Why is Costco and Sam’s Club Gas Cheaper?

Sam's Club

While gas prices have moderated off recent highs, filling your car’s gas tank still takes an unusually large bite out of most budgets. As a result, and in search of savings, consumers and business professionals now proactively seek out the lowest prices for regular and top tier gas within a reasonable driving distance.

As a result, companies like Costco and Sam’s Club have reaped financial bonanzas, primarily because they consistently offer cheaper gas from their dedicated fuel stations to drivers who hold a Costco or Sam’s Club membership card. Depending on the Costco or Sam’s Club fuel stations location, they typically offer top tier gas, regular, and diesel gas.

You might wonder why retailers like Sam’s Club choose marketing strategies that include a membership discount to attract (and maintain) a solid customer base. Traditional professionals would find this strategy of reducing prices out of the norm because it eats away at Sam’s Club gas stations profit margin – in an industry that is known to have notoriously slim profit margins, to begin with.

However, there are very good reasons why Sam’s Club (and other retailers) choose this marketing technique.

Why Is It Possible For Both Costco and Sam’s Club to Offer Consistently Cheap Gas?

Most retailers, like Sam’s Club, do not produce or manufacture the products they market and sell – even those products specifically marketed under the Costco of Sam’s Club brand. Instead, retailers have the option to buy products from a) manufacturers directly or b) wholesalers. Wholesalers are middlemen who connect producers with retailers, and they can often make the process faster and easier.

They are an integral part of most economic models, but their work adds to the cost (and ultimately the consumer’s price) of the item/product. Wholesalers are found across industries – from the provision of free shipping widgets to discounted gasoline – and everything in between.

Costco and Sam’s Club fall into the category of retailing. So, it should be of no surprise to learn that the above-noted business model would be applicable to each. However, retailers like Sam’s Club and Costco are businesses that are known for offering extremely low prices when compared with their conventional retail competitors.

Logic suggests that with Sam’s Club and Costco’s promotional-super-low prices, they aren’t exactly earning a whole lot of profit on those sales. So, how do Sam’s Club and other gas discounters remain consistently profitable?

How Does Costco & Sam’s Club Stay Profitable On Reduced Margins?

There are a few ways to successfully operate on reduced profit margins – and Sam’s Club and Costco have perfected this strategy – although each has its own unique spin.

Note that in 2022, it is estimated that gas retailers were operating on a profit margin of 2% on the sale of gasoline. Fortunately, both Sam’s Club and Costco do not depend solely on the sale of gas!

Although Costco and Sam’s Club fuel stations always have the option to improve their profit margin by refining operations and managerial inefficiencies, in the digital age, there are serious limits to how much wiggle room can be found.

One of the ways to help Sam’s Club iron-out inefficiencies (which reduces overhead and costs) is to ensure traffic flows in and around the gas pump area as smoothly as possible. However, the most classic and traditional way to counter a reduced per-item profit margin is to increase the amount one sells.

With a razor-thin profit margin, many gas retailers are tempted to raise prices as a way to offset their rising costs and keep pace with economic trends. However, while this may work in theory, it is problematic within the ‘retail gasoline’ sub-market. This is because the idea of brand loyalty for the modern-21st Century consumer when buying gas borders on the absurd.

Loyalty

For most consumers, when it comes to filling up their gas tank, their loyalty is to the price on the neon sign and their wallet. In addition, there are gas stations everywhere. So fuel stations face enormous amounts of competition even though they are usually owned and operated as small businesses.

The NACS – the National Association of Convenience Stores reports that there are more than 148,000 fuel stations in the U.S. – and about 80% offer gas for sale. Sixty percent of these are single-store business operators.

Costco’s Sales Numbers Say It All

Costco is a retail giant founded in 1983. In 2022, there were more than 800 Costco locations serving a global marketplace. The Costco signature brand is known as Kirkland, although it carries many well-known domestic and international brands. In 2022, Costco’s profit was more than $27.5 billion, nearly a 10% increase from the previous year.

Source

To illustrate just how slim this profit margin was, consider that in 2018, Costco made $138 billion selling products; it paid $123 billion for those products. Furthermore, even though Costco performs efficiently, the company still had to spend close to $14 billion for direct labor costs, indirect labor costs, and overhead costs – just to make those products available for sale. Ultimately, this reduced Costco’s net profit (by selling products) to $1 billion in 2018.

Sam’s Club’s Revenue 2022 Year-to-Date Net Sales is $73.6 Billion.

The company is a retail giant founded in 1983 by Walmart Founder – Sam Walton. Sam’s Club, which is headquartered in Bentonville, AR, has seen recent growth.

The stores carriy an exclusive brand – Member’s Mark, considered top-of-the-line for Sam’s Club. They operate 600 locations throughout the U.S., Mexico, Brazil, and China. The graph below represents the net sales for each fiscal year for Sam’s Club – 2018-2022 –

Source

Why Costco & Sam’s Club Memberships Are Profitable Marketing Strategies

Costco and Sam’s Club are master retailers who have perfected a strategy that generates consistent profits by moving tremendous amounts of products – across industries. This includes the sale of gasoline. However, a large part of the Sam’s Club and Costco business strategy includes a requirement – that to reap the benefits offered by these discount membership retailers, you must agree to become a paying member.

A Sam’s Club or Costco membership card and great customer service masterfully generate customer loyalty – a key ingredient in Sam’s Club and Costco’s ability to stay current and profitable, despite its low-profit margins.

Fortunately for Costco, Sam’s Club, and other copycat discounters, their total profits are not entirely dependent on selling products. Instead, these retailers make huge profits by selling memberships that enable people to take advantage of their discounted products and services.

And because membership in Sam’s Club or Costco essentially has no cost – this component of the business model has a tremendous profit margin for both retailers.

Understanding How Sam’s Club & Costco Membership Synergizes Business Opportunities

Remember that membership/club retailers like Costco and Sam’s Club are designed so that each customer begins to recognize the benefit their club membership has to offer – call it a synergistic effect.

For example, low gas prices are very attractive due to inflation. Non-members of Sam’s Club or Costco may notice an attractive gas price and use the opportunity as an incentive to join. Consider how powerful this is, especially if they were already considering becoming a member before they noticed the lower-priced gas.

New members at Sam’s Club or Costco now have even more motivation to discover what else they can save by shopping after stopping for gas rather than spending time and gas driving to another location. Many locations also offer ancillary auto services. Customers may be able to get an oil change and their tire rotated while shopping, which adds an additional convenience factor that is quite valuable to many consumers.

It is not hard to see the savings offered to members of Sam’s Club or Costco, which also requires that customers buy in bulk – quantities that are often larger than they usually buy. Ultimately, additional savings help further justify the cost of the membership.

The Take-Away

Discount membership retailers like Costco and Sam’s Club do not operate on a large per-item profit margin; they supplement their earnings with membership fees and other services that drive up revenue and increase profits. This also includes Sam’s Club gas stations.

Ironically, both discount fuel stations and small gas-station operators/businesses both rely on sales and services that have nothing to do with gas per se. Each of these business types depends on supplement sales and services. And, in the modern world, it is very rare to find a fuel station that does not offer other essential services and a place to pick up a quart of milk on your way home.

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