Why Costco Won't Make Petrol Cheaper

In a new twist in the long-running Australian petrol wars, Costco is preparing to join the discount petrol market. Sydney's second Costco outlet, scheduled to open later this year, will reportedly sell heavily discounted fuel.

Picture: Getty Images

Costco is already a big petrol retailer in the United States and Canada, but is now extending petrol retailing to Australia and the UK. It aims to set up petrol outlets at new Australian stores where space and regulations allow. This follows Costco's US model, but is very different from the "shopper dockets" approach used by Coles and Woolworths.

In the US, Costco sells petrol at its store sites and uses petrol to, literally, drive customers to the stores. It makes razor-thin margins on petrol with huge turnover. In general, Costco only sells petrol to members. Here in Australia, standard Gold Star Costco membership is $60 per year and internationally the retailer makes a lot of its profit from membership revenues. As one Canadian journalist recently asked:

"Is Costco opening their gas bar to make money from selling gas or to make money from selling more memberships?"

So what does this mean for Australian motorists?

In the big picture, not much. Australia is a net petrol importer and the retail price of petrol is dominated by two factors — the price (in US dollars) of Singapore refined fuel and the Australian dollar exchange rate. The Australian Competition and Consumer Commission (ACCC) 2012 petrol report showed that our retail petrol prices and the international petrol price follow each other like a pair of ballroom dancers. And the exchange rate is much more important than Costco when it comes to filling your petrol tank.

But petrol prices are emotive. Even a few cents per litre matters. And Costco in the US is regularly the cheapest retailer in the market.

But unless you are a regular Costco shopper, it is unlikely to be worthwhile driving to a Costco store just to fill up. Only 20 stores in total are planned for Australia, and not all of those can fit a petrol outlet alongside. So for most motorists, Costco outlets will be few and far between.

Also, paying a $60 membership up front means you have to buy a lot of fuel, or buy other Costco products, to save money. Even a saving of 4 cents per litre on a 50 litre tank will require 30 "fills" to break even.

In short, don't expect a retail petrol revolution.

Costco's model probably raises fewer concerns for the competition regulator than the Coles and Woolworths "shopper docket" schemes. Costco is simply co-locating its warehouse stores and its retail petrol outlets. In contrast, Coles and Woolworths use "shopper dockets" to link geographically separate outlets. Despite the discount printed at the bottom of your grocery receipt, it is far from clear that the Coles and Woolworths schemes really benefit consumers.

Joshua Gans and I looked at this issue about a decade ago when Coles joined Woolworths in offering a discount on petrol when you purchase groceries. Our analysis showed why this could raise profits for one retailer, but only until the other retailer copied it. And while prices dropped to consumers, transaction costs rose, as consumers travelled to less convenient, but bundled, pairs of retailers. Put simply, if you use an extra litre of fuel going to and from the 'paired' grocery and petrol retailers, you have pretty much spent all your shopper docket savings!

The ACCC has been investigating whether the Coles' and Woolworths' shopper docket schemes breach competition laws. As it states in its 2012 petrol report:

"The ACCC is also currently examining the effects of shopper docket discounting schemes on competition and long-term consumer welfare having regard to the size (value), frequency and duration of these offers."

The entry of Costco will make the competition issues even murkier and will undoubtedly lead to ACCC scrutiny. Costco has previously been subject to a legal challenge in the US on its petrol pricing, with claims that it had illegally sold petrol below cost. Costco denied these claims.

The real story behind Costco's expansion, however, is not petrol but groceries. The success of both Aldi and Costco in Australia has shown our retail grocery market was ripe for a shake-up. Coles and Woolworths compete like Tweedledum and Tweedledee. Despite all the noise, they look and sound the same. Costco and Aldi have shown that a significant number of Australian consumers want something different in their supermarkets. And they are voting with their wallets.

Stephen King is Professor, Department of Economics at Monash University. He was formerly a Member of the Australian Competition and Consumer Commission.

The ConversationThis article was originally published at The Conversation. Read the original article.


Comments

    Didn't ACA buy a bunch of grocers from a Coles and Woolworths that had a co branded petrol station relatively near and find it costs more than a store with no petrol statoin anywhere nearby?

    why is it that Australia is the only country (that i'm aware of) where petrol prices fluctuate so wildly. If you look at prices in the US or Europe and even Singapore, they don't fluctuate anywhere near the frequency our does.

    Its about time price fluctuations reflected actual delivered prices as opposed to at whim pricing.

      Back in my day, we learnt that petrol pricing uses FiFo system, that was by law it required to be charged this way. (10 years ago anyway)

      So they couldn't lower the price over night to reflect that days price drop of the wholesale price because they paid for the tanker of fuel last week (which was more expensive) and until they get the next delivery of cheaper fuel it wouldn't drop in price... it does seem logical to me.

    I'm pretty sure I saved $60 on grocery costs the first time I shopped at Costco in Sydney, so the fuel option is a bonus. That said, it's not worth driving there just for that purpose; just gaining access to the site is a traffic hellhole most of the time.

      Yeah because we all need 400 rolls of toilet paper, 3 loaves of white bread, 2kg of cheese, a tray of croissants and 25kg of laundry powder...*jokes*

      But did you actually save it or did you spend more to "save" that moey you may or may not have spent in future shops?

        If you buy in "small bulk" you'll definitely save. Breakfast cereal is a good example as they sell large economy sized boxes not available in supermarkets at the same price as a half-sized box.
        There are good deals on bags of veg and some of the meats. I have a pantry for my kitchen but I'm not willing to run a freezer so I pick and choose.
        $60 represents the contents of about 1-2 recyclable shopping bags at Woolies so it's not an enormous sum.

        I don't know if it's Australia or a sign of the times, but when I lived in the US 10 years ago, the savings were even more tangible. Now I see I can get as good deals on electronics at DSE or Goodguys.

    Don't you hate those people who don't know what side of the car their petrol hole is on and have to pull the nozzle all the way over the car and hope it reaches......*sigh*

      It *should* reach comfortably for a regular sedan. I don't see the point in waiting behind 2-3 other vehicles when an "opposite" bay is free.

        because you end up looking like a dill when you have to reverse and try to pull in at the next bowser and it becomes free in like 20 seconds anyway haha, how embarrassment!

          Why would you reverse? The hoses of 99% of the bowsers I've used will actually extend over or around the car (as shown in the photo above). Some stations have a swinging boom at the top of each bowser which makes it even easier.

    Shop at Aldi.. it's like getting $70 off your fuel bill each week (with the savings over Coles / Woolies) :-)

      plus you don't end up over shopping or spontaneous buying cause of the lack of lines, just the basics...unless Christmas chocolates form Austria have arrived, then there goes all my savings!

    Just saved 15 cents per litre at costco Crossroads on diesel. Cost per litre, $1.477. Outside, along Hume Highway heading south, cost was $1.629 per litre. Easily saved my $5 monthly cost of membership this trip.

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