Costco gas is famously a loss leader, typically running 15 to 20 cents below surrounding stations.
Is this true? I always assumed that Costco just had better deals/longer horizon commitments so it could undercut local stations. Maybe they even own a refinery just to maintain the best margin.
Weird. Costco is never the cheapest price for Coke in my area. Or the previous state I lived in. At least if you bought during sales at competing Supermarkets.
Where they win my Diet Coke business is that they are consistently a "good deal" - never the cheapest, but never the most expensive. And I don't need to wait for a sale to stock up.
I still buy soda from the local grocery stores when I happen by a deal when shopping for other things. But I don't go out of my way. The specials are usually much better than Costco though. By 25% or more per can.
Honestly this goes for most things I buy at Costco. Even in bulk, their per-unit costs beat the standard pricing at competitors - but never the sale prices. It just removes mental overhead. And the bulk prices are always better at a restaurant supply store. Where Costco wins in this area is curation so I can reduce mental load, but then again Costco does the bullshit where they stock something for 6mo out of the year and you spend an extra 20 minutes searching the store for it the next time you need it only realizing they stopped selling it. Then it appears randomly a month later.
They are a decent middle ground for me. I can buy 10lbs of chicken breast of decent quality for $2.99/lb I can toss directly into the freezer pre-packaged into meal-sized portions. Or I can buy 40lb boxes of bulk chicken breast for $1.39/lb from the supply store and spend a couple hours vacuum packaging it myself.
I definitely have a love/hate relationship with the place! I see Costco as the upper middle class consumerism version of nerd sniping.
I shop Costco because I don’t want to have to chase sales all over town. I did that in my 20s when money was tight but now I value my time more than saving fifty cents on chicken.
The soda thing is pretty crazy. I’ve mentally tracked it for about 20 years and Costco never beat supermarket sales for. Are brand soda. It was almost absurdly overpriced for something at Costco. Now their every day price is cheaper than the cheapest weekly deals.
20 years ago you could routinely find 12-packs for $2-$2.50 when bought in bulk. Today $5.50 is the best I’ve seen (48¢ a can). Costco is $15 for 35 (40¢ a can).
In my area, Costco is $15/35, BJ's is $19.49/35. Target is $8.99 normally, but the go on sale for 3/$20. (That's like one every 4-6 weeks, where it used to alternate between Coke and Pepsi bottler products weekly)
Sometimes other markets do the similar, but the prices are keeping up. I suspect that Costco has longer-term contracts, and the other retailers are stuck eating the increased costs for aluminum cans.
I don't know if this is how Costco itself thinks of it, but you can get to a pretty decent understanding of their financials by assuming they sell everything at cost and pocket the membership fees as profit. Their actual profits tend to be about 50% higher than that implies, but given the size of the rest of the business that means the membership fees are only about 2% of the revenue overall it's not a bad approximation.
They can twiddle with dropping a bit of price here and raising it somewhere else and still have the same ratio of cost.
Of course you can still think of things in terms of the cost per item versus the profit per item, but the stability of that ratio over many years makes me wonder if maybe Costco thinks of the membership fees that way.
It would be illogical to make gasoline a "loss leader" because, surely, there are people who visit the gas station and then jet out of there without going anywhere else. A loss leader item is something that gets people in the door, puts their butt in a seat, and gets them to make a transaction that will include piling on other stuff. So if your Jumbo Jack is a loss leader, then you can charge $2.00 for sodas and $3.00 for French fries, and the same customer will probably also grab a $6 Oreo shake.
Someone who's filling up for gas may or may not go inside the Costco store proper. But the gasoline isn't going to influence their buying habits. If they "just need gas" that's all they'll get.
Conversely, I cannot see how a $1.50 hot dog is doing anything but losing money. It's a classic candidate for loss leader.
The average Costco ticket is $150 out the door. The retail margin is 11%, or $16.50.
Say you fill the car with 15 gallons, and they lose $0.25/gallon. That’s $3.75. If 1/3 of the gas station customers go in the store, they’re making $5.50 from retail, less the gas losses they net $1.75.
They make money, deny their competition business, and lock you mentally into saving money on gas and renewing that membership. That membership is half their operating income.
I’m probably being pessimistic. One thing with Costco is they are incredibly efficient, so I’m sure they’ve baked out cost and overhead. You can see stuff like how they provide the minimum number of garbage cans.
They are selling 10000 gallons a day at some locations, so I find it hard to believe.
More like they don’t have a need to make a profit and they run the station in a barebones manner on real estate that they get as part of the larger site. So it would be a loss leader for anyone else.
It really doesn't sound good. A loss leader is meant to get you into the store; the gas station is usually far away, in the back of the parking lot.
Their $5 chicken now, that's a great "loss leader" (if it even is; that isn't confirmed). Because that forces you not just into the store, but all the way to the back. So you go in for the $5 chicken and leave with $20 of blueberries, $20 of cereal $20 of milk $20 of mayo.
During what I seem to recall was an earnings call about ten years ago, it was stated that Costco doesn't do loss-leaders. What they more likely do is sell the gas close to cost.
When you have a bunch of stores you do sign distribution deals with a nationwide distributor. If you buy enough fuel you might even be able to sign with an oil company that has refining capacity or their own distribution arm.
So Costco is definitely not paying the same price as your local convenience store. But they aren't getting a 35% discount either.
As many others have noted: Costco does not do loss-leaders. They're likely selling at cost or a very small profit above cost.
When we bought a house in 2021 I had 9.6kW of solar installed (and 20kWh of battery) and bought our first electric car. Since replaced it and have two electric cars now. At times like this I'm thankful for that. I make my own driving energy on my roof, covering over 80% of all driving and home electric usage.
Nobody is signing a national contract for gasoline. It all comes from the local refinery, or in some cases a pipeline to a slightly more distant refinery. The final shipping is by truck and it's almost never the case that you can find a different place that you could drive a truck to that's cost effective. Shipping guests. A few more miles by truck, it's only a few dollars different, and so it doesn't cost much difference per gallon. However, when we're talking 100 miles, now you're talking about significantly more money and that shows up in the pump price. Worse, even if you are willing to pay the price, every state has different specific rules for gasoline and so there is a very high odds that only your local refinery can make the correct gasoline for your local area.
What national chains can do is specify the additive that the refiner adds. Anyone other than a national chain doesn't have enough profit to be worth trying to build their own additive package and takes the standard additives the refinery has, which are almost always a good package anyway.
This is mostly wrong, sorry. Big chains absolutely do sign national or huge regional supply agreements for gasoline, e.g. Pilot/Flying J, Buc-ee’s, Sheetz, Costco, Sam’s Club, Speedway, etc.
You have two main errors: 1) conflating refineries with terminals 2) forgetting that fuel is a fungible financial product.
There are terminals all over the country, within trucking distance of the stations they serve. Those terminals can be supplied by a nearby refinery, yes, but also one or more distant refineries connected to a pipeline or via ship, train, or barge. There is an entire swath of the energy market called "midstream" that handles this.
Once a refined fuel gets into a terminal, its refinery of origin stops really mattering for contract purposes because of swaps. Exxon can supply gasoline in one market while Marathon supplies an economically equivalent amount somewhere else. Nobody is moving “Exxon molecules”. I mean, it literally all goes into the same tank if it's the same product. They (the terminal) just keep track of who supplied how much. The detergent package is also mixed in at the terminal loading rack, along with ethanol in the case of gas, not at the refinery.
Also, very few states actually have specific rules. California is the only real pain in the butt. You might be thinking of summer vs. winter blends, where the refiners adjust the vapor pressure to reduce emission in the summer and to increase ease of engine starting in the winter. This is something every refinery can and easily does.
Correct. Beyond that, doesn't matter. Go to where the fuel is the freshest (hasn't collected water, sat in a rusty tank for a long time, etc.). So, also probably Costco.
There is (usually) a logo on the pump. It's a standard that is vetted by an industry standards body[0].
If a gas station brand advertises Top Tier(tm) gasoline at all, every location must supply it. Diesel is location dependent and warrants more consideration.
Huh. Didn't realize it was actually standardized and not just a marketing claim.
I generally buy my gas at Kroger. I do buy premium as my car requires it. In some quick research just now I discovered that Shell is a major supplier of gas sold by Kroger, which bums me out as I have a long-standing personal boycott of Shell products.
SoftTalker says "as I have a long-standing personal boycott of Shell products."
What's your beef with Shell products?
BTW thanks for the post on Kroger: they've been tempting me with credit card offerings (lower gas prices and food discounts) recently and your post pushed their attempts into focus. Now I have a new quandary: Costco vs Kroger?
Costco isnt losing $10. They can sell gas at cost to run a gas station if they want to. They break even and get people there instead of a normal gas station.
Are you comparing cash-only prices to card prices? Some gas stations advertise cash-only prices with 20-30c added on for card processing fees—I've never seen Costco be more expensive then the card price
