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Experts explain why Costco is cutting gas prices much more and faster than other major chains

Costco gas station
Posted at 5:26 PM, Apr 08, 2022

SAN DIEGO (KGTV) — While Costco has always been one of the cheaper options for gas, they seem to now be cutting gas prices by a much larger amount and much quicker than the major gasoline chains. Friday, the cost of regular at local Costco locations was $5.29, which is about 56 cents lower than the San Diego County average. While the average price has dropped 15-20 cents from the peak in March, Costco has lowered its already cheaper prices by more than twice that amount.

“Almost every station on GasBuddy's list of lowest prices in San Diego is now Costco," industry analyst Patrick De Haan of GasBuddy told ABC 10News.

De Haan says prices should be dropping significantly at all gas stations in California because most of the refinery issues that had helped spike prices are over. But while other gas chains are dropping prices gradually, De Haan says Costco is cutting prices aggressively. “I think they’re passing down inevitable discounts much faster. Cheers to Costco for bringing down prices.”

There are several reasons why Costco can charge less. One is that its business model on all of its products is to take a lower margin. Second, because Costco sells so much gas so quickly, it does not have to sit on inventory. While other stations may still be selling gas they bought at peak prices one or two weeks ago, Costco is likely selling gas it purchased more recently and at a lower price.

But while that may explain how Costco can charge less, it still doesn't explain why. After all, even if they raised prices a quarter a gallon tomorrow, Costco would still be one of the cheapest options in most local communities.

Economics professor Alan Gin from the University of San Diego believes the motivation for Costco's aggressive gas price strategy has to do with how Costco makes its money. “The bulk of their profits come from memberships," he explained. Gin says up to 70% of Costco's profits come from the $60 or $120 (depending on the category) that customers pay for the right to shop at its warehouses. “They can afford to take some losses on the chicken and the hot dogs, and now maybe even the gas, if that gets people to sign up then for these memberships," Gin said.

De Haan thinks Costco may be taking enough business from other stations that they will have to drop prices faster than they would like. “This is terrific for motorists. My hats go off to them cutting their prices much faster, which will likely in turn cause more aggressive price decreases at the competition.”