The ongoing conflict in Iran and an increase in normal seasonal demand have caused gas prices to rise.
“The spring break season is here as the national average for a gallon of regular gas has risen nearly 35 cents since last week,” according to AAA.
This is an opportunity for Costco, which has used low gas prices as a way to encourage people to join the warehouse club.
“You save about 20 cents a gallon at Costco compared to other local grocers,” David Schwartz, who co-wrote “The Joy of Costco” with his wife, Susan, told CNBC. “It’s something we’ve seen time and time again across the country.”
When gas prices go down, Costco doesn’t drop prices at the same rate it raises them when prices go up. This allows the company to recoup some of the profits lost by restocking when prices rise.
In theory, this eases some of the pain at the pump for Costco members as prices rise.
Former Costco CFO Richard Galanti defended the practice, discussing Warehouse Club’s gas business during their second quarter earnings call.
“I think part of the story is being overlooked because it seems like not only us, but the supermarket retailers and other discount retailers that operate a large number of gas stations, they’re also able to use it. As prices have gone up or gone, even gone down a little bit, they haven’t come down as quickly, which might give them some comparability and ability in our view.” said
Costco sells its Gold membership for $60. If you assume $0.20 per gallon in gas savings, simple math shows that joining a 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 shoppers are also more willing to visit the chain’s pumps.
Former Costco CFO Richard Galanti shared more color on China’s gas prices during the fourth-quarter earnings call.
Related: History of Costco: Company timeline and facts
He said: “Everybody wants to increase in gas, which, in our opinion, allows us to increase a little bit and still be more profitable.”
“We’ve seen our competitive spread against our direct competitors everywhere, on average, has gotten better over the last couple of years now that it’s in the — I’d say $0.30 range per gallon. Thirty is the average, which is up. That’s an average, and it can be anywhere from 10 to 45.”
