-By Dr. Carl Steidtmann, Chief Retail Analyst, Deloitte Research

Were Charles Dickens to come back and declare that these were the best of times and the worst of times, he would undoubtedly be labeled an optimist. With the stock markets around the world turning in their worst monthly performance in June since the 1930s, it is hard to find many silver linings in the dark clouds hanging over the economy.

One of those dark clouds comes in the form of soaring energy prices. The rise in the price of energy is transferring massive amounts of wealth from consumers to producers, draining consumer purchasing power and retail corporate coffers. Over the long-run, the rise in energy prices will transform the economy, rewarding both conservation and new forms of energy production. In the short-run, it will create enormous challenges for food retailers as they try to balance declining demand from an income-strapped consumer with soaring costs from an energy-dependent supply chain.

For the 20-year period from 1986 to 2006, the average cost of oil to the consumer was 2.8 percent of their income. In January 2007, the consumers' cost of oil rose to 4.1 percent of their income. In June 2008, the share had jumped to 8.4 percent. This increase is a major drag on non-energy consumer spending. The two previous oil price shocks in 1973-'74 and 1979-'80 both resulted in severe recessions. Since the first of the year, the $50-a-barrel increase in the price of oil has drained 2 percent of consumers' disposable income, an annualized total of $230 billion, more than twice the size of the rebate checks sent to consumers as part of the recent government stimulus package.

At the same time, the rise in oil prices is increasing the tribute that U.S. consumers must pay to foreign producers. The bill for oil imports in 2007 came to $354 billion. This year, it is on track to exceed $600 billion. If the rise in energy prices sticks this time, as it did not in the early 1980s, it will transform the U.S. and the global economy.

The U.S. economy has been vulnerable to energy shocks since the early 1970s. Since that time, imports' share of total consumption has more than doubled while little has been done to encourage either more domestic production or more conservation. The rise in energy prices creates a substantial opportunity for businesses that can increase the production of energy regardless of its form, and reduce consumption through conservation and energy productivity improvement.

The High Price of Expensive Oil on Food Retail
Very little of the food retail industry was built with the expectation of oil above $100 a barrel. The rising price of oil represents a significant cost shock to the industry. While a great deal of attention has been paid to the impact of higher energy prices on consumer purchasing power, little attention has focused on how rising energy costs change the business model for retail.

The retail industry grew up on cheap energy. From big box food retailers to suburban mall developments with food specialty stores, they all counted on a consumer who was willing to travel ever-longer distances to shop. Higher energy prices point to fewer shopping trips and more store visits per trip. Shopper conversion and transaction size will become critical as food retailers will get fewer opportunities to make the sale.

When transportation costs were low, it made economic sense to bring in goods from the far corners of the world. The rise in transportation costs will shift one of the basic premises of retail merchandising from globalization to localization. The decline in the value of the dollar is adding to this shift. For food retailers in particular, being able to source product closer to the point of demand will be a critical skill needed for success.

The food retail industry that emerges from this energy transformation will be less consolidated, more regional in its reach, with a supply chain that includes more suppliers who are geographically closer at hand. It will generally favor small and medium cap businesses over the larger ones that have dominated the industry in recent years.

To comment on this article or pose another topic for this columnist, contact Dr. Carl Steidtmann at csteidtmann@deloitte.com.