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Costco to enter high-priced Chicago gas market


Shopping carts at Costco in Fairfax, Virginia, January 7, 2010. Costco Wholesale Corp on Thursday reported a better-than-expected nine percent rise in December sales at stores open at least a year, helped by an increase in gasoline prices and stronger foreign currencies. REUTERS/Larry Downing
Shopping carts at Costco in Fairfax, Virginia, January 7, 2010. Costco Wholesale Corp on Thursday reported a better-than-expected nine percent rise in December sales at stores open at least a year, helped by an increase in gasoline prices and stronger foreign currencies. REUTERS/Larry Downing

By Jessica Wohl

CHICAGO (Reuters) - Costco Wholesale Corp will soon start selling gasoline at its Chicago warehouse store, a move that should drive more sales even if it decreases the rate of profitability at the club.

Costco, the largest warehouse chain, keeps its costs low with a no-frills approach that includes basic displays of pallets of goods. It passes savings along to members, who pay annual fees of up to $100 to shop in its massive stores.

The formula also works in the gas business, where Costco monitors prices at nearby stations and matches or undercuts them in order to bring drivers over to its pumps.

With high gas prices on the minds of shoppers, Costco has seen year-over-year gains in the number of gallons it sells, said Chief Financial Officer Richard Galanti.

While gas is a profitable business, it is a "very low margin business" that is volatile, Galanti said.

Chains are keen on selling gas, as offering low prices helps recruit and retain members who spend in the stores, especially with gasoline prices soaring in recent months.

It doesn't just drive new memberships, it makes their customer more loyal, said Cowen and Co analyst Laura Champine, who has a "neutral" rating on Costco shares.

The key for Costco is driving people to sign up for and renew their annual memberships, a big revenue center.

"The membership fees are really where they make their money and if people are led to join up, that's great news for them," Champine said.

Some weeks, Costco's gas operations even lose money as the company cuts prices to stay competitive. On an ongoing basis selling gasoline is a profitable move, Galanti said.

"They're not so much in the gasoline business to make a lot of money per gallon, they basically want to cover the operating cost," said Northcoast Research analyst Chuck Cerankosky.

Costco typically prices gasoline 6 cents to 12 cents below the market price, Cerankosky said.

WINDY CITY PRICES LAG ONLY ONE HAWAII CITY

Bringing Costco's formula to the Windy City should drive more people to join the club, which is the only major U.S. warehouse chain that operates in Chicago.

Construction on the station began last week and it is expected to be up and running by late June.

In April, Costco's comparable gasoline sales were up a little over 50 percent, helped by the average selling price per gallon soaring more than $1 to $3.82.

Since then, prices have moved even higher, although they have retracted a bit in recent days.

The average price for regular gasoline in the greater Chicago area was $4.39 per gallon on Tuesday, up from $3.12 a year ago and above of the national average price of $3.94 according to data from AAA. The price ranks behind only the city of Wailuku, Hawaii, where the average gallon costs $4.82.

Other companies' gas stations located near the Costco in Chicago's Lincoln Park neighborhood have prices closer to $4.60 per gallon or higher, including both city and county taxes.

Of course, warehouse clubs do not have a lock on the business. Supermarket operators also operate some gas stations and offer their shoppers various discounts.

"I haven't talked to a retailer yet that has used it as a promotion that doesn't love it," Cerankosky said.

Once the 10-year-old Chicago store gets its gas pumps, only one of Costco's 16 Illinois stores will not sell gasoline.

Wal-Mart's Sam's Club does not have a store in Chicago but sells gas outside the city limits. On Tuesday, Sam's Club posted a strong 4.2 percent rise in first-quarter sales at stores open at least a year, excluding gas. Including gas, its same-store sales soared 8.5 percent.

BJ's Wholesale Club, which has no stores in Illinois, has said sales and memberships increase in tandem with the price per gallon. Its results are due on May 18.

(Reporting by Jessica Wohl, editing by Dave Zimmerman)

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