Costco’s cheap gas: not a gimmick, but a membership-driven margin strategy

Costco has built a reputation for gasoline that is consistently cheaper than nearby stations. In a new CNN segment, David Goldman, executive editor of CNN Business, broke down how Costco appears able to undercut local prices, even when crude and retail gas costs are moving quickly for everyone else.

The explanation starts with demand and logistics. Costco told investors that the company had not seen such strong gas demand in its history, with some locations so busy that it had to call in tanker trucks multiple times a day to keep stations from running dry. The segment also said Costco routinely undercuts local gas stations by around 30 cents per gallon, a gap that becomes especially noticeable when prices spike above roughly $4 nationwide and much higher along the West Coast.

Goldman framed Costco’s pricing as “not a loss leader.” According to Costco’s approach described in the segment, the company makes a small profit on gasoline, “a few cents per gallon,” which is far below the typical markup described as 25 to 35 cents per gallon at most gas stations. That difference matters because many independent retailers rely on gasoline markups to cover overhead and ongoing maintenance, and they struggle when consumers buy less fuel as prices rise.

Costco’s model shifts the economics. Most of Costco’s profits are not meant to come from gasoline volume or markups, the segment argued, but from memberships. It said membership fees account for roughly two-thirds of Costco’s profit, and that Costco generally sells many items at or near cost, sometimes below, as part of a broader value proposition. In that setup, gasoline becomes a tool to attract members and keep them coming back, rather than a product category that must independently carry high margins.

The segment also linked gasoline pricing to cross-shopping behavior inside Costco warehouses. It said about half of gas customers end up walking into a store, contributing to increased foot traffic and additional purchases beyond the pump. Costco’s CEO, Roland Vachris, was quoted in the segment saying the pattern tends to build loyalty, and that members who use the gas stations typically spend more in the warehouse. It further said gas was mentioned frequently on the earnings call, reflecting that management views the gasoline surge as strategically important.

To manage the value proposition when fuel costs move, Costco also used promotions in parallel with high gas prices. The segment said Costco extended discounts on items such as meat and eggs to members, explicitly to increase value at a time when households were allocating more of their budgets to gasoline. It also argued that Costco’s situation can flip depending on fuel price direction, with high prices squeezing overall gross margin on the low-margin fuel category, while cheaper fuel can improve the contribution of gasoline to gross margin.

What remains unclear is the precision behind the claims. The CNN segment did not provide a station-by-station pricing formula, disclose the exact gross margin or contribution margin for gasoline, or offer a detailed breakdown of how Costco’s wholesale fuel costs, hedging, and local competitive sets translate into the observed per-gallon discount. Costco also did not specify in the segment how much of the undercutting is constrained by operational factors like capacity and delivery timing, or how that changes in markets with fewer pumps and higher traffic.

For investors and shoppers, the key question is whether Costco can keep that value proposition consistent when the fuel environment normalizes. In Costco’s most recent quarterly results published May 28, 2026, it reported net sales of $69.15 billion and membership fees of $1.37 billion for the quarter ended May 10, 2026. The company’s next earnings updates may indicate whether management’s gas-driven loyalty momentum, and any associated promotions, can persist if gasoline prices fall and customers face less urgency to “top up” at the pump.