Costco’s
plan to pump gas
may fuel price
competition

Competitors wait to see the price
at the pumps planned
in Waipio Gentry

By Rob Perez
Star-Bulletin

Costco's plan to open one of the largest retail gasoline outlets in the state likely will bring lower prices to West Oahu, but industry opinions are mixed on whether pricing elsewhere on the island will be affected.

Costco is planning to operate three rows of gas pumps -- enough to serve 12 vehicles simultaneously -- at its Waipio Gentry store, which is scheduled to open next summer.

That would make the Costco site among the largest retail gas-fueling operations in the state, according to dealers and industry officials. Most Hawaii service stations can handle eight or fewer vehicles at one time. Some newer stations can accommodate 12 vehicles simultaneously.

Only Costco members will be able to purchase gas at the Waipio site along Ka Uka Boulevard.

Joel Benoliel, a senior vice president for Costco Wholesale Corp. in Issaquah, Wash., this week said it would be premature to discuss what kind of pricing the company will have in Waipio.

But in the roughly 70 markets where Costco sells gas on the mainland, its prices typically are 5 cents to 20 cents a gallon cheaper than competitors, Benoliel said.

In Los Angeles, for instance, Costco's retail price for self-serve unleaded in late October averaged 9 cents per gallon below the competition, according to a recent trade newsletter. In San Francisco the Costco average was 27 cents per gallon lower, the newsletter said.

Tim Hamilton, a Washington-based dealer lobbyist who has analyzed Costco gas operations in mainland markets, said he wouldn't be surprised if the company's initial prices were at least 10 cents lower than those offered by other Oahu competitors.

Costco typically goes into an area with aggressive pricing, he said. But once volumes reach a desired level, the company starts raising prices, eventually settling at the bottom of the market, Hamilton said.

What kind of pricing Costco offers here will depend partly on the agreement it reaches with a local gas supplier, he said.

Several West Oahu dealers say they don't expect to be able to compete with Costco on price.

George Williamson, general manager of a company that runs a Shell station less than a mile from where the new Costco is to be built, said he expects the station to lose some sales to the members-only retailer, especially from price-sensitive motorists.

But Williamson said the station will compete by offering superior service. Costco will be "just one more competitor as far as I'm concerned."

Allen Hagio, manager of Waipahu Shell Service, views Costco's entry as another sign that independent dealers like himself are being squeezed out of the business, victims of ever-shrinking profit margins.

"Pretty soon, we're not going to have independent dealers operating stations anymore," Hagio said.

Benoliel said Costco does not plan to install pumps at its two existing Oahu stores in Salt Lake and Hawaii Kai because those sites cannot accommodate gas operations.

For that reason, some dealers say Costco's effect on pricing will be limited to the West Oahu market.

"One site is not going to make a whole lot of difference," one East Honolulu dealer said.

But others say the Costco fallout likely will spread around Oahu. Some West Oahu dealers will lower their prices in response to Costco, then dealers in adjacent areas will adjust their prices to stay competitive with the West Oahu dealers, spreading the fallout even further, they say.

"The trickle effect could kill us," said Chevron dealer Frank Young, who operates a Kakaako station that draws customers from around Oahu.

As motorists become more price-sensitive, higher-priced stations stand to lose even more business, Young said.

He cited customer response when he raised the price of regular unleaded 3 cents a gallon last week, to $1.40.9, passing along a 3-cent increase from Chevron Corp., his supplier.

With cheaper alternatives elsewhere -- some Waianae Coast stations currently are selling gas for $1.30 a gallon -- Young saw his weekend business drop 20 percent.

"Customers are learning to price the cheapest gas," he said.