price value proposition has been strengthened and is being more effectively articulated. 

This wasn’t necessarily the case in the past when gas prices surged and distressed shoppers looked to Walmart. What they found was a disappointing store experience as inventory cutbacks led to abysmal in-stock levels that had sunk below the 90% level while some 8,000 items had been eliminated from shelves. Suddenly, the place that had long defined convenience as one-stop shopping on a broad assortment was alienating shoppers who found they needed to go elsewhere to satisfy all of their needs.

The big wildcard impacting traffic trends in the months ahead is where gas prices head from her. Up is the easy answer based on the recent trajectory and historical trends. The average price per gallon nationally this week was $3.87, or roughly 30 cents higher than last year’s late March national average price of $3.56, according to the U.S. Energy Information Administration. The big difference is the upward trajectory began earlier this spring than in the prior year, so it would be logical to conclude a national average price above $4 a gallon will occur in the very near future.

Of course, logic isn’t often a factor in the price of gas with such variables as refining capacity, political instability in oil producing regions and market speculation impacting crude oil prices. That said, if gas prices follow a pattern similar to last year, after another six weeks of upward momentum the trend could reverse itself. Gas prices in 2011 peaked in early to mid-May at just a few cents shy of $4 and then declined steadily throughout the year before reaching a low of $3.23 cents the week before Christmas.

The was a nice gift for the retail industry, and the fourth-quarter was coincidentally when Walmart reported increased customer traffic and produced its second consecutive quarter of same-store sale growth, posting a 1.5% increase. Customer traffic and sales trends could be under pressure in the weeks ahead as a further escalation in gas prices causes cash-strapped shoppers to re-evaluate their spending and choice of retailers. However, unlike past periods of gas price inflation, Walmart is now better positioned to gain and retain customer traffic even though average transaction sizes would come under pressure from the loss of disposable income.