No frills fills: discounter Costco gaining larger share of gas market.

THE Marina del Rey Costco is out of the way of Chris Conte's daily commute from West L.A. to Bellflower, but he's willing to drive an extra mile or two and wait 10 minutes for a turn at the pump in order to save 10 or 12 cents a gallon.

"Before prices went up I'd be here every few weeks," he said. "But since the war I come here all the time, maybe two, three times a week."

Even as prices began to pull back last week, Conte and others had already shifted their routines over the past months, when pump prices in Southern California skyrocketed to $2 and beyond. It has driven business and market share gains toward discount gas retailers - especially Costco, a relatively new entrant to the California gasoline market.

Since opening its first pump in California seven years ago, Costco Wholesale Corp. has become one of the state's largest independent gasoline retailers. While oil company consolidation has sparked charges of price gouging among the six major branded gas retailers - a charge that the California Energy Commission has found to be baseless - Costco, with only 57 stations attached to its members-only stores, has thrived as a discounter.

Relying on the same high-volume strategies that made it one of the nation's leading mass retailers, Costco has boosted its gasoline market share in the state to about 5 percent from a standing start, according to NPD Automotive Products Group.

Last week, the average price of regular unleaded gasoline fell 1.3 cents to $2.13 a gallon, according to the Energy Department's Energy Information Administration. In San Francisco, which historically has the highest gasoline prices in the country, pump prices fell a penny to $2.16 a gallon.

The war in Iraq, which appeared to be going better last week, will be a major factor this summer. Prices of crude oil have been dropping with renewed advances by U.S. and allied troops, and stood at $29 a barrel last week, compared with a 12-year high near $40 in late February. Crude oil makes up 40 percent of the cost of gasoline.

Yet other factors could keep supplies tight and prices high in the state.

California refiners switched to a federally mandated summer blend of gasoline that caused prices to spike in March, and the state's stiff environmental laws require that refiners produce a cleaner-burning reformulated gasoline with an ethanol additive by 2004. Most refiners have already switched to the new blend, which has added to the cost at the pump.

Jeremy Bulow, a former chief economist with the Federal Trade Commission and a professor at Stanford University, said companies like Costco might drive out some retailers, particularly during periods of tight supply.

"The independents always tend to lose share when there is a shortage because the major oil companies tend to supply their own stores first and not raise prices as much as the market might take," Bulow said. "That leaves the independents with less gas and higher costs."

Paul Latham, vice president of gasoline at Costco, based in Issaquah, Wash., said he expected prices to remain fairly high in California this summer because of the state-mandated switch to ethanol-blended gas.

Local impact

Up to now, Costco has been huffing mostly smaller gasoline retailers unfortunate enough to be located near one of the huge mega-stores it opens.

Tomoko Pak, who owns a Shell station with her husband at Venice and Lincoln boulevards near the Marina del Rey store, said her customers left two years ago.

"When they opened we felt a big change," said Pak, whose station was deserted last week, while Costco's had a crowd. Costco's regular unleaded was selling for $2.07, 12 cents below Pak's. Its premium unleaded, at $2.25, was also 12 cents lower.

John Nemelka, manager of a Chevron station catty-corner from Pak's, said competition has become tougher with rising prices. Chevron was selling regular unleaded for $2.15 and premium for $2.31.

"Everybody around here is a tough competitor," he said, declining to discuss Costco specifically. "Any time prices go up, volume goes down."

Costco's focus on California runs counter to other mass merchant retailers that have dabbled in gas. Its 57 gas stations statewide make up 31 percent of the company's 181 stations nationwide. By comparison, Albertsons Inc. operates 12 fuel centers in-state out of 208 nationwide; Kroger Co. has only three in California of 376 nationwide; Safeway Inc., which owns Vons, has 23 in California of 183 in the United States.

Together, these other mass merchants account for less than a 1 percent market share, according to NPD.

Like other discount operators, Costco takes measures to cut down on its per-gallon price by not accepting credit cards, which add several cents a gallon to the retailers' costs. (The exception is American Express, which charges lower fees.)

Costco buys and sells more than a million gallons of gas every day in California, enough to fill the tanks of 100,000 cars. Just one Costco station sells the equivalent, in volume, of four to five regular gas stations.

Gasoline is bought under contract with a single supplier but the company takes a bigger risk by purchasing some of its gas on the spot market. These prices fluctuate daily and are volatile, but they allow Costco to adjust its pump prices to changing market conditions more quickly.

"When prices are rising we tend to do much more volume relative to our competitors because the difference in the price of gas appears to be more dramatic," Latham said.

Gas is not used as a loss leader, a term coined by supermarkets to describe products such as diapers that often are sold at below cost to drive more customers into a store.

"I won't say that there aren't times when we're selling at a loss, but it's not intentional and we will never go below cost unless it matches someone else," he said.

Since gas is a mature product category, its gains come at the expense of others, said David Portalatin, a senior account executive at NPD.

Unable to compete on price, others are left to highlight other benefits they offer.

"Costco is a no-frills gas station experience so they're a different animal from an Ultramar or Arco," said Joanna Weidman, a spokeswoman for Valero Energy Corp., which operates 655 gas stations in California under the Ultramar, Arco and Exxon names.

At a Valero-run station, a customer may stop in on the way home from work, buy some milk, a newspaper or some chips along with gas. "If you go to Costco," she said, "it's more of a visit and there's a membership fee involved."

Still, Costco's presence in California is a "wake-up call" to its competitors, said Ron Appel, chief executive of privately held United Oil in Gardena, which operates 105 gas stations and conveniences stores. "They're saving consumers a lot of money," he said. "Luckily, they're not open 24 hours."

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