Everybody knows the basic tools in the Costco playbook for keeping prices low. The membership-based warehouse club stocks a limited amount of items and sells them in no-frills warehouses.
You won't get to pick between five different sizes of ketchup bottle and you may have to buy soda cans in a 24-pack and K-Cups in larger-than-grocery store quantities, but the overall price per serving will be low. Costco (COST) also uses its massive buying power to get its supplies to bring down costs, or at least in these inflationary times, eat some of the increase.
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The chain puts a lot of effort into managing its pricing including shopping its biggest rivals -- think Walmart (WMT), Amazon (AMZN), and Target (TGT) -- on a daily basis. Costco does that because it wants to make sure it's offering members a good relative value compared to the other places they might shop.
Costco, however, also has one big tool in its basket that Walmart has to a lesser extent, but Amazon, Target, and many (but not all) regional grocery chains don't have at all. The warehouse club uses that advantage to support lower prices for its members.
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Costco's Gas Profits Have Gone Up
Costco has seen its gas profits rise as gas prices have fallen. Essentially, when gas prices were climbing, the warehouse club did not pass on the full increase to its members in real-time. Now, that they have been moving in the right direction, the retailer hasn't passed the full savings onto its members either but it's doing that for a positive reason.
CFO Richard Galanti explained how the company was taking advantage of the gas situation during the chain's first-quarter earnings call.
"As it relates to gas, for several quarters now, even beyond a year ago, we talked about the gas profitability for us, and we believe our competitors -- other big chains of gas stations have made more in gas. And certainly, that's helped us use some of that to continue to hold prices where we can on some things," he said.
Essentially, instead of further lowering gas prices, Costco takes some of its increased profits from its gas stations and uses it to offset potential increases in other areas. That's a major advantage for the chain, which generally already offers the lowest gas prices in most markets, but it's not one that will necessarily last forever.
"Who knows what the new normal is? What we know is that not only is gas more profitable than it has been in the past, and like I said the same thing a year ago, will that change at some point? Maybe. We don't know," he shared.
Of its major competitors, only Walmart also sells gas. Amazon and Target do not operate gas stations.
Gas Gives Costco Another Edge
Members, at least in many markets, can offset the cost of joining Costco by regularly buying gas at the warehouse club. A saving of $0.10 per ten-gallon fill-up once a week nearly does that it produces $52 in savings when a basic Gold Star membership costs $60.
Inflationary times where consumers are more conscious of price have driven Costco's gas sales higher.
"So, right now, it's good. And by the way, as we've mentioned a couple of times, we've seen strong gallon sales, and we're still taking market share. When the U.S. gallon sales are generally close to flat, we're up in the 10% to 15% range in gallons," Galanti said.
Selling gas also drives other sales, according to the CEO.
"So, we're driving people into the parking lot. And the fact that gallons of gas are profitable, that there's just a little bit more for us as well. So, that's helped us. There's always things that are going to help us, and there's always going to be puts and takes," he added.
