The US Media Rings Alarm Bells That Gasoline May Soon Cost $4 a Gallon, And If It Does Advertising Managers Will Be Pushing The Panic Button

Add to that, the housing market has really turned down meaning that real estate advertising is dropping precipitously with no end in sight and a media advertising manager’s worst nightmare of huge cutbacks in the ad spend are taking form.

For if people won’t take the car out so often to go shopping, and they have less money in their pockets to buy something anyway because they need more for gas, resulting in lower retail sales, and far fewer people are buying and fixing up houses then all of that trickles down to the retail advertising spend.

First quarter advertising revenue results for most daily newspapers were awful and the first results in for April show the problem getting worse as per the Wall Street Journal and the Tribune newspapers.

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Already the country’s two top retailers -- Wal Mart and Home Depot -- are reporting soft financial results for the recent quarter. "Our results were not up to Wal-Mart standards," Chief Executive Lee Scott said in explaining the company’s worst sales drop since 1979. He said improved summer weather might help sales but “the biggest unknown is the impact of gasoline prices on our customer base."

Home Depot, the world's largest home-improvement retailer, announced a 30% profits drop and a lower forecast for yearly earnings since people aren’t buying houses therefore logically they don’t need to spend for home improvement.

If the two largest retailers are already experiencing problems with rising gas prices and a weakening housing market – with nothing really to show any short-term improvement, and that’s without gas hitting $4 yet -- then the outlook for when the gas price does go higher fits the nightmare scenario. For history shows that as retail sales decline so does the advertising spend.

Newspaper broker Larry Grimes explains, “I think we are already seeing the effects of $3 gas with retail sales very weak. May will be an important month for retail. I would surmise that if gas gets much higher, then people will start cutting back on their purchases. This will have a ripple down effect on retail advertising and will affect both the weekly and daily newspaper business.”

And Grimes points out those higher interest rates that have hit the housing market hard are starting to affect the employment markets. “As job creation slows, so does employment advertising. I expect employment advertising to be weak through the summer.” But Grimes does not believe that newspapers alone will feel the pinch. So will the Internet.

“Don’t think the Internet will be immune from a decline in retail spending, “ he says. “As ad budgets are slashed, so will be monies for new media initiatives.” Indeed he said there may even be a silver lining in all this. “Advertisers will put their monies where they have traditionally gotten the most bang for their buck – that would be the newspapers in many instances and especially the weeklies for the smaller advertisers.”

Most metropolitan newspapers reported large Q1 advertising declines -- $3 a gallon gas was firmly entrenched -- and the April numbers are even worse. Looking at the numbers from the Tribune newspapers probably give a fair idea of what is in store as gas prices go higher – retail advertising, including department stores and home furnishings, down 6.8%, national advertising down 8.2%, classified advertising down 14.9% with real estate the biggest problem, falling 20%.

Rising gas prices affect everything from whatever is delivered to home, office, and the store to people going out to eat. The average U.S. household is already spending $1,000 more per year -- an 85% increase -- on gasoline than it did five years ago, two consumer groups told Congress Wednesday, and rural households have been hardest hit spending about 20% more on gas than urban residents. Government statistics show that pump prices have risen 43% since January because of refinery outages and tight supplies, and that goes a long way in explaining those rotten Q1 newspaper advertising results.

And the problem is that for many drivers they simply can’t cut back on their essential driving. The Census Bureau says that the number of commuters with drives lasting more than an hour grew by almost 50% between 1990 – 2000, so that means the unessential driving and spending gets hit. Internet shopping could see a lift.

Of course all things are relative. European readers will ask what all the fuss is about. Gasoline is far more expensive for European drivers than it is in the US. In Western Europe, depending on the country, a gallon of gas costs anywhere from about $4.50 to $6.50. But Europeans tend to use their cars mostly for short trips and take public transport for longer ones. Swiss car license plates show the canton in which the car is registered and very seldom does one see a car registered from an outside canton that does not border.

Last year in Switzerland there were nearly 285 million rail passengers – a record year. "Never have so many people travelled by train," according to Andreas Meyer, the head of the Swiss Federal Railways. He might also have added that never before had gas prices been so high in Switzerland which encouraged the increased train travel, but also the Swiss Railways has very savvy marketing which encourages family travel with children paying much reduced rates or even carried free.

But Americans don’t take the train. They drive. The Memorial Day weekend in the US – it starts May 26 – signals the beginning of the summer driving season and Americans will save what they need to in order to pay the cost of their driving holidays. The higher the gas price the less they will buy elsewhere. And that trickles to the advertising spend.

As Larry Grimes, the newspaper broker, told ftm recently, “We are all holding our breaths gasoline prices will hold steady.”