Gas prices are high at the moment. As a result, it is natural for people to seek out places that are selling gas at lower prices than their competitors. Thanks to this, Costco, Sam’s Club, and the like have benefited because they are famous for offering consistently cheaper gas than most places. Some people might wonder why these retailers do so. After all, businesses are businesses because they want to make a profit, so it can seem very strange for them to offer consistently cheaper gas. However, there are very good reasons why these retailers do so, which is connected to differences in how they make their profits when compared with more conventional retailers.
Why Is It Possible For Both Costco and Sam’s Club to Offer Consistently Cheap Gas?
Interested individuals should have a good idea of how most retailers make their profits. Generally speaking, retailers don’t make most of their products on their own. Instead, they buy these products from other businesses so that they can sell these products to their customers. Sometimes, retailers will buy these products from the products themselves. Other times, retailers will buy these products from wholesalers, who are responsible for connecting the producers with the retailers. Wholesalers are often necessary. However, wholesalers can also be a bad thing from a consumer’s perspective. This is because every single business operates for the purpose of making a profit. As a result, every single link in the chain of logistics that connects them to the producer means a higher price because of the profits that they need to make. Costco, Sam’s Club, and the like are retailers. As a result, it should come as no surprise to learn that this model is very much applicable to them. However, Costco, Sam’s Club, and the like are famous for selling their products at very low prices when compared with their conventional counterparts, which suggests that they aren’t exactly earning a lot of profit on those sales. Yes, it is possible for retailers to improve their profit margin by squeezing out efficiencies here and there, but there are serious limits to how much they can do so, particularly since every retailer have strong incentives to do the same. Instead, the situation is pretty much exactly what it seems like, which is to say, Costco, Sam’s Club, and the like aren’t making a lot of profit from the sales of products. Gas is no exception to this rule. There are claims that gas stations make just 1.4 percent net profit margin on their gas, which is very low because the average is something like 7.7 percent net profit margin for all of the industries that exist out there. A lot of gas station owners might want to raise their prices. However, they have no way of doing so. After all, consumers tend not to feel a strong sense of brand loyalty, meaning that they will go to whichever gas station is cheapest for them. On top of that, there are gas stations everywhere, so they face an enormous amount of competition even though they are very local businesses by their very nature.
Costco’s own numbers make it clear that these are the circumstances under which it operates. In 2018, it made $138 billions selling products, which sounds very impressive until one remembers that revenue is not the same as profit. This is illustrated by how Costco had to spend $123 billion for those products. Furthermore, it is important to note that even though Costco has a very efficient system, it had to spend close to $14 billion on everything else needed to make those products available for sale to interested individuals. For those who are confused, examples of those costs would include direct labor costs, indirect labor costs, and overhead costs. Thanks to that, Costco made just a $1 billion in profit by selling products in 2018.
Fortunately for Costco, Sam’s Club, and the like, they don’t make the majority of their profits by selling products. Instead, they make the majority of their products by selling the memberships that enable interested individuals to make use of them. This part of the business has a much better profit margin for them. After all, there are much lower costs needed to keep things running in this regard, meaning that everything else can be considered profit. For further support, consider how Costco reported a total profit of more than $3 billion in 2018, which makes it very clear that most of its profits came from its memberships rather than its products in that year.
Of course, Costco, Sam’s Club, and the like are set up so that each part of their business synergizes with the rest. To name an example, low gas prices are very attractive at the moment. As a result, that encourages people to pay for a membership, which can be particularly effective if they were already on the verge of paying for a membership. Once that happens, those people have extra incentive to make purchases from these retailers in order to justify what they have spent on their membership. Similarly, low gas prices can convince people to visit these retailers for gas. After which, they will be incentivized to buy other products at these retailers while they are there because that will be more convenient for them than heading elsewhere afterward. Costco, Sam’s Club, and the like might not be making a lot of profits by selling products. However, they are still making money, meaning that every single sale is helpful for them. In fact, it is interesting to note that gas stations don’t make most of their profits by selling gas. Instead, they make most of their profits by selling their products. In any case, high gas prices mean that people might be curious about whether they can benefit from the opportunities made available by Costco, Sam’s Club, and the like. Fortunately, they should have no problem figuring out whether paying for a membership will be worth it for them or not. After all, interested individuals can just compare gas prices as well as other products’ prices to see how much they stand to gain while making sure to remember the price of the gas consumed going where they need to go. Then, it is just a matter of checking whether they will visit these retailers enough to make the price of the membership worthwhile.