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Could Diesel Fuel Be Retail’s Achilles Heel? Week Ahead

Inflation and supply chain hiccups are a global problem, but an upcoming shortage of diesel fuel may turn into the next near-term problem for retailers.

On Wednesday, American billionaire businessman John A. Catsimatidis said he wouldn’t be surprised if people start rationing diesel fuel on the East Coast this summer. He has long warned of food shortages and higher prices at supermarkets. Catsimatidis, who owns Red Apple Group, which runs New York’s Gristedes grocery chain and has a footprint in energy, real estate and media, told Bloomberg this week that diesel inventories are running low.

Inventory levels in the U.S. have been declining since Russia invaded Ukraine.

“It’s giving us a lot of concerns about potentially the inability to purchase fuel at the pump or rationing of fuel or anything that could occur,” Louis Campion, president and CEO of MD Motor Truck Association, said in an interview with Baltimore’s WBAL-TV 11.

Trucks need diesel to transport goods to retailers, and even those who can find the fuel face higher prices, which retailers and ultimately consumers end up paying for in the form of costs rising at the cash register.

Consumers will see an impact in other ways too. Diesel is the primary fuel source for public transportation on buses. The fuel source also powers farm equipment, as well as boats and barges that transport consumer products. And in February 2021, the U.S. Postal Service decided to replace its aging truck fleet with new diesel-powered mail trucks. Trucks operated by UPS and FedEx also rely on diesel-powered engines.

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One former retail executive said that if “there’s a shortage starting on the East Coast, the next concern should be whether that then moves across the country to the West Coast” and impacts cross-country cargo.

For now, retailers are stocked with both spring merchandise, and early summer goods, according to Walter Loeb, a former Wall Street analyst and now retail consultant. “Over the next several weeks, they will waiting to receive summer orders and early back-to-school (BTS) merchandise,” Loeb said, noting that some retailers start BTS floor sets in July for college students who begin the new semester in mid-August.

Loeb was quick to note that should shortages and rationing materialize, retailers could soon see an impact on receipts of fall and holiday merchandise. “Some of those goods begin to arrive in August,” he said.

Walmart, Target and Kohl’s are all set to report on first-quarter earnings next week, and might provide some intel on the state of the consumer.

Some people have already voted with their wallets.

“Even as supply chain disruptions continue to weigh on retailers, the impact of soaring inflation is taking a toll on consumers’ willingness to buy, much less pay top dollar,” Jharonne Martis, Refinitiv’s director of consumer research, said, citing people who canceled their Netflix subscriptions when the service raised prices.

On Friday, the University of Michigan said its consumer sentiment survey fell to 59.1 in May, representing the lowest level since 2011. Rising mortgage rates, higher gas prices, and a cap on baby formula purchases at CVS, Walgreens and Target are just some of the consumer’s challenges right now.

“With the possible exception of mortgage rates, none of these problems are new and have been chipping away at consumers’ psyche for some time. Consumer sentiment has been trending sharply lower for the past 12 months,” Tim Quinlan and Sara Cotsakis, economists at Wells Fargo, said in a note on Friday.

Aditya Bhave, U.S. and global economist at Bank of America Securities, sees inflation as a global problem, although for different reasons on either side of the Atlantic. Inflation in Europe is driven by supply chain disruptions and a larger energy price shock because it is heavily dependent on Russian energy, he said. In contrast, U.S. supply disruptions have run into strong demand driven by massive fiscal stimulus and a red-hot labor market. He also sees spending on services picking up to offset the slowdown in goods spending.

Bhave expects the “Euro area to flirt with a technical recession this quarter and next,” although Germany is likely to enter a technical recession. For the U.S., the risks of a recession this year are low. “Our view would not change if the Euro area were to go into recession because the U.S. is an insulated economy: it exports downturns but usually does not import them,” he said.