The ongoing conflict in Iran and normal seasonal demand increases have caused gas prices to climb.
“Spring Break season is here as the national average for a gallon of regular gasoline jumped nearly 35 cents since last week,” according to data from AAA.
That’s an opportunity for Costco, which has used low gas prices as a way to entice people to join the warehouse club.
“You save approximately 20 cents a gallon at Costco over other local vendors,” David Schwartz, who, together with his wife Susan, authored “The Joy of Costco,” told CNBC. “That’s something we have seen time and time again across the country.”
When gasoline prices fall, Costco does not lower prices at the same pace it raises them when prices are climbing. This allows the company to recoup some of the profits lost by doing the reverse when prices rise.
In theory, that alleviates some of the pain at the pump for Costco members as prices climb.
Former Costco CFO Richard Galanti defended that practice, discussing the warehouse club’s gas business during its second-quarter earnings call.
“I think part of that story has been thrown away because it seems that not only us, but the supermarket retailers and other discount retailers that operate large numbers of gas stations, they’ve been able to use it too. As prices went up or went, even went down a little bit, they didn’t go down as fast as perhaps they could have been, which gives us, in our view, an ability to make a little more and still be the most competitive,” he said.
Costco sells its Gold membership for $60. If you assume $0.20 per gallon in gas savings, simple math reveals that joining the warehouse club is worth it for the gas savings alone.
Every five gallons saves you $1, so 50 gallons is $10 in savings, and 300 gallons equals the price of your membership. As gas prices rise, Costco customers are also more willing to drive farther to visit the chain’s pumps.
Former Costco CFO Richard Galanti shared more color on the chain’s gas pricing during its fourth-quarter-earnings call.
Related: History of Costco: Company timeline and facts
“Everybody seems to be wanting to make more in gas, which allows us, in our view, to make a little more and still be even more profitable,” he said.
“We’ve seen our competitive spread versus our direct competitors at every location, on average, improve over the last couple of years to now be in the — I want to say the $0.30 range per gallon. Thirty is the average, which is up. It’s an average, and it can range from 10 to 45.”
