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The Real Cost of Higher Fuel Prices

When one sits down and starts to measure the impact that gas prices of $4.50 or more a gallon will have on our economic condition, it is frightening.

We all understand what it means for the cost of fuel itself, but the unintended consequences will impact keeping warm, being fed, the cost of public transportation and the price of everything that is delivered by truck, which is just about everything. Stop and think about it—look around your home or your business—what wasn’t delivered by a truck? This is just one example.

While we have tasted $4 per gallon gasoline as recently as 2008, it didn’t last too long because consumers cut back on their driving by 34 billion miles. They did so by changing long-held habits, such as reducing trips to the store, forming motor pools where possible and giving birth to the term “Staycation” by visiting nearby attractions and beaches. And, unfortunately, they cut back on the number of meals away from home.

Then there is the question of commodities. Prior to this recent run-up in fuel prices, there were signs that beef prices were rising between 5% and 8% due to smaller herds and increased foreign demand. Add the increased cost of getting the beef to market and to the end user and you can see where this is going. You are very familiar with how difficult it is to absorb these costs and even more difficult to pass them on. As you read on, you will see why that will be even more difficult for certain segments of the industry.

It is not my intention to be a purveyor of doom and gloom; however it is an established fact that when the price of “a meal away from home” becomes too costly, the consumer has a choice and that is eating at home. I realize that you, the readers, are very much aware of this but what you might not be aware of is that based on recent consumer research by food industry consultant Technomic and reported by QSR magazine, “retailers are winning over restaurant customers.”

Forty percent of consumers surveyed in Southern California agree that “prepared foods from retailers are restaurant-quality foods at better prices.” Nearly two-thirds say they’ve seen significant improvements in the quality and variety of retailer-prepared foods over the past five years.

Technomic defines retailer meal solutions as prepared (or partially prepared) foods that are found in sections of the store where consumers can pick up ready-to eat or ready-to heat items from service counters or self-service areas (e.g., an expanded deli section). These products do not require extensive preparation beyond reheating (if applicable). They might be refrigerated, but they are not frozen. Examples include rotisserie chicken, sushi, sandwiches, pizza, salads, soups, side dishes, etc.

All restaurant segments are losing visits to retailers and lower prices make the most impact. Among surveyed consumers who say they are visiting restaurants less often, it is family style, upscale fast food, and traditional fast food that are hit the hardest. More than two-thirds of these consumers are cutting back on visits to these restaurants. This a tough environment in which to raise menu prices.

Just realize that for every one cent increase in fuel costs, $1.5 billion dollars is drained from the general economy and reduces discretionary income by the same amount.

Mark Brandau, writing in Nation’s Restaurant News, made this observation as it relates to the question, “Can anything stop runaway fuel cost inflation?” He wrote, “you cannot discount the effect of old-fashioned supply and demand... Look at what happened in 2008. $4.00 per gallon didn’t last long. We reduced our driving, fuel demand fell dramatically and prices went with it. You hear people talking about $5 gas, but we won’t get there this year, because the consumer won’t tolerate that. Most people won’t stop their driving altogether, but they will find ways to moderate their travel.”

While I agree somewhat with that analysis, the world is a different place than it was four years ago. China and India in that very short period have increased their use of fossil fuels at a prodigious rate, the crisis in the Middle East is not going away, and there is no way we can increase production in the next few years to meet our needs.

It has been 40 years since we had our first gas crisis; although brought about by different circumstances, the effect was disastrous. I cannot believe that, by our own inactions as a country, we have allowed ourselves to return to potentially the same situation. Shame on us.

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