Why is Costco Gasoline Cheap?—The Business Model of "Low-Cost Fuel" Created by a Membership-Based Retailer

Every time gasoline prices rise, there's a place that gains prominence among American consumers. It's not the street corner stations with oil major signs, but the Costco gas stations set up in a corner of their massive parking lots. At many locations, lines of cars waiting to refuel form. Customers buy household goods and groceries in bulk at the warehouse store and fill up on gas as well. However, from a business perspective, this "as well" is precisely what supports Costco's strength.

The reason Costco's gasoline is cheap can be summed up in one phrase: "They are not aiming for maximum profit from gasoline alone." Of course, this doesn't mean they are recklessly selling at a loss. The important point is that for Costco, gasoline sales are not only a standalone revenue source but also a strategic tool to increase membership, boost store visit frequency, and drive purchases at the warehouse store.

Typical gas stations make profits not only from fuel sales but also by selling beverages, snacks, cigarettes, car washes, and car accessories in their attached convenience stores, balancing overall profitability. Location and convenience are often reflected in the price. In contrast, Costco's gas stations are often located within or adjacent to the membership-based warehouse store premises. The already existing massive store, parking lot, logistics, and membership base allow the gas station to function as part of the customer attraction pathway.

Costco itself explains that the gasoline business increases traffic to the warehouse stores. In the company's annual report, gasoline is positioned as one of the ancillary businesses to the warehouse, and it is noted that while the gross margin of the gasoline business is lower compared to non-gasoline businesses, the selling and administrative expense ratio is also lower. In other words, gasoline is not a product that earns high margins but rather one that is sold in large volumes at low costs.

This structure aligns well with Costco's core membership model. Members pay an annual fee to gain the right to buy cheap products. The store can maintain a stable revenue base through membership fees even if it keeps the profit margin per product low. Costco's membership revenue reached about $5.3 billion in 2025, with a renewal rate of over 92% in the US and Canada. The low gasoline prices serve as a clear benefit supporting this membership renewal rate.

For example, if gasoline is 20 to 30 cents cheaper per gallon, the savings are significant for households that use cars regularly. For households with high annual fuel consumption, the savings on gasoline alone can cover a substantial portion of the membership fee. Consumers feel they "get their money's worth even with the membership fee," and for Costco, a cycle is created where "they renew because of the gasoline" and "they shop while stopping for gasoline."

Another factor supporting low prices is thorough operational efficiency. Costco's store model has grown by purchasing a limited number of items in bulk and selling them at low costs in large warehouses. They strip away lavish interiors and complex services, competing on sales volume and turnover rate. This philosophy is also reflected in their gas stations.

The product lineup is simple. In many locations, they focus on limited fuel types such as regular, premium, and in some cases, diesel. Self-service is the norm, with card payments being central. The flow of the fueling lanes is designed to be one-way to reduce vehicle congestion. By lining up many pumps and serving many cars in a short time, they can lower the operational cost per gallon.

Furthermore, being membership-based itself contributes to efficiency. Unlike stations open to everyone, customers are limited to Costco members. The attributes of customers coming for the price are easier to read, and demand forecasting is simpler. If many customers combine store visits with refueling, the efficiency of parking lot and site utilization increases. The fact that gasoline sales are incorporated into the economic zone of the warehouse store, rather than being standalone, is a significant difference from competitors.

However, just because it's cheap doesn't mean the quality is compromised. Costco explains that its Kirkland Signature gasoline meets TOP TIER standards. On its official US page, the company promotes that its gasoline contains detergents exceeding EPA standards, and it is also introduced as TOP TIER approved gasoline in Japan. Since there is a tendency for consumers to suspect "cheap fuel might be of low quality," quality assurance becomes an essential element supporting the low-price strategy.

On social media, there are both support and skepticism regarding Costco's gasoline prices. On platforms like Reddit, comments such as "cheaper than the local lowest price" and "sometimes several cents cheaper than other stations" are common, and many users choose Costco for the price difference. On the other hand, reactions like "if I wait 20 minutes to save a few dollars, my time is worth more" and "seeing long lines makes me hesitate to use it" are also present.

This reaction well reflects the essence of Costco gas. Consumers are not just looking at the price per gallon. They are considering the savings amount, wait time, planned shopping at the store, membership fee, car fuel efficiency, and tank capacity to comprehensively judge whether it is beneficial. For those who own large SUVs or trucks and refuel frequently, there are significant benefits. However, for those with small tank capacities, minimal price differences with nearby stations, and long wait times, it may not necessarily be the optimal choice.

Nonetheless, what matters to Costco is not being the perfect choice for everyone. It is sufficient if enough members feel "it's cheap," "the quality is reliable," and "it's convenient while shopping." Gasoline is a product where prices are easily noticed daily, especially during price increase phases, appealing to consumer psychology. Price differences in groceries and daily necessities tend to be obscured in the overall shopping, but gasoline prices are easy to compare on roadside signs and apps. Therefore, the impression of low prices remains strong.

In recent years, Costco has been increasing its investment in gas stations. By the end of 2025, it operated 747 gas stations worldwide, with the gasoline business accounting for about 10% of total sales. In the US, there are also attempts to develop standalone gas stations not attached to warehouse stores. The standalone facility planned in Mission Viejo, California, could pose a threat to conventional convenience store-attached stations as a large refueling hub exclusively for members.

If standalone gas stations spread, Costco's strategy will shift a notch. While "refueling while shopping" has been the focus, there is a possibility that "acquiring members through refueling" will become even stronger. In phases of soaring fuel prices, the cheapness of gasoline itself becomes an advertisement. Consumers search for savings, find a nearby Costco, and discover reasons to become members. Costco can use this touchpoint to guide customers into a broader membership economy, including warehouse stores, online sales, tire centers, pharmacies, and travel services.

What is troublesome for competitors is that Costco is not playing the same game with gasoline. While typical gas stations compete on the profitability of fuel sales and in-store sales, Costco competes on comprehensive customer value, including membership fees, bulk purchases at warehouse stores, private brands, credit cards, and service businesses. If competitors try to match prices, their profits will be eroded. However, if they leave the price difference as it is, cost-conscious customers will be drawn to Costco.

Of course, Costco's model has weaknesses too. Firstly, the congestion at gas stations. As repeatedly pointed out on social media, long lines offset the savings effect. Even if they increase the number of pumps, extend hours, and improve traffic flow, congestion will recur if popularity rises. Secondly, being membership-based creates a hurdle for non-members to use. Thirdly, in phases of falling gasoline prices, sales amounts may be pushed down, negatively affecting financial visibility. In fact, Costco explains in its annual report that falling gasoline prices have negatively impacted sales.

In the long term, the spread of electric vehicles and changes in environmental regulations cannot be ignored. If gasoline demand structurally decreases, the effectiveness of using gas stations as customer attraction tools may diminish. However, in the US, car dependency varies by region, and gasoline demand will not disappear quickly. During the transition period, price-sensitive consumers may increasingly seek cheaper refueling options. For Costco, even if gasoline is not an eternal growth source, it will remain a powerful tool to enhance membership value for the time being.

From a business perspective, Costco's gasoline strategy is not "discount selling" but "designing a revenue structure." By putting forward products with low gross margins, they increase customer visit frequency, enhance member satisfaction, and connect it to membership fee income and in-store purchases. Consumers head to Costco thinking they are saving on gasoline costs, but in the process, they enter the store, buy daily necessities, and naturally accept membership renewal as the obvious choice.

Costco's strength is not just in selling cheap fuel. It is in having a mechanism where the entire business can operate even when selling cheap fuel. The more gasoline prices squeeze household budgets, the more sensitive consumers become to price differences. At that time, Costco's gas stations function not just as a service but as an entry point to membership-based retail. The lines are both a source of dissatisfaction and evidence of demand.

At the end of the line of cars seeking cheap gasoline, there is more than just profit from fuel sales. There is a unique Costco business model that encloses members, habitualizes visits, and ingrains the impression of low prices in daily life. That's why Costco can sell gasoline cheaper than competitors. And for competitors, more than the low prices, the mechanism that makes those low prices possible is the real threat.

Source URL

Costco 2025 Annual Report / SEC Filings
Used to confirm that the gasoline business accounts for about 10% of total sales, operates 747 gas stations by the end of 2025, encourages store visits, and details on membership revenue and renewal rates.
https://www.sec.gov/Archives/edgar/data/909832/000090983225000101/cost-20250831.htm

Costco Company Profile
Used to confirm that Costco operates self-service gas stations in multiple regions, including the US, Canada, and Japan.
https://investor.costco.com/company-profile/default.aspx

Costco Gasoline Our Fuel Promise
Used to confirm that Kirkland Signature gasoline meets TOP TIER standards and promotes detergent additives.
https://www.costco.com/fuel-promise.html

Costco Fuel Q&A
Used to confirm explanations about fuel quality, types of fuel handled, and procurement from major refiners and distributors, as well as the premise of membership-based refueling.
https://www.costco.com/f/-/gasoline-q-and-a/

Costco Japan TOP TIER Approved Gasoline
Used to confirm explanations about TOP TIER approved gasoline and diesel in Japan.
https://www.costco.co.jp/gasoline-toptier

C-Store Dive
Used to analyze Costco's standalone gas station plans, the facility overview in Mission Viejo, and the impact on competing convenience stores.
https://www.cstoredive.com/news/costcos-first-standalone-gas-station-to-open-by-late-june/815004/

Business Insider
Used to analyze the increase in Costco's fuel sales and store visits during gasoline price rise phases and the potential for refueling to lead to in-store purchases.
https://www.businessinsider.com/costco-big-winner-sales-boost-drivers-flock-cheaper-gas-2026-5

The Motley Fool
Used to confirm investor analysis that Costco uses gasoline as a strategic product for member acquisition and retention, and that it is 20 to 30 cents cheaper per gallon than competitors.
https://www.fool.com/investing/2026/03/25/why-costco-gas-pricing-strategy-good-news-stock/

Reddit / r/CostcoWholesale
Used to confirm user reactions regarding wait times for Costco gasoline.
https://www.reddit.com/r/CostcoWholesale/comments/1quw5z3/on_average_how_long_do_you_wait_for_costco_gas/

Reddit / r/CanadaFinance
Used to confirm user reactions regarding cost-benefit calculations, such as "is it really worth it considering the wait time."
https://www.reddit.com/r/CanadaFinance/comments/1f9svvf/why_do_people_bother_waiting_in_line_for_gas_at/

Reddit / r/bayarea
Used to confirm user voices that Costco gasoline appears significantly cheaper than competitors depending on the region.
https://www.reddit.com/r/bayarea/comments/1ctxvm0/why_does_costco_gas_cost_40_cents_to_in_some/