The Perk That Makes Costco Really Worth Joining

Membership has its advantages, especially when it comes to gas prices.

Aug 9, 2014 at 1:18PM

My wife and I joined Costco (NASDAQ:COST) this year. In doing so we joined more than 40 million others around the world who are willing to pay just to shop at the company's warehouse stores. With that membership comes a lot of privileges and perks. Near the top of the list is the money that we are saving on gasoline each year. It's the one perk that can really make a Costco membership worth the cost. 

  Costco Gasoline

Fueling savings
As of the end of last year Costco operated 548 warehouses in the U.S. and Canada. Of those locations, 414 had retail gas stations that offer members a discounted price on gasoline purchases. Lucky for me our local Costco is one of those locations with a gas station. Reason being, the discount on gasoline alone can easily offset my own membership fee each year. 

The other day when we purchased gas at Costco it was $3.11 per gallon. Other stations in the area surrounding Costco were charging, on average, $3.29 per gallon. That $0.18 per gallon savings can really add up. In our case it worked out to a nearly $2 savings to fill up our car. If that discount held throughout the year and we bought gas at Costco every other week we'd nearly offset our membership.

That's even before factoring in additional savings we get from using Costco' branded credit card and its 3% cash back on gasoline purchases at any gas station in the U.S. If we used the card on all our gas purchases over the past year that alone would have saved us the full cost of the membership and then some. Needless to say it's not hard to save enough on gasoline purchases alone to pay for a Costco membership.

Fueling membership
These savings are a big reason why Costco's gas stations are popular among its members. In fact, Costco gas stations pump out an average of more than $27 million in revenue per location. That's more than 10 times the sales of an average retail gas station in the U.S., which will typically have revenue of about $2 million each year.

Surprisingly, though, despite the discount, Costco actually makes money on gasoline sales. Its profits do fluctuate, but it is not a loss leader for the company. It can't afford to lose money on gas as it is actually a nearly $13 billion per year business for the company.

  Costco Members Only

Still, the gas business is there because it brings people to Costco. On the company's last quarterly conference call with analysts and investors Chief Financial Officer Richard Galanti had an interesting quote about its gas business: "[C]learly, gas brings you to the parking lot." That's why the company spends a lot of time comparing its gas price to competitors to make sure its price is as low as possible. Galanti noted that at some locations the company will comparison shop three to four times each day to make sure its gas price is the best of the bunch. The company wants its members stopping buy and getting gas, so that they will renew their memberships each year.

Final thoughts
A Costco membership has a lot of perks, but its gas business is a real tangible example of the savings of being a member. We typically don't remember what we paid for a gallon of milk last month, but most of us do remember what we pay for gas because gas prices are so visible from the roadside. Being a Costco member helps many to not only lessen the pain at the pump, but frequent shoppers can actually more than offset their membership just from the savings from buying gas at Costco. It's the one perk that makes Costco really worth joining for so many members.

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Matt DiLallo has the following options: long January 2016 $90 calls on Costco Wholesale and short August 2014 $120 calls on Costco Wholesale. The Motley Fool recommends Costco Wholesale. The Motley Fool owns shares of Costco Wholesale. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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