Southern Nevada Economy: The Fuel Effect

Like a hard left hook to the kidney, surging gasoline prices have recently slowed and staggered American consumers.

They'd better keep their gloves up, because a potential knockout blow is poised to hammer the already dazed U.S. economy.

Competitive concerns have prevented many businesses from passing added fuel costs on to consumers.

But executives say the time is approaching when increased shipping rates could force companies to charge more for items ranging from T-shirts at Target to meatballs at Romano's Macaroni Grill.

"There's no doubt that fuel surcharges are more prevalent than they've ever been," said Bob Costello, chief economist for the American Trucking Associations. "When we see (fuel price increases) of this magnitude, it's going to have a big impact."

THE SECOND SHOCK

Shoppers' fuel-related frustrations, so far, have primarily involved sticker shock at the pump. AAA reported that one gallon of unleaded fuel cost $3.02 in the Las Vegas Valley on Thursday, nearly 74 cents more than a year ago.

Drivers grumble whenever their vehicles' fuel tank comes to mind. And quietly, but no less significantly, fuel costs are also pinching the U.S. trucking industry.

Local prices for diesel fuel averaged $3.13 per gallon Thursday, a 72-cent increase from 12 months ago. Nationwide, diesel averaged more than $2.98 per gallon, well above last year's $2.33.

It's no secret that deserts aren't known for bountiful harvests. Nevada factories produce few of the products its residents consume each day.

That's why trucks carried more than 93 percent of the state's manufactured tonnage in 2003, the most recent data available from the American Transportation Research Institute.

U.S. trucking companies will spend $98.3 billion on fuel this year, the American Trucking Associations estimated last month using an Energy Information Administration advisory that said diesel fuel prices will average $2.70 per gallon this year.

That estimate is $10.6 billion more than truckers spent filling their rigs in 2005. And this summer's planned introduction of ultralow sulfur diesel should raise prices further because that fuel blend is more expensive to make and distribute.

Industry leaders are worried that recent and projected price increases will boost inflation and hurt the economy.

"An affordable supply of diesel fuel is imperative to keep our trucks moving," said Bill Graves, president of the Alexandria, Va.-based American Trucking Associations. "We are not recreational vehicles. We have to be out there delivering the goods that America and our economy are demanding."

SHOP TILL THEY DROP

Marsha Gilford, a Salt Lake City-based spokeswoman for the Smith's grocery chain, said high fuel prices have affected her company "from farm to table."

Trucking companies have tacked on fuel surcharges before drivers arrive at Smith's warehouses in Utah and Arizona, she said. That doesn't include the cost of shipping goods farther to stores in Southern Nevada.

"We fight very hard to keep our prices as low as we can, to be as competitive as we can," Gilford said. "We're trying very hard to absorb that cost."

But for how long?

"No one knows what the future holds in terms of gas prices," Gilford said.

Consumers here have a advantage because produce is widely grown in the West, Gilford said. But tomatoes and ketchup are trucked in from the Southeast, for example, while poultry and meats come from all corners of the country. Each trip cuts into Smith's bottom line, as well as its competitors'.

"It's something that's part of everyone's business in terms of manufacturing and food production," Gilford said.

The Kroger Co., the Cincinnati-based parent of Smith's and Food4Less, recently told Wall Street that high energy costs and the effects of hurricanes Katrina and Rita hurt its bottom line last year.

Rising energy expenses should again raise operating, general and administrative expenses this year, Kroger management said in an April filing with the U.S. Securities and Exchange Commission.

Despite pricing challenges and other competitive concerns, Kroger shoppers won't necessarily pay more.

Rather, the company plans to continue eating higher fuel expenses to avoid passing on costs and driving customers elsewhere.

Pleasanton, Calif.-based Safeway, which operates 30 stores in Nevada, also told investors fuel costs reduced its profits last year. In a May SEC filing, Vons' parent company warned that rising fuel and energy costs could force the company to miss its 2006 sales expectations.

Prices for big-ticket items could also suffer. In April, Furniture Today reported some trans-Pacific shipping companies raised their rates from $150 to $170 for each 40-foot cube container shipped to the West Coast from Asia. All-water rates between Asia and the East Coast rose by $400 per container effective May 1.

Inland fuel surcharges for containers shipped via truck or rail from ports were $179, up 13.2 percent from October.

Fuels prices are the top concern of Wal-Mart customers, many of whom have altered their shopping patterns, said Tom Schoewe, chief financial officer for the Bentonville, Ark.-based retailing giant.

That doesn't mean Wal-Mart shoppers are spending less on items besides gasoline, however.

Customer traffic slipped slightly last month, but same-store sales at U.S. Wal-Mart and Sam's Club stores increased 2.7 percent from May 2005.

"Our customers are consolidating their store visits and focusing their spending on consumables, a trend that we have been seeing since Easter," Schoewe said in a June 1 report on Wal-Mart's May sales.

Wal-Mart's findings are not unique. Seventy-six percent of Americans said they've altered their spending habits due to high gasoline prices, up from 56.4 percent just two years ago, a May National Retail Federation survey of nearly 7,400 U.S. consumers shows.

Nearly half of those polled (44.8 percent) said they're driving less; 37.2 percent said they'll cut back or cancel their vacation plans.

Thirty-six percent will eat out less, while 1 in 5 respondents plan to delay major purchases, the survey found.

"Higher prices at the pump act as a tax on disposable income," said Tracy Mullin, president of the Washington-based Federation. "Consumers will be looking for retailers that provide the best return for their dollar. This clearly gives the advantage to discounters, warehouse clubs and online retailers over department stores and mall-based retailers."

EATEN OUT OF HOUSE AND HOME

Restaurateurs are also scrambling to cope with rising shipping rates.

Paul Hartgen, president and chief executive officer of the Nevada Restaurant Association, said restaurateurs he spoke with last week are mainly concerned about efforts in Washington and Carson City that would raise minimum wages to more than $8 per hour. But fuel prices weren't overlooked.

"If consumers are spending $3, $4, $5 or whatever it ends up being (per gallon), obviously that comes out of their discretionary income that they'd use to eat out in restaurants," Hartgen said.

Strip restaurants won't suffer equally with local eateries, Hartgen added, because tourists and business travelers tend to go all-out when dining out in Las Vegas.

Brinker International, the Dallas-based owner of Romano's Macaroni Grill, Chili's Grill & Bar, and Maggiano's Little Italy, told investors increased energy costs may hurt its profitability this year, especially in regions where it has multiple restaurants.

John Gerarde, general manager of the Maggiano's Little Italy at Fashion Show, said increased freight costs have hurt his restaurant's finances. For example, a flat of tomatoes that cost approximately $12 used to include a shipping fee of $1.90. Lately that fee has been as high as $2.50, he said.

Maggiano's has not passed those costs on to diners. Instead, Gerarde said his restaurant and other Brinker eateries are developing a "cost avoidance" program to help maintain current menu prices.

"We're trying to effect change by being smarter," Gerarde explained. "We're looking at buying products from fewer warehouses, eliminating small orders to focus on bigger loads, things like that."

The company also hopes to combine shipments when possible, another way to reduce the mileage driven by trucks restocking Brinker's kitchen storerooms. But the success of those steps will ultimately depend on how high fuel surcharges climb.

Roadside eateries could suffer most. Lebanon, Tenn.-based CBRL Group, which operates nearly 550 Cracker Barrel Old Country Store restaurants nationwide (though none in Nevada), said guest traffic in the quarter ended April 28 fell by 3.3 percent, while menu prices rose 1.8 percent.

Chairman Michael Woodhouse said rising gasoline prices "began to squeeze consumer discretionary income again" this spring.

Surprisingly, printing expenses could help keep menu prices down, Hartgen said. Because so many restaurants use expensive, preprinted menus, he believes restaurateurs will be reluctant to order new menus due to short-term changes in shipping rates.

Fuel costs have also affected American farms, where bad news for Kellogg's could be a boon for Kikkoman.

High fuel and fertilizer costs led many U.S. farmers to switch from corn to less input-intensive crops this planting season, the U.S. Department of Agriculture's National Agricultural Statistics Service reported earlier this spring.

Farmers said they'll plant 78 million acres of corn this year, down 5 percent from a year ago. Soybean plantings are expected to hit 76.9 million acres nationwide, a record high and an increase of 7 percent.