30 MARCH 2016 nacsonline.com

SURVEY SAYS…

Findings from the 2016 NACS Retail Fuels Report show that gas prices drive more than c-store sales—

they drive customer morale.

Fuel is woven into the fabric of everyday life. And that makes it a regular topic of discussion—whether a politician is talking

about energy dependency or your neighbor is bragging about finding the cheapest gas in the city. But how much do consumers and the media really know about fuel? Turns out not much.

NACS works hard to demystify for consumers and the media how the motor fuels market works—from the time crude oil is extracted from the ground to when fuel flows into a vehicle’s gas tank. The 2016

NACS Retail Fuels Report, released this month, continues our tradition of providing a fact-based analysis of the market to explain how gas is sold and to describe the composition of the retail fuels industry. This resource is updated throughout the year at www.nacsonline.com/gasprices.

NACS has also conducted monthly consumer sentiment surveys since January 2013 to measure how Americans feel about the economy and gas prices, among other topics, to identify the link between gas prices and optimism—and spending. Our results are shared here.

By Jeff Lenard

20%

35%

50%

65%

80%

In nearly every month measured since 2013, consumer sentiment and gas prices had a direct, inverse relationship. That is, when gas prices rose, consumer sentiment dropped, and vice versa. However, a schism developed in November 2015, when sentiment declined even though gas prices (and consumers’ self-reported miles per dollar) also declined. At this point, our monthly surveys showed that gas prices were less important to consumers’ overall economic sentiment.

It’s likely that other factors are weighing on consumers’ minds more heavily than gas prices. Broader economic concerns, including a sharp downturn in the stock markets, an elevated concern about domestic terrorism and the growth of ISIS worldwide, and the negative tone of the U.S. presidential campaigns, have played a greater role in sentiment as gas prices continue to fall. By December 2015, a record low 71% of consumers said that gas prices were an important consideration in economic sentiment.

Driving HabitsSo how is consumer optimism affecting miles driven? Gasoline consumption in the United States peaked in 2007 at 9.3 million barrels per day and declined sharply over the next two years, as the Great Recession took its toll on both jobs and savings. Since then, demand has crept higher and by 2015 was close to fully recovering, growing to 9.2 million barrels per day. Reviewing gallons sold is one way to measure spending, although it does not take into account the impact of fuel efficiency increases in newer vehicles.

Emotional ConnectionGas prices play a significant role in how consumers feel about the economy. After all, 39 million motorists fill up on a daily basis, and gas purchases account for 4% to 5% of total consumer spending. But gas prices also affect those people who don’t fill up. Even driving past a convenience store and seeing gas prices rise or fall over a period of days has an effect on one’s psyche.

But to what extent does consumer sentiment translate into spending, whether overall or specifically at convenience stores? In looking at NACS survey results from both consumers and retailers, it’s clear that low gas prices grow convenience store sales—but what about overall retail sales?

Low ExpectationsAn overwhelming 85% of consumers surveyed say that low gas prices are good for the economy, but they generally don’t think lower prices at the pump will last. Even as prices dropped during the second half of 2015, about one in three customers each month expected prices to increase within 30 days.

GAS CONSUMERS:Total predicting higher prices

32% 32%

41%38%

33%37%

55%59%

72%

49%

73%

58%

31%

Gas price

$2.00 $1.98

$2.20

*

(* question not asked)

$2.39$2.64

$2.79$2.75

$2.59

$2.40

$2.39

$2.10

$2.20

DECAUGAPR NOVJULMAR OCTJUNFEB SEPTMAY JAN 2016

JAN 2015

In 2015, gas prices ended the year lower than they started, yet consumers were feeling less optimistic about the economy than they were a year ago. Consumer optimism in January 2016 was down 10 percentage points from the year prior.

20%

35%

50%

65%

80%

GAS CONSUMERS:Total optimismGas price

January 2015

57%$2.20

January 2014

43%$3.35

January 2016

47%$1.98

January 2013

46%$3.30

10%

15%

20%

25%

30%

In 2015, the percentage of drivers who said they would drive more over the next 30 days was fairly stable, ranging from 17% to 24% no matter the price of gas. Of all demographics, younger consumers (ages 18–34) regularly said that they were more likely to drive more. For example, in January 2016, 32% of drivers ages 18–34 said they would drive more, compared to only 20% of all drivers and

GAS CONSUMERS:Compared to the last 30 days, how much will you drive in the next 30 days? Total drive more

Gas price

(* question not asked)

more than three times higher than drivers age 50 or above (9%).

The monthly NACS surveys provide predictive analysis of whether driving would increase, and we are seeing that consumers are indeed driving more. Overall, U.S. fuels sales were up 3% in 2015 and one in three consumers said their driving habits changed. Of this subgroup, 59% said they increased

22%

20%

22%

24%

22%22%21%

19%

21%21%20%

24%

17%

$2.00

$1.98

$2.20

*$2.39$2.64

$2.79

$2.75

$2.59$2.40$2.39

$2.20

$2.10

10%

15%

20%

25%

30%

ECONOMIC OPTIMISM VS. MILES PER DOLLAR

Very Optimistic

Somewhat Optimistic

Miles/$

JUL 2014

9%

37%

6.49

FEB

11%

43%

11.33

SEPT

9%

39%

10.13

AUG

5%

34%

6.68

MAR

5%

39%

9.96

OCT

10%

43%

—

SEPT

11%

36%

6.84

APR

10%

42%

9.83

NOV

8%

42%

10.80

OCT

9%

37%

7.10

MAY

6%

42%

8.83

DEC

11%

37%

11.65

NOV

7%

39%

7.96

JUN

11%

41%

8.84

JAN 2016

8%

39%

11.82

DEC

8%

39%

9.00

JUL

8%

39%

8.74

JAN 2015

9%

48%

10.95

AUG

9%

40%

9.09

0%

10%

20%

30%

40%

50%

60%

6

7

8

9

10

11

12

DECAUGAPR NOVJULMAR OCTJUNFEB SEPTMAY JAN 2016

JAN 2015

0 1 2 3 4 5 6$0 $10 $20 $30 $40 $50

in three retailers (63%) reported increased fuels sales, compared to only 18% who saw a decline in sales.

What Could Change Driving Habits?As gas prices dipped below $2 per gallon in 2015, three in four drivers (75%) still said that gas prices affected their feelings about the economy. But would rising prices force them to change their driving habits, and at what price point?

In January 2016, consumers said they would change their behavior if gas prices were to increase from $1.48 to $3.46 per gallon (which was the average price of gas as recently as September 2014). That’s not to say that consumer behavior will actually change at that price because what consumers say they will do doesn’t always reflect their actions. But it’s instructive to review the difference between the current gas price and the price at which consumers say they would change what they do. For most of 2013 and 2014, that difference was around 50 cents per gallon. In 2015, it swelled to more than a dollar per gallon as prices dropped. It may take a significant price spike to slow down fuel demand in 2016.

the amount they drove, as opposed to 41% who decreased the amount they drove.

Clearly lower gas prices play a role as to why consumers are driving more, but different demographics cite different reasons for driving more.

Men are twice as likely as women to say that low gas prices affected their driving (52% to 25%). It also appears that while older Americans say they are not increasing the amount they drive, for those who do, they are travelling a greater distance on trips as a result of lower gas prices. More than one in three (38%) consumers age 50 or older say they travelled out of town more in 2015.

To validate consumer survey findings, NACS also conducts quarterly surveys of its retail members, with the most recent survey conducted in December 2015.

In terms of gallons sold, NACS retail members report that they saw increased fuel sales in 2015. Nearly two

GAS CONSUMERS:

(Based on a December 2015 survey of 100 NACS member companies.)

(* question not asked)

GENDER AGE

M F 18-34 35-49 50+

Lower gas prices 40% 52% 25% 41% 39% 39%

My job / longer commute to work / I have a new or second job 22% 22% 23% 18% 40% 0%

School / I commute to my or my child’s school 11% 5% 18% 17% 5% 0%

I go out of town more / Going on more road trips or vacations 7% 6% 9% 3% 0% 38%

I have a better car now 4% 5% 4% 5% 0% 11%

I am going to more places 3% 3% 4% 0% 10% 0%

Other 12% 8% 17% 16% 5% 12%

DEC

AUG

APR

NOV

JUL

MAR

*OCT

JUN

FEB

$0 $1 $2 $3 $4 $5 $6

SEPT

MAY

JAN 2015

Why are you driving much more than you were a year ago? How much would gas prices have to increase for you to reduce how much you drive?

Which best describes your overall fuel gallons sold in 2015, compared to 2014?FUEL GALLONS SOLD:

$3.52 $1.52

$3.42 $1.22

$3.57

$3.80 $1.05

$3.56 $1.56

$3.73 $1.09

$3.61 $1.02

$3.73 $1.53

$3.65 $0.86

$3.60 $1.22

$3.63 $1.23

Mean / Difference between median gas price and mean price for change

Significantly higher gallons sold

Somewhat higher gallons sold

Flat gallons sold Somewhat fewer gallons sold

Somewhat fewer gallons sold

9% 54% 19% 13% 5%

GAS PRICE:

JAN 2016

0 1 2 3 4 5 6$0 $10 $20 $30 $40 $50

JAN 2016 $3.42/$1.22

36 MARCH 2016 nacsonline.com

Effect on In-Store SalesThe average American household was forecast to spend $1,962 on gasoline purchases in 2015, about $550 less than in 2014 and the lowest level in 11 years, according to the U.S. Energy Information Administration.

Yet survey results showed that consumers weren’t planning to increase their spending as a result of low gas prices. Only three times in 2015 did consumers say they would spend more money in the upcoming month; and two of those occasions happened to be November and December, when consumer spending dramatically increased due to holiday shopping.

The first time occurred in June 2015, when gas prices were near their peak for the year but significantly lower than the same time period in previous years. Consumers were certainly spending less money on gas, but were they saving that money or spending it?

The monthly NACS surveys revealed that younger consumers age 18–34 would increase their spending over the coming month. But when NACS asked consumers in June 2015 what they were doing with their savings from lower prices, these younger consumers were most likely to also save it: 60% said they were saving money or paying down debt.

On the surface, this appeared to be bad news for convenience retailers. Their best customers (those age 18–34) were saving while their least likely customers (those age 50+) were spending. But it is more likely that younger consumers were saving a bit more because of lower gas prices, and their overall spending was still higher than other groups.

In fact, younger consumers (age 18–34) led spending in convenience stores. For some items—better-for-you products and foodservice (sandwiches, health bars, fruit)—their consumption rate doubled the national average.

TRACKED AGE

2015 2014 18-34 35-49 50+

Soda/fountain drink 29% 26% 34% 37% 36% 19%

Lottery ticket 22% 19% * 19% 26% 20%

Coffee 21% 18% 26% 23% 25% 17%

Cigarettes/tobacco 18% 16% * 19% 22% 14%

Chips 18% 15% * 28% 18% 11%

Candy 17% 16% * 24% 21% 9%

Bottled water 15% 12% 19% 24% 18% 6%

Beer/alcohol 9% 9% * 11% 10% 5%

Energy drink/energy shot 8% 6% * 16% 9% 1%

Donut 8% 7% * 13% 7% 5%

Sandwich or other meal item (prepared on site) 6% 7% 8% 8% 7% 3%

Sandwich or other meal item (from a grab-to-go case) 6% 5% 8% 11% 6% 3%

Nuts/trail mix 5% 4% 9% 8% 6% 2%

Jerky (beef, turkey, etc.) 5% 4% 9% 10% 5% 2%

Bagged ice 5% 4% * 8% 5% 2%

Fresh fruit/vegetables 4% 2% 4% 8% 3% 2%

Health/nutrition bar 4% 2% 6% 8% 4% 1%

Cut or packaged fruit or vegetables 2% 1% 3% 4% 2% 0%

Yogurt 2% 2% 4% 5% 1% 0%

Packaged salad 1% 2% 2% 2% 2% 0%

Over-the-counter medicine 1% 2% * 2% 1% 0%

In the past 30 days, what did you purchase from a convenience store that sells gas?

GAS CONSUMERS:

(* question not asked)

JAN2016

This article was compiled based on results from the NACS Consumer Fuels Survey, conducted January 7–11, 2016, by Penn Schoen Berland, a market research, political polling and strategic consulting firm with five U.S. offices. Overall, 1,101 consumers were surveyed, and the margin of error for this survey is 2.95% at the 95% confidence level.

WAIT, THERE’S MORE!

The NACS Retail Fuels Report provides a comprehensive overview of the fuels retailing industry. More information, analysis, statistics and graphics can be found at www.nacsonline.com/gasprices.

Of those four factors, the only one within retailers’ control is growing their product mix to include more better-for-you items. It remains to be seen how the other three will play out. By mid-January 2016, the stock market was down 10% before rebounding and the East Coast was hit by a massive snowstorm. At the same time, gas prices continued to fall, with the national average dropping under $1.90 per gallon.

History shows that the spring months are often a volatile time for gas prices as the industry transitions to producing summer-blend fuel. Since 2000, gas prices have increased an average of 53 cents per gallon between the first week in February and the seasonal peak, which is usually in May.

As retailers wait to see how the spring transition plays out, they also have taken more control of their future as they place more bets on foodservice and healthy options. As a result, 2016 may turn out to be a good year for retailers—regardless of the price of gas.

Jeff Lenard is the NACS vice president of strategic industry initiatives. He can be reached at jlenrd@nacsonline.com or (703) 518-4272.

Significantly higher

Significantly optimistic

Somewhat higher

Somewhat optimistic

Flat

Neither optimistic nor pessimistic

Somewhat lower

Somewhat pessimistic

Significantly lower

Significantly pessimistic

Not applicable

25%

23%

53%

55%

7%

16%

8%

5%

0%

1%

7%

(Based on a December 2015 survey of 100 NACS member companies.)

Convenience retailers also saw an increase in foodservice (food prepared on-site) sales in 2015. More than three in four retailers (78%) surveyed by NACS said foodservice sales were up in 2015, compared to only 7% who said foodservice sales had declined.Convenience retailers also are optimistic about their prospects for the first quarter of 2016. Overall, more than three in four retailers (78%) are optimistic about their business prospects in Q1 2016, compared to only 6% who are pessimistic. Four broad factors emerged as reasons for retailer optimism in the first quarter of 2016:• Low gas prices (cited by 33%)• The economy (15%)• The weather (14%)• Embrace of better-for-you items (10%)

WHAT DESCRIBES YOUR FOODSERVICE SALES IN 2015, COMPARED TO 2014?

WHAT IS YOUR OVERALL CONFIDENCE LEVEL ABOUT YOUR BUSINESS FOR Q1 2016?