How Costco Keeps Gas Prices So Low
Costco keeps gas prices significantly lower than competitors (9-24 cents cheaper per gallon) by operating on razor-thin margins, viewing discounted gas as a membership retention tool rather than a profit center. This strategy drives record fuel demand and warehouse traffic, with 50% of gas customers also shopping inside, generating substantial loyalty and spending that far exceeds the minimal gas profits.
Summary
Costco has become a major destination for discounted gasoline, with demand reaching record levels during its fiscal third quarter. The company typically sells gas at approximately 9 cents cheaper than local competitors and 24 cents below statewide averages. Unlike traditional retailers, Costco operates on very thin margins at the pump, making only a couple of cents per gallon, because the primary goal isn't profit generation but rather member retention.
Costco's business model relies heavily on membership fees, which generated over $5 billion in 2025, representing nearly 66% of the company's net income. This revenue structure allows Costco to use gasoline—similar to its famous $1.50 hot dog combo—as a loss-leader or break-even product that incentivizes customers to maintain their memberships and visit warehouses more frequently.
The strategy is demonstrably effective: demand for Costco gas showed double-digit growth even when national gasoline consumption was flat or declining. Many warehouses require multiple daily fuel deliveries to meet demand, with customers lining up around the block. Analysts estimate that 50% of customers who visit for fuel also shop inside the warehouse, and members typically spend nearly $3,200 annually at Costco. Record gas sales in the third quarter also brought many first-time fuel customers to Costco, expected to drive future loyalty.
Other warehouse retailers like BJ's and Sam's Club employ similar strategies. Costco recently expanded this approach by opening its first stand-alone members-only gas station in California without an attached warehouse, with a second location planned for Hawaii in 2027. For Costco, gasoline serves as a competitive advantage tool to earn and maintain member loyalty during periods of volatile fuel prices.
Key Insights
- Costco generated more than $5 billion from membership fees alone in 2025, an amount equivalent to nearly 66% of its net income, allowing it to operate gas stations on minimal margins without maximizing pump profits.
- Costco experienced double-digit growth in gas consumption while overall US gasoline consumption was flat to down, indicating customers are specifically choosing Costco despite general reduced driving patterns.
- Analysts estimate that 50% of customers who visit Costco for fuel also go inside the warehouse, and members typically spend nearly $3,200 a year at Costco, making the gas strategy a traffic driver for higher-margin warehouse sales.
- Demand for Costco's discounted gas was so strong during the third quarter that many warehouses required multiple gas deliveries each day to serve members lining up around the block.
- Costco expanded its gas strategy by opening its first stand-alone members-only gas station in California not connected to a warehouse, with plans for a second location in Hawaii in 2027.
Topics
Transcript
[0:00] Gas prices are rising again, following the effective end of the ceasefire between the US and Iran. And as Americans look for more ways to save money at the pump, many are heading to one of the country's most popular destinations for cheap gas. >> Gas here at Costco so much cheaper. If you're a member, the gas discounts are worth the price of admission alone. >> Demand for Costco's discounted gas reached record levels toward the end of its fiscal third quarter. In fact, demand was so strong that many warehouses required multiple gas deliveries each day to serve members, [0:30] who often line up around the block just to fill their tanks. >> Against the backdrop of…
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