Scraping the barrel – because getting another is too expensive

The price of oil is rocketing and this is having an obvious effect on US consumers struggling to cope with the costs of travel in a vast country

Petrol%20pumpsThis column has spent the past several months hinting at, debating, then awaiting the inevitable US economic slowdown, yet there are times following conversations with senior executives at some consumer-facing businesses that I’m left wondering if journalists and economic pundits are blowing things out of proportion.

Executives at businesses in major sectors such as telecoms and media say they’re seeing little impact from the slowdown so far. Even a company that promotes major rock concerts told me last week that things were going very well thank you very much.

How can this be? According to the experts, the US economy is in free-fall with all the worst indicators coinciding. A housing market in turmoil, the financial markets are in bear territory and many big banks and major funds are on the brink, either laying off staff or closing down.

But of all the factors that are causing US economists concern, the number one worry is undoubtedly the ballooning price of oil on the global markets. Last week oil barrels shot past the $140 mark for the first time ever. It was only a few months ago central bankers around the world were pulling their hair out over $100 per barrel.

In recent months the rising price of oil has really started to impact “US main street”, and one of the biggest topics on personal finance pages of newspapers and local TV programmes is how to cope with the cost of gasoline. Since the beginning of the year, car gas prices have, on average, risen by more than 30%. The most recent “tipping point” for a gallon of gas at the pump was $4, which has been passed and is moving inexorably to $5. This is still laughably less than British and other European consumers pay for petrol. Not that that matters much to the ordinary American consumer who, on average, has a much further distance to drive on essential journeys than their fellow European.

Indeed permanent gas price inflation is uncharted territory for a large proportion of this generation of US consumers and, in my informal straw poll of executives, the rising price of gas was the one factor all acknowledged could cause a dent in their business. But smart US marketers, rather like the best politicians, have spotted an opportunity in the midst of the scary headlines and news reports.

Free gas

One such company is Charter Communications, a cable TV company with more than 5 million subscribers. In May it started a promotion giving new subscribers “free gas” cards of $25, $50 and $100 depending on how many TV, internet and phone services the household signed up for. The company said it has seen a 27% lift in its prospect-to-customer conversion rate since the promotion started online.

And if evidence was needed that the “gas price crisis” has usurped the housing market crisis as the issue of the day, a good example is an enterprising Indiana couple who advertised their home for sale with the added incentive for the buyer of a thousand gallons of gasoline. While one would expect the cost of such a gimmick to be worked into the price of the home, it does capture how American consumers and marketers feel about gas prices today.

Many smaller companies are getting in on the act from restaurants to grocery stores and even blood banks. The tourism industry has been particularly keen on gas promotions as local hoteliers and resort owners have been concerned that their regular annual visitors may not be as willing to make the trek in their cars as they would usually do.

When the summer travelling season kicks in this year – a time when many Americans hit the roads with their families – the impact of expensive petrol could begin to be seen in the tourist industry. Some hoteliers have been sending regular customers $50 gas cards just to get them to make the drive to their favourite spots.

Marketing academics say that the $50 gas card in today’s market is a better incentive psychologically for consumers than just being given a more typical $50 discount on a product or service. “The more the purchase feels discretionary, like staying at a luxury hotel, the more the gas cards have impact because people can use them to justify something they might not otherwise do,” said marketing professor at the UCLA Anderson School of Management, Suzanne Shu, in an interview with the Associated Press.

However, it is the car industry that might see the biggest shifts in the way it does business because of the price of gas. The Big Three US car makers – General Motors, Chrysler and Ford – are facing another very difficult summer and have been almost giving their cars away with offers like six-year interest-free financing and some promises of either subsidised or free gas for a year on certain models.

All car makers recognise that Americans have fallen out of love with sports utility vehicles (SUV) and luxury trucks and so they are focusing their efforts in either cutting production of these models or are seeking ways to reduce their inventory and bring in more efficient models. GM is said to be in talks to sell its Hummer SUV brand. Expensive gas, of course, also creates opportunities for “green marketers” trying to push more energy efficient products, especially cars.

Everyone agrees that the free gas promotions will be a trend for this summer but will ease off afterwards even if the prices keep rising much beyond that. The argument goes that even iPod giveaway promotions, popular a few years ago, will not be effective today now the majority of people have an iPod or other digital players.

The other big industry that has been hit severely by rising oil prices is the already very fragile and struggling US airline industry. The cost of jet fuel, up more than 80% this year, is forcing airlines to accelerate their restructuring plans with thousands of lay-offs, slash routes and increase ticket prices. They’ve also added plenty of small additional fees, which has added plenty of frustration to the average passenger’s flight experience, such as charging $25 for checking in a second bag and some charging $10 for reserving extra legroom.

Though the wider troubles of the airlines have been well-documented with a string of on-and-off merger talks up in the air (pardon the pun), their respective management’s attempts to improve their cost structure have turned to their chief marketing officers for the first time. US-based airlines always had a tradition of enticing and encouraging passenger loyalty with generous free air miles rewards schemes but airline executives are ready to throw tradition to the wind.

Delta Air said last week it was rethinking its strategy due to the high cost of jet fuel. It said from August it will start charging $50 for previously free international flights that were rewarded as part of its frequent fliers programme while it will charge $25 for local US flights. United said it would also charge $50 for processing frequent flier awarded tickets starting August while American Airlines started charging $5 last month for processing such free tickets.

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