While Costco generally offers cheaper gas than any competing stations, that perk becomes more valuable as gas prices rise. The warehouse club, which requires a membership to shop in its stores and use its gas pumps, spoke cautiously about the Iran war’s expected impact on gas prices during its second-quarter earnings call on March 5.
As of Feb. 24, the average price nationally for a gallon of regular unleaded gasoline was $2.95, according to data from AAA. A month later, the price per gallon has climbed to $3.97.
Costco CFO Gary Millerchip said that member behavior changes when prices rise at the pumps.
“Generally speaking, we see about half of members that will shop at the gas station will also cross-shop at the warehouse. And obviously, as [Costco CEO] Ron [Vachris] mentioned, it is early days to know what the impact longer term might be from events in the Middle East at the moment,” he said.
Those numbers increase, he added, when gas prices go up.
Costco tries to keep prices down
For most customers, Costco is generally not the closest gas station, so they have to weigh the value of making that extra trip.
“When prices are higher, that will tend to cause members to maybe take the extra mile that it might involve to get to the gas station because of the incremental value they see there,” Millerchip added.
Gas prices have been moving steadily higher.
“With the Spring equinox ushering in warmer weather and more time on the road, gas prices are trending upward alongside seasonal demand. Last week’s announcement by the White House to release 172 million barrels of oil from its strategic reserves over four months has no immediate relief on the oil market as the price of a barrel of crude continues to climb,” AAA reported.
Compared to traditional fuel stations, Costco does not face the same pressure to make money on gas.
“Gas isn’t Costco’s central product, so it can handle offering rates that aren’t as beholden to supply and demand. Like any company, it wants to make some money on what it’s selling, but as just one department, it can handle running on lower profit margins if it means customers spend on Costco’s other offerings,” according to auto site SlashGear.
Costco offers gas tools
While apps like GasBuddy allow consumers to check local gas prices, Costco actually makes it easy for members to know if a trip to the warehouse club is worth it. The chain also offers some other helpful services, which it shared on its website.
- With the Costco app, you can check Costco gas prices on your phone. On the app, find your local warehouse to see hours of operation, gas prices, and more warehouse details.
- Fuel up fast, no matter which side of your car the gas tank is on. Extra-long pump hoses allow you to fuel up from either side of a vehicle.
- Although Costco’s stations are self-serve, the chain does offer a safety-certified attendant on site.
And the savings are meaningful.
“You save approximately 20 cents a gallon at Costco over other local vendors,” David Schwartz, who, with his wife Susan, authored “The Joy of Costco,” told CNBC. “That’s something we have seen time and time again across the country.”
Costco raises prices slowly
Former Costco CFO Richard Galanti gave some rare insight into Costco’s gas pricing strategy during its second-quarter 2022 earnings call.
Essentially, the warehouse club chain does not raise prices on gas quickly. It then makes that up, but lowering them more slowly as wholesale costs fall.
“As prices went up or went, even went down a little bit, they didn’t go down as fast as perhaps they could have been, which gives us, in our view, an ability to make a little more and still be the most competitive,” he said.
Gas prices can fluctuate even in the same community.
“Gas prices within most cities vary from 13 to 33 cents per gallon for regular grade fuel,” Thomas Weinandy, principal research economist at Upside, an app that provides cash back on gas and other purchases, told WTOP News.
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Gas makes up about 10% of total Costco sales, according to the company’s annual report.
Costco takes its gas value proposition very seriously.
“Generally speaking, if gas prices start to increase, then we tend to see our value proposition resonate better with members, just because obviously we want to be the pricing authority on gas,” Millerchip said during the earnings call.
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Costco is growing its gas business
“Costco gas is wildly popular with members because of the cheaper prices,” GlobalData Managing Director Neil Saunders told The Arizona Republic.
The chain has also begun using new tools to manage its gas business.
“We’re now in the process of deploying AI tools in our gas business, which we expect will improve inventory management and drive incremental sales by ensuring we are always delivering the best value to our members,” CEO Ron Vachris said during Costco’s first-quarter earnings call.
Higher gas prices have already had a positive impact for Costco.
According to Gordon Haskett’s analysis of weekly and monthly foot traffic trends, visits to Costco gas stations “inflected sharply” in the week ended March 7, and continued to accelerate as prices moved higher,” CNBC reported.
This has happened before.
“If you’re curious how higher gas prices and inflation might affect Costco, 2022 offers a good analog. Back then, gas prices spiked after Russia invaded Ukraine, and prices rose due to supply chain constraints caused by the end of the pandemic,” reported The Motley Fool’s Jeremy Bowman.
That was good news for the warehouse club’s sales.
“Costco shone in that era. In the quarter ended Aug. 28, 2022, it reported comparable sales up 10.4%, adjusted for fuel prices, and 10.6% growth for the year ended that date, even as Costco had delivered strong results during the pandemic,” he added.
Costco gas FAQ:
Question: How does Costco’s gas pricing benefit members?
Answer: Costco offers fuel at lower prices than most local stations, helping members save money at the pump. The discounted gas also encourages visits to the warehouse, where roughly half of members who fill up also shop inside, giving access to Costco’s broader deals and products. Members can check local prices and hours through the Costco app, and stations are designed for convenience and safety.
Question: Why are Costco gas prices lower than other stations?
Answer: Costco treats fuel as a traffic-driving service rather than a profit center. This allows the warehouse club to sell gas at lower prices, encouraging members to visit the store. Even though gas is offered at thinner margins, members often shop inside during their visit, boosting overall sales.
Question: How can members check Costco gas prices before visiting?
Answer: Members can use the Costco app to view real-time gas prices at their local warehouse, check hours of operation, and see pump availability. This helps members plan trips efficiently and decide if the savings at the pump make a visit worthwhile.
Question: Does Costco make money on gas?
Answer: Gasoline is not Costco’s central product, so the company can operate with lower profit margins. While it does earn some revenue on fuel, the main benefit comes from drawing members into the warehouse, where they often purchase other items at higher margins.
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