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Saturday, Jul 13, 2024
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Rising Gas Prices Prompting Delivery Companies to Curb Operations

BY HELEN KAIAO CHANG

As gas prices rise past the $3 a gallon mark, San Diego businesses are battening down the hatches.

In the last several months, local companies have eaten profits, lost staff, raised rates and offered new services to keep going, said owners.

But as gas prices continue to head skyward, business owners are worried. “We’re very concerned,” said JD Gigante, president of Mobile Waiter, which delivers restaurant meals to its customers.

Businesses with delivery services may be hit hardest, but experts say the effects are rippling throughout the entire economy. Every 10-cent rise in gas prices impacts the county’s economy by $7 million per month, estimates Alan Gin, associate professor of economics at the University of San Diego and publisher of the monthly Index of Leading Economic Indicators for San Diego County.

“People now are spending money on gasoline when they could have been spending it on going to the movies or buying clothes,” Gin said. “So it takes money out of the economy.”

In the past several months, many businesses have seen profits drop because of higher gas prices. They have been hit on several fronts: the supply side, because of delivery drivers who cannot afford high gas prices; the cost of goods, because of higher import costs; and the demand side, because of customers looking to cut costs.

Corporate courier Same Day Express has suffered a profit drop of 20 percent in the last four months due to rising gas costs, said Manager Sam Ilaian. The Miramar-based business, with gross revenue of $800,000 in 2006, has seen its part-time driving staff cut in half from 15 to seven since December. The business relies on these drivers, who are paid by the item and distance, to deliver packages throughout Southern California.

The company has been unsuccessful in recruiting new drivers. “They figure out how much they make and how much they are paying for gas, and they say no, they cannot do this kind of job,” said Ilaian.

Mobile Waiter , a Solana Beach-based restaurant delivery company with sales of $2.4 million in 2006 , said it has lost 10 percent of its work force since early February because of higher gas prices, said Gigante. It now has 36 drivers, who pay for their own gas and live mostly on tips. As a result, the company has had to limit the number of orders it takes and extend delivery times, thus eating into profits. “It’s money out of pocket,” said Gigante.

At the same time, businesses can only raise prices so much. Same Day Express has not been able to pass costs on to customers because of competition from national delivery services, which can absorb higher gas costs, said Ilaian. As it is, many customers have already cut delivery services to shave overhead due to higher costs. “Our customers are looking for good prices, or they leave us,” said Ilaian.

For many businesses, the costs of goods have risen due to higher transportation fees. Penelope Bax, owner of Rancho Santa Fe Flowers & Gifts, said the cost of raw products throughout the floral industry has risen 12 percent to 15 percent during the past year due to higher freight costs. Bax, who said company sales are among the nation’s top 15 percent in the flowers category but declined to name specific revenue figures, cites higher prices for imported flowers.

“We use peonies from New Zealand and roses from Ecuador,” she said. “It’s costing us more to get it here.”

Higher transport costs also have hit the restaurant industry. Mobile Waiter’s Gigante said that its supplier restaurants have raised prices 10 percent during the past two months due to higher freight fees.

Economist Gin said local businesses pay high import costs, because few goods are actually manufactured here and the geography is limited. “We’re a cul-de-sac location, so we have to depend more on products shipped from other places,” he said.

Businesses are adjusting by narrowing their geographic reach, raising prices, offering alternative services, and paying higher wages.

Mobile Waiter, for one, is shrinking its geographic reach. Previously, drivers would serve a radius of six to 12 miles , say from Cardiff to La Jolla. But now, drivers are limited to a three- to four-mile radius.

“That gives some relief to the driver, so they are running less miles and are able to put more back in their pocket,” said Gigante.

Rancho Santa Fe Flowers & Gifts has raised delivery prices for further distances, said Bax. A year ago, the company charged a flat delivery fee of $9.95 for service to anywhere in San Diego. Now it charges $9.95 within Rancho Santa Fe and up to $14.95 elsewhere in the county. Yet the company only breaks even on delivery charges, said Bax.

Companies are also creating alternative services. Same Day Express is planning to offer more cost-effective services by the end of March. These will entail longer delivery times or multiple packages per trip, which reduces costs for the customers, said Ilaian.

Mobile Waiter’s Gigante said management will consider other tactics, such as increasing drivers’ wages, subsidizing mileage costs, or raising prices for consumers. The company is also limiting its hiring pool to drivers with fuel-efficient, four-cylinder cars, rather than six- or eight-cylinders.

For the consumer, this means less choice for the same price. “They can’t order from their favorite restaurant maybe 15 miles away, but can choose a restaurant that is closer to home,” said Gigante.

The economic dampening extends far beyond food and flowers. Economist Gin said gas prices directly affect consumer confidence. “When gas prices go up people feel bad, and when they go down, (consumers) feel more confident,” he said. “So if gas prices go up, their confidence will go down and will affect how much they spend on big-ticket items, like automobiles and housing.”


Helen Kaiao Chang is a freelance writer for the San Diego Business Journal.

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