How Costco sells such cheap gas

Customers pump gasoline at a Costco Wholesale gas station on March 18, in San Diego, California. (Credit: Kevin Carter/Getty Images via CNN Newsource)

In its 50-year history, Costco has never seen such demand for gas.

Many of its stations have been so overwhelmed that they’ve had to call in tanker trucks multiple times a day to avoid running dry, Costco said this week during its quarterly earnings call. A growing number of customers are buying just enough to top up their tanks, concerned about what tomorrow’s prices may be.

As prices have surged above US$4 across the U.S. – and above US$6 along the West Coast – Costco has become America’s destination for cheap gas. Well, relatively. Costco routinely undercuts local gas stations by around 30 cents a gallon.

That’s an enticing bargain at any time, although long lines sometimes dissuade customers, especially when gas is inexpensive. Not now: A significant number of Costco members filled up for the very first time over the past three months, Costco said on that earnings call.

How – and why – does Costco sell gas for so cheap? It’s all about chickens. Well, kinda.

Not a ‘loss leader’

Costco actually makes a profit on gas – a few cents per gallon. That’s substantially lower than the 25- to 35-cent markup that most gas stations take.

Unlike most gas stations, which are small, independently owned and operated businesses – maybe with an attached convenience store or a repair shop – Costco can rely on its massive scale and membership model to drive profit.

Last year, membership fees accounted for roughly two-thirds of the company’s profit. Costco sells most of its products the same way it sells gasoline: at or just above cost – and sometimes below, like its famous $1.50 hot dog and soda deal.

Competing gas stations need the markup to pay for overhead and repairs. When gas prices rise, customers buy less of it, keeping a relative cap on the amount they’re able to charge.

That’s why, ironically, when gas prices are high, most gas stations struggle to make money.

Costco has a different problem: When gas prices are high, Costco sells more gas. But, because gas is among its lowest-margin products, the company’s overall profit margin gets squeezed. The opposite is true when prices are low.

Last year, when prices spent a considerable amount of time under US$3 a gallon on average, gas added about a tenth of a percentage point to the company’s gross margin. Last quarter, gas subtracted two tenths of a point.

Nevertheless, it’s a good problem to have. Costco said it brought in US$2.3 billion less in gas sales in 2025 than the year before because prices got cheaper.

Costco has 747 gas stations, which brought in 10 per cent of its overall sales last year.

A chicken driver

Where do the chickens come in?

Costco says about half of its filler-uppers end up walking into a warehouse. As a record number of members visit Costco’s gas stations, foot traffic at stores increased around 5 per cent. And customers are buying more when they shop, too.

“We believe this will drive even greater loyalty with these members in the future as members who use our gas stations typically spend more with us in the warehouse,” said Costco CEO Roland Vachris on a conference call with analysts Thursday, during which gas was mentioned 72 times.

Vachris said customers were stretched this past quarter, because they were allocating a higher percentage of their paychecks to gas. But that gave Costco an advantage: its competitive prices.

Among its best-selling how-can-they-sell-it-this-cheap products: rotisserie chickens, which Costco sells for US$4.99 – way undercutting local supermarkets. And they’re sold at the back of the warehouse, forcing customers to navigate the aisles – and probably pick up some other items along the way.

Recognizing the moment, Costco extended discounts on meat and eggs (also sold at the back of the warehouse) to members to drive more customers into the warehouses.

“We saw it as an opportunity, recognizing that our members were dealing with higher gas prices, to really invest in increasing value to the member,” said Gary Millerchip, Costco’s chief financial officer, on the call.

The question is whether Costco can hang onto those gains when gas prices fall again. The trends work in Costco’s favor when gas prices rise – but they work in reverse when they fall.

The company remains hopeful that the momentum it built in recent months can continue to, even if gas prices fall.

“Over time, it’s a great way to build loyalty,” Millerchip said. “We do think it’s a good, healthy barometer of long-term growth for the business.”

Analysts were skeptical. So were investors. The stock fell nearly 4 per cent Friday.