Costco opens first standalone gas station in California, undercutting rivals by 71 cents per gallon

Author: Daniel Kline Read time: 5 min

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When I lived in Connecticut with my wife, our house was about three miles from a Costco that itself wasn't near much except for Target. To get there, we passed at least three gas stations, and in the other direction, there were two within a mile of our house.

Costco always had the best prices, but unless I was planning to shop at the warehouse club, I had to factor in not just price but also the value of my time.

Costco CFO Gary Millerchip acknowledged that the chain is generally not the closest gas station for members, meaning they must weigh the value of making an extra trip.

"When prices are higher, that will tend to cause members to maybe take the extra mile that it might involve to get to the gas station because of the incremental value they see there," Millerchip said during the chain's second-quarter earnings call.

However, the warehouse club has quietly made a move that may have 7-Eleven, Circle K, Casey's General Stores, Murphy USA, and BP America — the five largest gas station and convenience store chains in the U.S., according to CSP Daily News — at least a little concerned.

Costco's Gas Station Plan Has Been Simple

Traditionally, Costco uses low-priced gas to drive members to its warehouse clubs, and that has been an effective tactic, according to Millerchip.

"Generally speaking, we see about half of the members who will shop at the gas station will also cross-shop at the warehouse," he said.

While Costco has no set discount or specific amount of savings it wants to offer customers, it is consistently cheaper than rivals.

"You save approximately 20 cents a gallon at Costco over other local vendors," David Schwartz, who co-authored "The Joy of Costco" with his wife Susan, told CNBC. "That's something we have seen time and time again across the country."

Only members can use Costco gas stations, and they must pay with a credit or debit card. — Shutterstock

Costco Changes Its Gas Station Model

Gas makes up about 10% of total Costco sales, according to the company's annual report.

Costco has long treated gasoline as a membership benefit rather than a major profit center. Because the company earns billions annually from membership fees, it can afford to keep fuel margins thinner than many traditional convenience-store chains.

Costco takes its gas value proposition very seriously.

"Generally speaking, if gas prices start to increase, then we tend to see our value proposition resonate better with members, just because obviously we want to be the pricing authority on gas," Millerchip said during the earnings call.

The standalone stations suggest Costco may also be exploring another role for fuel: bringing its value proposition closer to members who do not live near a warehouse.

Standalone Gas Stations: A New Strategy

Costco has opened a new stand-alone gas station in Mission Viejo, California, C-Store Dive reported.

"Regardless of Costco's long-term plans for standalone gas stations, the new Mission Viejo location will almost certainly put pressure on nearby convenience retailers, which are unlikely to match the wholesaler's aggressive fuel pricing," the news site shared.

According to Costco's website, the station is selling regular gasoline for $4.59 per gallon — roughly 71 cents below the Orange County average, according to AAA.

Costco also has plans to open a second stand-alone gas station in Hawaii, but the company has not commented on its overall plans in this area.

Retail analysts say that if Costco expands its standalone gas strategy, competing chains may feel pressure to respond.