Why Costco benefits from higher gas prices

The company prices its own gas lower in hopes it will increase shoppers' visits to its stores.

By Kim Peterson Mar 5, 2012 4:48PM
Image: Filling fuel tank (© Corbis)Rising prices at the pump make retailers' hearts sink. Wal-Mart (WMT) gets hit hard, for example, as shoppers make fewer trips to the store and have less room in their budgets.

But Costco (COST) is one of the few retailers that do better as gas prices rise, writes analyst Mark Miller at William Blair & Co.

"With the typical seasonal uplift in gas prices leading up to Memorial Day, and with uncertainties in the Middle East, we now believe that gas prices should be a neutral, or potential positive, factor to Costco's sales going forward," Miller writes in a report Monday. He raised his rating on the stock to "outperform" from "market perform."

Costco shares traded up more than 1% Monday afternoon to $87.41. The stock is up more than 3% this year.

Costco benefits from higher gas prices because it sells its own gas at between 6 cents and 12 cents below the market price, according to Trefis. You can't buy gas there without a membership, and for some people it's a no-brainer to become a member just for the gas discount.

Let's say you have a car with a 17-gallon tank capacity. Filling up the tank completely at Costco might save you $1 to $2 each time -- probably enough to justify the $55 annual membership fee. And you get to buy enormous jars of pickles to boot.

Costco sells discounted gas on the expectation that it will lead to more visits and higher revenue in its stores. The company beat expectations last week for its second-quarter earnings, saying profit rose 13% while same-store sales increased. Shoppers spent 2.4% more per visit in the quarter, and visit frequency rose 5.2%.

Even after raising membership fees at the end of last year, Costco executives say the renewal trend is the best in the company's history, Miller writes after speaking with management. The company is aiming to increase first-year renewals and get new members to visit at least three times.

Tags: COSTWMT
21Comments
Mar 6, 2012 10:31AM
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first, there is no honest reason for gasoline being as high as it is. second, many people will spend $4.00 in gas to save $2.00. if you don't believe me look around. look at things you do.
Mar 6, 2012 5:03AM
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The real genius gets 3% back on that card they PAY OFF each month, for the usually better than average price of fuel... and also pays nothing for the Costco membership, by getting 2% cash back INSIDE (with the $110 membership), or the $ difference back (yes, I've earned $300 on my $100 membership). And I've been to most of America, with no need for any Costco.... but I sure do like their stock, and I do believe that's the common denominator -ahem- here on MONEY.MSN

Mar 6, 2012 12:32PM
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I was excited buying gas at Costco on Sunday.  While all the other stations in town were running $3.95-$3.99, Costco gas was $3.69.  Doesn't take a genius to see a savings of 26 to 30 cents per gallon.  I bought 19 gallons and saved $5.70 for something I needed anyway.  Great savings!  I used my debit card since Costco doesn't take Credit Cards so I didn't pay any additional in interest.  Even with paying a membership fee, the check I get back for my 2%  cash back more than totals the cost of membership.  Very pleased with my Costco savings! 
Mar 6, 2012 8:49AM
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Maybe I missed something in the report, but I think it is about spending power of average people.
Middle class and lower can not afford to shop at even low budget stores because more monies need to be diverted toward higher fuel costs. The upper middle class and up are trying to save a buck also by trying to buy items in bulk. The best way I find is to put up on line the prices of gas stations in route to were I am headed to see who is the cheapest. Costco most of the time does not fit the bill. There is a lot of competitiveness out there, just have to find it. There are two things being built out there faster than any thing else. One are still banks, you can see them on every street corner. Second are gas stations with a mini mart. I guess in hard times these two entities are the cash cows for the times.
Mar 6, 2012 10:27AM
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Yes, Costco use to keep their gas prices artificially lower until last month. ARCO gas prices are 5 to 10 cent lower  then Costco. I save money at ARCO on gas, not at Costco. Check the records of the gas price App.'s and you will see the price change.
Mar 6, 2012 12:59PM
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Everyone that drills, refines it, and sells  it at the pump makes greater profits when the price goes up.
Mar 6, 2012 12:09PM
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Alright, I have worked at Costco for almost 14 years now.  Costco loses money when the price goes up!  Ex.  the local Arco replenishes their supply once a week.  Costco gets a shipment everyday.  The gas Arco has on day 7 was purchased for 3.00/gallon.  Costco has to purchase on day 7 at 3.10/gallon.   Costco does a "comp shop" every morning within a 5 mile radius (at PDX) to determine its price.  So while Arco is selling their 3.00 gas for 3.10 and making a profit, Costco has to match and break even on the price alone.  It is a loss leader in some cases.  
Not to mention, most Costcos now have top tier gas.  That makes us 10-20 cents cheaper than Shell or Chevron.     
Mar 6, 2012 9:34AM
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not so here in cleveland area.costco stores only match price within 3 miles of store.,,many times I can get it cheaper.I think that since we pay a membership fee we should get it cheaper than any place else in the area or just boycot stores.Lets think about it!!!!!!

 

Mar 6, 2012 9:01AM
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The Costco store is 25 miles from home. The rising cost of gas is going to force us to cancel the membership. No savings when you include travel.
Mar 6, 2012 9:17AM
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Mary Mary we are talking about Costco not Costa. That may be your problem!
Mar 5, 2012 9:38PM
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Well, it's not very practical to join Costco when they don't have any stores, except in the big cities, especially if you live in a rural area.  KC is the closest one to us, 150 miles away.  Even Tulsa, OK doesn't have a Costco.  I guess they only build those stores in large population areas.
Mar 7, 2012 1:38AM
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If you have your membership at Costco, You have the option to get your membership as a American Express account. There is no additional charge for this card.

But, make sure you get the American Express Rewards card.

You will get 3% rebate on your Gasoline purchases at any brand station that takes AMEX.

This discount also applies at the Costco stations. The rebate is payable annually by a Costco check. It can be cashed only at Costco for cash or towards your purchase.

Aug 29, 2012 11:28AM
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I almost never check gas prices. Mainly because my car uses so little. On average, I fill the tank once every other month. Maybe somewhere down the road it will have some significance, but for now, my car & motorcycle both get the same MPG's
Mar 6, 2012 12:58PM
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Read the articles in the last few days about Wal Mart and their Sams Clubs, paying warehouse workers in New Mexico $3.00 an hour. After your done digesting that bit of information return to the blogs and expel the virtues of being a Sams Club member.  The Wal Mart execs should be put in prison along with the quasi owners of their warehouse operations. 
Mar 6, 2012 9:14AM
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Since BJs also sells gas then I believe all the prior comments apply to a BJs membership.
Mar 6, 2012 11:41AM
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COSTCO DOESN'T ALWAYS HAVE THE  LOWEST COST GAS. NORMALLY IT IS  EQUAL TO OR  .01 CENTS LESS THAN  OUT ON THE STREET. THIS IS BASED ON  HOOVER (BIRMINGHAM) ALABAMA. DO THE MATH AND SEE WHO'S FOOLING WHO. A $50 DOLLAR MEMBERSHIP EQUATES TO 5,000 GALLONS DIVIDED BY 20 GALLONS A TANK EQUALS 250 FILLUPS. DO YOU BUY THAT MUCH GAS?
Mar 6, 2012 10:14AM
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yes, this is not true in Royal Palm Beach either. They match the clostest station in the area or maybe 1 cent lower....but than you factor in the rebate you get each year as a business member and if you buy it on the American express credit card you are getting it cheaper...but you wait like a year to get it back......
Mar 6, 2012 1:46AM
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Newsflash Mr author:  Wall Mart--Sam's Club--sells discount gas as cheap as Costco.
Mar 5, 2012 8:24PM
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Just don't bring any cash only credit cards are accepted at the gas station. most cards have a 21 to 30% interest rate.  Why can't a business in the US accept US currency.
Mar 6, 2012 12:31PM
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Um, Sam's Club does the exact same thing. Why the article only on Costco?
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