Anyone who has recently driven through the west part of town will have seen the Costco gas bar is now open. There is a lot of speculation about whether this will lower gas prices in Prince George. My own opinion is that Costco's presence will indeed lower gas prices. However, the retail gas market is notoriously murky and on top of this, Costco has a very unique pricing strategy with regard to its usual products. So there is no way to know for sure what impact Costco will have. But we can hope.
There are three fundamental factors that affect the final price we pay at the pump. The first and most obvious is the price of crude oil. The price of crude is set on international markets and no retailer, even Costco, will be able to affect the world price of crude oil. The second component to the price we pay at the pumps is the cost of refining. In fact, we have a refinery here in Prince George although it is quite small; the smallest in Canada in fact. But the refinery has been operating for a long time without seeming to result in lower gas prices compared to other parts of the province. It is unlikely Costco could change that.
This leaves the retail component of the cost of gas. There has been endless debate and even a few conspiracy theories concerning how retail gas prices are set. Having toured around B.C. on my motorbike this summer and having purchased a lot of gas along the way, I can give some anecdotal evidence. In rural areas, I have noticed two extremes depending on location. For example, in Liard Hotsprings where it is a very long way to the next gas station and they can therefore charge whatever they want, I paid $1.99/litre. In Hazelton on the other hand, which is off the highway and therefore they need to entice you to get there, I paid the lowest price anywhere in B.C. and was even treated to true full service. I didn't think that existed any more.
In major cities, it seems most gas retailers try for long term customer loyalty either by offering rewards programs, (ESSO, Husky, etc.) or by tying in gas purchases with other products offered by the store, (e.g. Canadian Tire, Superstore). Yet despite these attempts at differentiation, gas prices always seem to converge to the same price. How might Costco disrupt this?
With its traditional merchandise, Costco is known for having some of the lowest margins in the industry. In fact, they cap their margins at 14 per cent. This, combined with the low prices they can demand from the suppliers is why they can keep their prices so low. Another unique aspect to Costco's retailing model is that a significant amount of their profit comes from the yearly membership fees. In fact in 2005, Costco's revenue from membership fees equaled their net profit, In other words, in 2005 they didn't make any money from selling products, only from selling memberships. That begs the question; is Costco opening their gas bar to make money from selling gas or to make money from selling more memberships?
It will be interesting to see how all these factors play out for Costco in the retail gas market. Disrupting a local gas market to lower prices is a difficult task. But I think that Costco is up to the task. This is, after all, the store that manages to sell a hot dog and pop for $1.50. I wish them all the best in the Prince George gas market.
