Why Costco Gas is So Much Cheaper Than Other Stations

The Lowdown on Costco's Cheap Gas Prices

Filling up your gas tank can put a serious dent in your wallet these days. Gas prices fluctuate but remain high overall. That's why so many people head to Costco to fill up their tanks. Costco gas stations have a reputation for having some of the cheapest gas prices around. But why exactly is the wholesale retailer's fuel so affordable compared to other stations?

Costco's Business Model Allows for Cheap Gas

First and foremost, Costco is able to offer low gas prices because their core business model is entirely different from other gas stations. Most gas stations make the majority of their profits from fuel sales. But for Costco, gasoline is just one small part of their sprawling retail business.

The bulk of Costco's profits come from membership fees. Costco customers pay an annual membership fee for the privilege of shopping at the warehouse club. With millions of loyal members, those fees really add up for Costco. This gives them more flexibility with gas pricing compared to stand-alone gas stations.

Gas Functions as a Loss Leader

Not only is fuel a small part of Costco's overall business, but gas prices basically function as a loss leader for them. A loss leader is something sold below cost in order to attract customers and encourage additional purchases.

Costco gas stations typically sell fuel at razor thin margins or even at an outright loss. But Costco banks on the fact that customers stopping for cheap gas will also go inside the warehouse and buy higher profit items. So they are willing to take a hit at the pumps to drive more high-margin sales elsewhere.

Membership Fees Subsidize Cheap Gas

Costco can afford to sell gas at rock-bottom prices partly because those aforementioned membership fees help subsidize the costs. The $60 to $120 that customers pay in annual fees goes towards offsetting the low margins at the pumps.

Of course, members expect added value for their membership fees. And serious savings at the fuel pumps is one of the perks that keeps them renewing year after year. So cheap gas prices also serve as an incentive to maintain Costco's lucrative recurring revenue stream from memberships.

How Costco Keeps Gas Prices Low

Costco's unique retail model allows it to leverage cheap gas as a customer draw. But exactly how does it manage to acquire fuel at low prices in the first place? There are a few key supply chain factors at work enabling Costco to beat the competition's prices:

Direct Relationships With Refineries

Most gas station chains have agreements with jobbers, third-party fuel distributors that store and transport gasoline from refineries to stations. These middlemen have to take their own cut, marking up prices along the way.

Costco, on the other hand, eliminates the jobber middleman by dealing directly with fuel refineries and distributors. This saves money and allows them to pass substantial direct savings on to customers at the pump.

High-Volume Fuel Purchases

The other advantage of Costco's direct supply chain agreements is that they involve high-volume fuel purchases negotiated at corporate-level. Costco is able to leverage its size and vast distribution infrastructure to buy large quantities of wholesale fuel.

According to industry analysts, Costco likely gets allocated fuel at spot market prices not available to smaller independent gas stations placing smaller orders. Their fuel volume gives them special pricing and first dibs when prices dip.

No-Frills Stations Keep Overheads Low

Costco also keeps their fuel stations decidedly no-frills in order to maximize savings. Most locations have 16 to 24 fuel pumps without convenience stores or repair bays attached. Some sites don't even have attendants present to provide services like filling gas tanks.

These pared-down stations translate into much lower operating and labor costs compared to standard gas stations. With overheads kept very low, Costco can pass a higher portion of fuel savings directly to customers at the nozzle.

Strategies to Save Even More on Costco Gas

The standard prices at Costco pumps already beat most of the competition. But members who want to maximize their savings can employ some insider strategies to score the absolute lowest prices when filling up at Costco:

Time Your Fill-Ups Strategically

The cheapest times to fill up at Costco tend to be on weekday mornings, which see less traffic and therefore better fuel pricing. Prices tend to rise in the afternoons and evenings when most members fill up after work. It pays to schedule morning fill-up runs when possible.

Take Advantage of Any Instant Discounts

Certain Costco locations offer special instant discounts on gas purchases over a certain level. For example, spend $250 on an Executive Membership and save an extra $0.10 per gallon. Multi-gallon fills can net substantial savings through these instant rebates.

Pay With Your Costco Card

Members who pay at the pump using an eligible Costco credit card receive additional discounts per gallon. That's instant unadvertised savings on every fill-up just for paying with plastic. Costco Visa cardholders currently get an extra $0.10 off per gallon at U.S. stations.

Using these inside tips, Costco members have opportunities to further lower their fuel costs beyond the everyday low posted prices. Consistently filling up cheap at Costco does require some strategic planning. But the effort pays off nicely for savvy regular customers at the gas pumps.

FAQs

Why is Costco able to sell gas so cheaply?

Costco can sell cheap gas because fuel is a small part of their business, so they use it as a loss leader to attract customers. Their membership fees also subsidize the low cost. And they buy gas directly from refineries at high volumes to get better prices.

Is Costco gas good quality?

Yes, Costco gas is top-tier gasoline comparable to brands like Shell or Chevron. They sell regular, premium, and diesel fuel that meets top industry standards for quality and performance.

Do you have to be a Costco member to buy their gas?

Yes, a current membership is required to purchase gas at Costco pumps. They check membership cards at the entrance to verify active members.

What's the best day and time to buy Costco gas?

The best times to buy Costco gas for lowest prices are weekday mornings, especially earlier on Monday to Wednesday. Prices generally rise in the afternoons and peak in evenings around rush hour.