The economic effects of supply and demand on convenience stores, along with disrupted employment and travel, began with the huge anomaly of the COVID-19 pandemic, not by any regular cycle of inflation.
Treating a financial embolism with oxygen deprivation doesn’t make the patient well. A mixed metaphor, but you get the idea.
Ignoring the financial interdependence of c-store businesses and their investment partners disregards the downstream to impact on labor costs, real estate and producer goods. The Fed’s perception of the commercial economy is narrowed by policy rather than reality. Sort of like holding your binoculars backwards and wondering why everything seems far away.
Increased interest rates inflate the price of pretty much everything that a convenience store operator pays for. Interest rates impact c-store real estate, fuel production costs, impact investment in new snack and tobacco products and make hiring more expensive.
The Fed is now creating as much, if not more inflation than it’s reducing. Look at it like this: Money is an ingredient in everything a c-store sells and a customer buys, whether it’s an energy bar, a cup of coffee or a pack of cigars. The higher the cost of money, the higher the cost of goods sold (COGS).
From manufacturer to distributor, through wholesale jobber to the retail shelf and consumer, increased interest costs absorb margin that needs to be recovered to sustain net profit at each step. People reading this already know how gross profit margin works.
Product costs (and the money) get marked up at each stage of distribution. Along the way everybody needs to make a profit. So 6% becomes 18%. The 12-month inflation rate for March was 5%, the lowest it’s been since July 2021. But the inflation rate for the past six months was 1.8% (3.6% annualized) and falling. Have the Fed’s governors ever seen the other side of a cash register?
Some business borrowers are paying three times more in interest than they were a year ago in order to produce to post-pandemic demand. Grocery store food prices are lower than comparable restaurant prices for the first time in over a year, but consumers are now paying an average 21% interest on credit cards. Excessive and continuing Fed rate increases caused this.
Supplier and operating costs of the 148,000 U.S. convenience stores now include interest rates beyond where a normal inflation cycle should have ended. While an overheated recovering economy threw demand and supply into chaos, interest rates stepped up from .5% to 4.75% in a single year.
Now, in early May, the Fed has approved its 10 th increase, taking rates to a target range of 5-5.25%, a level not seen since 2007.
The Fed made sure that financing the recovery would be expensive.
Melons and tomatoes are grown through advance financial contracts between fresh produce wholesalers, their banking partners and growers from California to Michigan to Florida. The cost of labor, the shipping box, truck fuel and consumer prices are all increased by the higher cost of interest, not 2021’s inflation spike. Don’t take my word for it. Ask Alexander Hamilton how debt financing works. It paid off the revolutionary war.
Labor Woes
C-store retailers will always find it difficult to retain enough merchandisers, store managers and clerks to provide quality service. The first 26 Google ads under convenience store staffing are by recruiting companies. For some, it’s a job that’s viewed as a steppingstone to something better.
Still, there are hundreds of thousands of job openings in convenience retailing and it isn’t enough. If a store needs 12 employees, they only get nine because mortgage interest and higher COGS ate the money. Either that or the price at the pump and register goes up.
The Fed’s solution was to raise interest rates, so credit card debt costs more and prospective c-store employees need higher wages to reduce their debt incurred during the pandemic.
This increases the cost of hiring people who need jobs. Instead of just reading their own economic policy, maybe the Fed should just visit a convenience store.
John Geoghegan has spent the last 30 years in the tobacco business, including vice president strategic planning at General Cigar Co., U.S. manager for DjEEP Lighters, head of marketing for Kretek International Inc. and manager of LaMirada Cigar Co. He began his career 57 years ago at Procter & Gamble. Geoghegan is a graduate of the University of Cincinnati. He lives in Laguna Niguel, Calif.
