The Gas Price Pipeline To Retail IT Spending

Written by Evan Schuman
August 21st, 2008

It’s generally accepted that any key economic issue—whether it’s a housing slump, rising gas prices or tax refund checks—can have a sharp impact on business spending. But the IHL Group is floating an interesting theory that recent gas price hikes are going to have a very specific and direct impact on IT spending next year.

Here’s the IHL theory: Not all IT spending is created equal, and some retail segments spend a heck of a lot more on IT than others.

Given the way that gas price hikes impact consumers, it’s likely going to have a much more negative impact on the retailers that happen to spend the most. So, the theory continues, even if the ebbs and flows of retail sales even out, with Nordstrom—for example, possibly losing sales that migrate to Wal-Mart—IT could be severely hurt, depending on how those shifts shake out.

IHL President Greg Buzek gets more specific. "A dollar in revenue to a specialty soft goods retailer like Abercrombie does not equate to the same amount of IT spend as a dollar to a grocer like Kroger. A typical grocer spends about 1 percent of revenue on IT systems, whereas a specialty soft goods retailer will typically spend 2 percent of revenue, or twice as much per dollar, on IT," Buzek said. "So for every dollar that shifts for 2008, anywhere from 10 to 50 percent of the IT spend could be lost for 2009. In other words, the more the U.S. consumer has to focus on ‘needs’ rather than ‘wants and desires,’ this will have a negative domino effect on total IT spend."

It’s a very interesting theory, and it may just prove to be true.

"Increased food and fuel prices in the last 12 months have removed $132.4 billion from consumers’ discretionary spending in other areas since last August. I think the important thing to note is that the $132.4 billion was lost to other areas, not necessarily lost, with autos and restaurants definitely losing out. Specialty retailers and department stores are losing out as well, but not to the same level," Buzek said. "But within retail and restaurant segments, a 10 percent loss in revenue means a 10 percent loss of IT spend is likely for that segment. If that dollar goes to a segment with a lower percentage of revenue spend, then it is not all recaptured. There is a net loss in IT spend overall."

Worse yet, even if the situation improves for retailers in the last quarter of this year—as is predicted in some corners—it will likely be far too late to impact 2009 IT spending.

"Budgets are typically set for 2009 in the fall of 2008. When the 2008 budgets were formulated, the economic slowdown was unknown," Buzek said. "This year, things will likely be improving for retail because of the drop in gas prices, but the damage done because of the increase has been pretty severe for some segments. And that will affect IT spending for next year."


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