Costco Moves the Metal

Costco’s warehouse clubs have become big sellers of cars

Source: Costco Auto Program

Ron Schurter didn’t bother visiting a dealer when he was in the market for a new car. He hit his local Costco. There was no haggling. Or upselling. There was just the price the warehouse retailer offers its members: about $39,000 for a 2015 Toyota Highlander, $4,000 less than the manufacturer’s recommended price. Schurter signed the contract and picked up his SUV from a Toyota showroom. “I’ve been telling everybody,” says the 75-year-old retiree from Yorba Linda, Calif. “I probably won’t shop anywhere else.”

Last year, Costco Wholesale moved almost 400,000 vehicles of all major brands in the U.S., twice as many as in 2008. Without fanfare, the membership-only merchant better known for selling flatscreen TVs and jumbo-size boxes of cereal has pulled within spitting distance of No. 1. car retailer AutoNation, which sold 533,000 vehicles last year. “That’s a much bigger number than I would have expected,” says LMC Automotive analyst Jeff Schuster. “This reinforces that everybody wants a deal, but they don’t want all the headaches of haggling.”

Source: Costco Auto Program

Costco is tapping America’s growing wariness with car dealers. Dozens of services such as TrueCar have sprung up to improve the auto shopping experience by offering price transparency, one-stop comparisons of multiple brands and models, and even help with negotiating. At the end of 2014, 65 percent of new-car buyers reported using such services, up from 40 percent in 2008, says J.D. Power.

Costco doesn’t sell cars per se. Working through an auto-buying service called Affinity Auto Group, the $112.6 billion retailer uses its purchasing power to negotiate discounts for its more than 45 million U.S. cardholders. Costco’s huge scale gives it the clout to insist that local auto partners that sell through Affinity beat rivals’ prices. Ken Ryan, who runs a GMC dealership on Long Island, says Costco’s tough negotiations mean buyers save as much as $1,000 per vehicle. The retailer fields a team of mystery shoppers to make sure dealers stick to the agreed price.

Last October, Costco and General Motors offered U.S. buyers a $500 store gift card plus a non-negotiable price for most GM models. In the fourth quarter of last year, GM sold 43,300 vehicles through Costco, or about 6 percent of the automaker’s total domestic sales in that period. The Costco promotion helped GM attract buyers in California and Western and Southern states, where foreign brands are more popular.

Costco makes no money on the auto sales. It offers discounted vehicles to attract members and keep existing ones paying the club’s $55 annual fee. “Their primary, overwhelming interest is members’ willingness to join and renew,” says John Rand, senior vice president for retail insights at Kantar Retail. “The filter by which they do anything is, ‘What do my members think?’ ”

Eight years ago, it was sometimes difficult for Costco to get carmakers’ attention for national promotions, says Gina Paolino, president of the Costco Auto Program. Today, automakers are coming to them, and there’s a waiting list of dealers keen to participate at almost every Costco warehouse. “Now we have a story,” Paolino says. “We’re getting more interest because of the success.”

The bottom line: More than 398,000 vehicles were sold through Costco’s warehouse stores last year vs. more than 199,000 in 2008.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE