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Marketing expert finds increasing gas prices affect consumer retail behavior

October 01, 2010

Amy Schmitz
(315) 443-3834

It’s no secret: for a number of years, gas prices in the United States have been fluctuating—at times reaching more than $4—and this fluctuation has significantly affected Americans’ disposable income. Dinesh Gauri, assistant professor of marketing in the Whitman School of Management at Syracuse University, recently studied approximately 1,000 households to determine how consumers modify their shopping behaviors when higher gas prices put pressure on their budgets. Specifically, Gauri and his co-authors tracked shopping trips and purchases of almost 300 product categories across retail formats, including grocery stores, drugstores, mass merchandisers and warehouse clubs, during 2006-08.

gauriThe paper, “An Empirical Investigation of the Impact of Gasoline Prices on Grocery Shopping Behavior,” was co-authored with Yu Ma (University at Alberta), Kusum Ailawadi (Dartmouth College) and Dhruv Grewal (Babson College) and is forthcoming in The Journal of Marketing.

“We specifically wanted to find out if, as a result of higher gas prices, consumers shifted their shopping from one retail format to another, if they bought more generic brands over national labels, if they bought more sale items or if they were consuming less of certain items to make up for the increased expenditure on gas,” says Gauri.

The researchers found that:

  • An increase in gas price significantly reduces shopping frequency, purchase volume and dollar spending. For a 100 percent increase in gas price, the average household reduces these three variables by approximately 20 percent, 6 percent and 14 percent respectively. Though consumers travel less and eat at home more as gas prices increase, there is still a substantial reduction in overall purchase volume and dollar spending.
  • One-stop shopping formats benefit as gas price increases. In other words, consumers consolidate their shopping as gas price increases. Drug stores and mass stores are the most vulnerable to macro-economic conditions. When gas price goes up, consumers visit them less, though they buy a bigger share of their requirements there when they do visit. Though consumers consolidate their shopping when gas prices go up, they preserve their preference for quality brands, looking for them on promotion to save money.
  • Promotions are an effective retention tool as gas prices increase. Consumers do increase their share of promoted national brands and private-label purchases as gas price increases, and also as general economic conditions worsen. Importantly, the increase in share of promoted national brands is 29 percent, as compared to a mere 3 percent increase for private-label share.

As might be expected, consumers buy fewer full-price name brands, shifting instead to promotions on name brands rather than shifting to buying generics. “Interestingly, among those who continue to buy name brands, we find an increase in the share of mid-tier brands,” says Gauri. “It appears that consumers who stick to name brands want to preserve their preference for them. They don’t compromise quality, but do seek out deals to get more value for their money.”

The implications of these findings for manufacturers and retailers are important. The role and leverage of large supercenters increases in tough economic times and manufacturers must figure out whether they want to move their focus to these formats or help their traditional retail partners out with better trade deals.

Manufacturers must recognize that promotions work and should use them to keep their consumers from switching to private label, and retailers must realize that private label, while important, should not be overemphasized at the expense of attractively merchandised name brands.

Finally, it may be dangerous for well-known brands to extend into low price tier and likely lower-quality space—they may not be able to get their costs low enough to compete with private label anyway, and they run the risk of hurting their brand equity.

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