Rising petrol prices set to hit profits of retail, hospitality and transport

Businesses should expect lower revenue and profits over the short- to medium-term if petrol prices continue to escalate due to the ongoing unrest in the Middle East and workers demand wage increases as a result, economists have warned.

The warning comes as petrol is now expected to hit $1.50 a litre in response to military action taken by the United States and its allies against the Libyan government – action that has no sign of ending.

“Any petrol impact on confidence is still ahead of us, and it will be significant,” Westpac economist Bill Evans told SmartCompany this morning.

Evans says the last Westpac consumer sentiment survey took a 2.4% hit due to talks over a potential carbon tax, and did not include any impact on petrol prices as no significant rise had been recorded by then. As a result, next month’s survey may contain a larger than usual drop.

“We have found that it’s interest rates and petrol prices that tend to create the most havoc with consumer sentiment. And petrol prices didn’t move before the last survey, so we will surely see an impact.”

Evans says the main impact will be on the spending power of consumers. Yesterday, CommSec economist Craig James revealed data that showed the average household is now spending $200 a month to fill up their cars – up by $25 from December.

“In the short-term, this is usually what happens – the budget gets stressed and there is less money to spend on discretionary items.”

“And that has happened anyway as consumers remain cautious, so it will only add to that impact.”

The medium-term risk is a worry for businesses, however. Evans says that as workers try and extract compensation for higher petrol prices in the form of wage increases, profits could be squeezed even harder than they are now.

“The challenge then is whether those businesses will be able to pass those costs on or not. Given the already cautious nature of consumers, that’s going to be difficult “

The Australian Council of Trade Unions has already lobbied for an increase in the minimum wage this year, while various individual unions have been calling for increases in their respective fields, such as manufacturing and transportation.

James said yesterday the national average petrol price rose by 0.5 cents to 143.2 per litre in the week to March 20 – that’s a 29-month high. Over the past five weeks, the national average price has risen by 8.4 cents per litre, representing the biggest five weekly gain in two years.

Businesses and consumer in Canberra are paying the most at $1.49 a litre, but that price is set to become more common elsewhere in the week ahead.

“The lift in the price of petrol is further bad news for motorists, taking precious spending dollars out of consumer pockets.”

“Retailers already have to contend with the effects of the weather on seasonal spending, consumer conservatism and higher utility prices.”

Certain sectors are being hit more than most. The tourism industry is already reeling from the natural disasters in Queensland; further petrol prices will hit transport companies even more.

Shane Oliver, head of investment strategy in Sydney at AMP Capital Investors, says the tourism and transport sectors will be hit significantly hard, and the costs will be passed onto consumers.

“At the top of the list is transport, so trucking companies and so forth. Obviously they get hit because the strong proportion of their costs are energy related. At the other end of the spectrum you’ve got companies in education, banks which really aren’t affected at all.”

But Oliver also agrees with Craig James, saying that discretionary retail will be the first area to be impacted, as companies will be forced to pass on discounts to consumers as they are already expecting lower prices.

“People have a weekly cost for spending areas such as this, and there’s not much left over if petrol prices keep increasing. There’s not much left for discretionary retail.”

“As to whether they will pass it on, it depends on the power of the company. Surely transport companies have a bit more power to do that, and the airlines have been increasing their fuel levies.”

“It’s a reasonably competitive market out there, and there’s always pressure to discount. It varies from industry to industry, but discretionary retail is going to be one of the most impacted areas.”