FYI | Apr 21 2006
Middle income earners are always the worst hit by petrol price increases. This comes about as a result of the proportion of income spent on petrol. While low income earners may either not own cars or avoid using them too much, and high income earners spend a lot of money on other things beside petrol, middlers are the ones who feel the pinch on a comparative basis.
SB Citigroup notes middlers spend 4.1% of their income on petrol whereas the high end spends 3.3%. The analysts anticipate a 2.2% reduction in retail spending for 2006 based on a Sydney/Melbourne average of $1.40/l.
This forecast is based on the assumption that petrol spending patterns do not change. The intuitive idea is that people will still drive to work, or the kid’s school or sport and so forth whatever the price. They will, however, put off or abandon buying discretionary items. This was largely the experience of last year.
Citigroup sees the biggest losers as a result as being discount department stores, convenience stores and furniture outlets. Those income-earners who tend to shop at such establishments are the ones most likely to feel the pinch of higher petrol prices.
Citigroup suggests Coles Myer (CML) will face the greatest exposure to spending changes due to its discount department and convenience store retailing. These divisions represent 33% of Coles FY06 earnings. Harvey Norman is exposed through 12% earnings in furniture, and Woolworths (WOW) is exposed through 9% earnings equivalent to Coles.
There is some good news. Apart from crude oil prices being higher, refinery margins are running at double there three-year average which, notes Citigroup, adds about 5c per litre to the price of petrol. This is not refiner rip-off – it is more a reflection of the refinery maintenance shutdowns occurring in the US, many of which were put off after Katrina in order to cover shortfalls. Citigroup notes the round of shutdowns should be completed over the coming month.