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Published: Wednesday, 5/18/2011 - Updated: 3 years ago

Prices for gasoline widen rich-poor gap

BLADE NEWS SERVICES

NEW YORK -- High gas prices are driving a wider wedge between the wealthy and everybody else.

The rich are back to pre-recession splurging: Saks Fifth Avenue and Nordstrom customers are treating themselves to luxury items such as $5,000 Hermes handbags and $700 Jimmy Choo shoes, and they're paying full price.

At Target and Walmart, shoppers are concentrating on groceries and skipping even little luxuries. BJ's Wholesale Corp. said Wednesday that its customers are buying more hamburger and chicken and less steak and buying smaller packs to save money.

"The average shopper isn't in the game, except for necessities," said Faith Hope Consolo, chairman of retail leasing and marketing at Prudential Douglas Elliman. At the same time, among the rich, "luxury products are selling like bread."

J.C. Penney Co., Wal-Mart Stores Inc., and home-improvement retailer Lowe's Cos. said they notice their customers are consolidating shopping trips to save money on gas as the average price is near $4 a gallon.

This week more than a half-dozen corporate earnings reports show that for the affluent rising prices are merely a nuisance. For others, they can mean scrimping to put food on the table.

The wealthy were the first to start spending again after the recession. Middle-class Americans' spending started picking up late last year.

But the retail earnings results show that rising prices for gas and food, particularly meat, dairy, and produce, have started to erode spending power.

It could get worse later this year, when clothing prices are expected to rise 10 percent to 15 percent. Meat prices are expected to rise 6 percent to 7 percent this year, and dairy products as much as 5.5 percent, according to estimates from the U.S. Department of Agriculture.

The bottom fifth of earners, with a median household income of $9,846, spend 35.6 percent of their income on food and 9.4 percent on gas, according to Citi Investment Research.

The top fifth, whose median household income is $157,631, spend only 6.8 percent on food and 1.9 percent on gas. So they feel price increases less.

"While the U.S. economy is showing some signs of improvement, we expect the recovery will continue to be slow and uneven, particularly for more moderate-income households," Gregg Steinhafel, Target's chairman, president, and chief executive officer, said on a conference call with analysts Wednesday.

The divide is prompting retailers to alter their strategies: Luxury stores like Saks Fifth Avenue -- which had added items at lower prices after the financial meltdown in late 2008 -- are again rebalancing their assortments. Now it's back to the $300-plus dress shirts. "We are increasingly optimistic about the future," Saks CEO Stephen Sadove said in a call with analysts on Tuesday.

At the other end of the spectrum, Wal-Mart and others under more pressure to get their financially squeezed shoppers to spend, are offering more discounts and pushing smaller packages at the end of the month when shoppers have less money.

Walmart shoppers' median income is $42,000 to $45,000, estimates Craig R. Johnson, president of retail consultant Customer Growth Partners.

CEO Mike Duke told reporters last month that Wal-Mart is seeing more pronounced drops in buying in the few days before the end of the month when money is tight and then a big spike in spending during the first few days of the month when many shoppers get paychecks or government assistance.

Some customers wait inside the store at the end of each month with full shopping carts until the clock strikes midnight. Then their electronic-benefit transfers from the government go through, and they pay for their groceries and other staples.

Although customers are spending more on food at Walmart than they did a year ago, they are buying less in most other categories.

One is apparel. "We're simply not converting enough of our grocery customers to shop apparel," said Bill Simon, the president and chief executive of Wal-Mart's U.S. division, in a conference call with investors.

Target, whose shoppers' median household income is $60,000, said Wednesday that it's the better-off customers who are driving its revenue growth.

The rest of its customers are focusing on necessities like food, resulting in some sales declines in the rest of the store.



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