Costco fuelling gas-price wars

It is putting downward pressure on gasoline prices throughout Ottawa, which already has among the lowest gasoline prices in Ontario, according to provincial government surveys.

And there is a second potential benefit: the Costco move has drawn attention to the high credit card fees charged to many retailers by Visa and MasterCard, which together dominate the credit card industry.

Costco does not accept Visa or MasterCard as a method of payment. If its members want to pay with plastic, they must use a debit card or an American Express credit card.

Costco has a "strategic partnership" with American Express, says Ron Damiani, the shopping club's spokesperson. For consumers, this means they can pay by credit card without having to bear the cost of high fees Visa and MasterCard charge retailers.

Most consumers give no thought to these fees when they use a credit card. Why should they care? Consumers don't have to pay these fees. No - but they end up paying in the form of higher retail prices.

Costco won't say how much the shopping club pays American Express for the convenience of offering the card. But you can bet it's only a fraction of the charges levied by its competitors.

Estimates of fees retailers pay to Visa and MasterCard range as high as three or four per cent - or $3 or $4 on a $100 purchase. Taking the lower figure, that could mean a cost to the retailer of $1.50 or more on a tank of gas.

Gasoline is a product where price is critical. Prices are listed down to one-tenth of a cent, and posted on large signs for passing motorists to see. Motorists drive blocks to save a penny a litre, or less.

Just on savings in credit card costs alone, Costco should be able to undercut its competition by as much as two cents a litre, or even a little more, I figure.

That's what seems to have happened since Costco opened its first Ottawa gas station in late October.

The Costco station - located southwest of the city centre, on Hunt Club Road near Merivale Road - has sometimes had prices that are three or four cents a litre below the citywide average for regular unleaded gasoline.

The Merivale Road shopping strip, from Hunt Club to Baseline roads, has become a hot spot for gasoline price skirmishes, with some nearby gas stations (but not all) responding to the competition from Costco by dropping their prices.

The downside is that you have to be a member to shop at Costco, and that costs between $1 and $2 a week. Still, tens of thousands of area residents are now Costco members - drawn as much, perhaps, by the quality of the goods as by the prices.

Costco - not wishing to flaunt how it's undercutting the competition - is one of the few gas stations that doesn't post prices prominently for passing motorists to see. Of course, most of the others without big signs are the ones with the highest prices.

Gasoline is probably the most competitively priced of all products at the retail level. Today, with the Internet, motorists just have to go to a website such as ottawagasprices.com to find the lowest prices in the city at any moment.

The Ontario Ministry of Energy, which tracks retail gasoline prices weekly in six major markets, says Ottawa gas prices have been the lowest in the province for the past two years. It's not clear why, but retail competition has to be the reason.

Spencer Knipping, a gasoline price analyst with the ministry, says price wars in Ottawa sometimes bring retail prices down close to wholesale level. But wholesale prices can be misleading, because they do not take into account the rebates, discounts and price supports paid to retailers by the oil companies.

Now, with Costco in the picture, the competition should remain fierce.

However, getting Visa and MasterCard to lower their fees to retailers will probably take a while, if that ever happens.