As gas prices continue to rise across the United States, Costco has become a popular destination for affordable fuel. The wholesale giant’s gas stations are seeing unprecedented demand, with some locations requiring multiple tanker deliveries daily to keep up with customer needs.

Costco’s Business Model

Costco’s strategy for offering cheaper gas lies in its unique business model. Unlike many independently owned gas stations that rely on a 25- to 35-cent markup per gallon to cover overhead costs, Costco operates on a much lower profit margin. The company makes only a few cents per gallon, thanks to its massive scale and membership-based approach.

Membership fees are a significant source of revenue for Costco, accounting for about two-thirds of its profit. This allows the company to sell products, including gasoline, at or near cost. In some cases, Costco even sells items below cost, such as its famous $1.50 hot dog and soda deal, to draw customers into its warehouses.

Impact on Local Gas Stations

Local gas stations often struggle when prices rise, as customers tend to buy less fuel, limiting the stations’ ability to increase prices. In contrast, Costco benefits from increased sales volume when gas prices are high, although this can squeeze its overall profit margins.

Last year, when gas prices were lower, Costco’s gas sales contributed positively to its gross margin. However, in the most recent quarter, higher prices led to a slight decrease in the company’s profit margin. Despite this, Costco remains optimistic about the long-term benefits of increased customer loyalty and foot traffic in its stores.

Driving Customer Loyalty

Costco’s strategy extends beyond just gas sales. The company has seen a 5% increase in foot traffic at its warehouses, as many customers who fill up on gas also shop inside. Popular items like rotisserie chickens, priced at $4.99, are strategically placed at the back of the store to encourage additional purchases.

Recognizing the financial strain on customers due to higher gas prices, Costco has offered discounts on other essentials, such as meat and eggs, to provide added value to its members. The company believes these efforts will foster greater loyalty among its customers, even if gas prices eventually decrease.

While some analysts and investors remain skeptical about Costco’s ability to maintain its momentum if gas prices fall, the company is confident that its approach will continue to drive long-term growth and customer satisfaction.

Original reporting: KRDO (Colorado Springs metro) — read the source article.