Costco is more than just a membership warehouse. Sure, they sell pallets of blue jeans and ketchup by the gallon, but there are countless other products and services available.
They offer appliances and fine wine, can fill a prescription and even help you book a dream vacation. But did you know they’re also able to get you a killer price on a car? The Costco Auto Program is something many people have never heard of, even though it’s been around for more than 25 years.
“The value we’re bringing to members is both price and the process,” said Rick Borg, executive vice president of the Costco Auto Program. “We’ve kind of taken away the need to negotiate.”
Members get the lowest price a dealer would ever be able to sell a car for, he says, all without any uncomfortable bargaining because Costco has already done the heavy lifting.
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Conservatively, Borg said the average savings for members is around $1,000. Of course, the savings would likely be higher if you’re purchasing a high-markup Lexus opposed to a Honda Fit, so you could drive away with even more money in your pocket. Further sweetening things, this reduction is taken off the transaction price, not the MSRP, making the savings even more impressive.
Aside from monetary advantages, the company aims to keep every single one of its customers happy through a special outreach program. “This member advocacy group is there to support members at any stage of a transaction,” Borg said. Buyers can call whenever necessary to get questions answered or to address any potential concerns, like verifying a vehicle price or checking on the availability of replacement parts.
Beyond factory-fresh automobiles, the program also covers used models, though not just any second-hand clunker is eligible. “It’s for new cars and certified pre-owned and select pre owned [vehicles],” said Gina Paolino, president of the Costco Auto Program. These cars and trucks need to have at least 12 months and 12,000 miles remaining on their comprehensive manufacturer warranties to be eligible.
Buying in Bulk, Saving in Spades
How is Costco able to offer such competitive pricing? Well, ingeniously, they’ve applied the same business model to selling automobiles that they’ve used to great effect wholesaling snack food, mattresses and office equipment. The secret is volume. By moving a lot of metal, they can get prices as low as possible. Costco doesn’t, however, actually sell vehicles themselves — it partners with specially certified dealerships.
Curiously, not just any dealer can sell to Costco members. “We only select certain dealerships in a market area,” the best of the best, Paolino said. So, if you’re looking for a new Accord, there may only be one Honda showroom in your town that has partnered with Costco.
These dealerships “agree to give Costco … very aggressive pricing on the purchases of those vehicles,” Borg said, and in turn, they get higher sales volumes and happier buyers. It’s a win-win for everyone, except perhaps Costco. They didn’t get involved in car sales to make money; instead, it’s just another service they offer to keep customers happy.
On the dealer side of this equation, “They want to get conquest sales,” noted Paolino, adding that volume is a huge measure of success for dealers. “Because of the exclusivity, we have dealers that are on waiting lists,” said Borg. So clearly, the program is beneficial to more than just Costco members.
To guarantee such terrific deals, Costco’s staff is constantly doing market research, calculating supply levels, verifying available incentives, and checking on factory rebates to come up with the lowest prices possible. “We do an extensive amount of background work … moving toward the pricing dealers can offer members,” said Borg. Adding an extra layer of complexity, these discounts vary from region to region and season to season.
Once Costco determines a price, “Dealers decide if it’s something they want to offer,” said Paolino. Accordingly, not every make or model will be available in all areas, though Borg said, “Pretty much, it’s across the board in most markets.”
Vehicles from a wide swath of mass-market brands are on the menu, ranging from Chevrolet and Kia, to and BMW. “Most markets will have most brands represented,” he added, though, “We don’t have any Ferrari or Lamborghini dealers on the program … Not yet.”
Everyone appreciates a good deal, but aggressive pricing is far from Costco’s only focus. According to Borg, they make extraordinary efforts to educate participating dealers so they keep their members pleased. Accordingly, not every salesperson can work with Costco customers; only ones that have proper schooling, high customer service scores and many years of experience qualify. “We go to great pains to train those people and certify those people every year,” Borg said.
Of course, participating dealers must have top-notch ratings and be geographically reasonable for members. Someone living in Las Vegas shouldn’t have to drive all the way to Sacramento just to buy a vehicle and fortunately, they don’t have to, because there are more than 3,000 participating Costco franchises in the country.
This buyer-focused attitude is a boon for both members and participating dealerships. Chris Pappas, general manager, Toyota of Lake City in Seattle, Washington, said, “When the customers come in, they know they have a pre-negotiated price … And they feel good about it.”
Ensuring the entire experience is as pleasant as possible, Pappas noted, “There’s a safety net there too, to ensure the consumer gets the value they’re supposed to get.” Costco is “super aggressive” on pricing and audits transactions to make sure dealers play fairly.
Surprisingly, sales through the Costco Auto Program aren’t necessarily big money makers for dealers. “It’s not profitable [up front],” Pappas said. “You kind of have to look past the initial transaction.” However, he said money can be made down the road with trade-ins and vehicle service, because happy customers are often return customers.
Pappas said another benefit to participating dealers is that “there’s a very high closing percent.” Around eight of 10 Costco members who go to his showroom with an appointment end up with a new vehicle. Typical transaction rates are much lower. He said, “[The] normal closing percent would be around 10 percent.” To keep up, seven members of Pappas’ 30-person sales team are certified to work with Costco members.
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But what about franchise laws? Is Costco running afoul of these sometimes draconian regulations? “We obviously don’t sell cars ourselves … [they] can only be sold [through] franchised dealers,” Borg said, meaning all of their activities are on the up and up. Further clarifying things, Paolino noted, “We don’t get a per-sale or per-transaction fee,” though dealers do pay a small amount for marketing.
Not many of the nearly 50 million Costco members in the U.S. are familiar with the company’s automotive business, but it’s still a pretty popular program. Borg said their sales continue to increase with every turn of the calendar. Paolino added, “Members are purchasing more than 400,000 vehicles a year,” which is hardly miniscule. And with a laundry list of benefits, it’s likely the Costco Auto Program will continue growing.