Should TrueCar Investors Be Concerned About This Development?

By Daniel Miller Markets Fool.com

Image source: Getty Images.

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Brick-and-mortar retailers thrive when they capitalize on the impulsive spending of their consumers. When a customer peruses the aisles of Wal-Mart (NYSE: WMT) for milk and eggs, but also grabs a box of Russell Stover chocolates from the endcap, Wal-Mart wins. Now the retailer is taking that to a new level, hoping that in addition to the box of chocolates you didn't plan to purchase, you might even buy a car -- yes, you read that correctly, a car. Let's take a look at Wal-Mart's CarSaver partnership, and whether or not TrueCar, Inc. (NASDAQ: TRUE) investors should be concerned.

Can this actually work?

Wal-Mart plans to jump into the auto sales game using CarSaver, an online auto retail platform, and partnerships with a handful of AutoNation Inc.dealerships. The program will launch in April at 25 Wal-Mart Supercenters in four major markets: Houston, Dallas, Phoenix, and Oklahoma City.

Customers will be able to use CarSaver kiosks inside Wal-Mart stores, set up across from checkout lanes where vision centers and hair-cutting services are located, to select a new, used, or certified pre-owned vehicle. There will be options for financing and insurance at the kiosk as well.Once the customer selects a vehicle, the platform will connect them with one of the selected local auto dealerships and schedule an appointment. If the transaction is completed, the dealership pays a fee of about $350 to CarSaver.

But this program may prove to be impractical, as vehicle purchases happening impulsively at Wal-Mart stores doesn't seem like a match made in heaven. To be fair, auto programs similar to this have been wildly successful for Costco Wholesale, which generated roughly 465,000 sales for dealerships in 2015. But that program isn't intended to move the profit needle for Costco; rather, it's to provide value to its membership group to help keep customers enrolled. Wal-Mart doesn't have a comparable membership program that would benefit as Costco's does. What's even more intriguing is that Wal-Mart-owned Sam's Club does have a similar auto program to compete with Costco, and it's actually powered by TrueCar -- so why use CarSaver for Wal-Mart stores?

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The program's success might hinge on whether or not consumers feel like they're saving money using CarSaver, which is good news if the pilot program is any indication. In a pilot test at Wal-Mart in Florida last April, more than half of appointments scheduled led to a sale, and on average, with the no-haggle, up-front pricing that has made TrueCar and CarMax famous, saved about $3,000 off sticker price, CarSaver CEO Sean Wolfington told Automotive News. It's worth noting that $3,000 off MSRP is a trivial number, because consumers would likely get a similar discount at the dealership anyway,so chances are, consumers using CarSaver aren't really "saving" much money. Remember, CarSaver gets paid by dealerships for sales leads, and it's in its best interest to keep dealers profitable and happy. That said, as long as consumers feel like they're saving money, it could propel the program to success. And if successful, it could spellbad news for TrueCar, because it's basically the same business model. When you look at CarSaver's sales goals for the program, it could certainly take a bite out of TrueCar's market.

Will this move the needle?

The Wal-Mart CarSaver program aims to sell roughly 1,000 vehicles annually per Supercenter. If those goals are achieved, that initially means 25,000 units sold during the first full year. For context, TrueCar has sold 589,000 units through the first nine months of 2016. However, when you consider that Wal-Mart has about 3,500 Supercenters nationwide, and that CarSaver expects to be located in Wal-Marts nationwide within two years, that could take a huge chunk of TrueCar's business -- because both are vying for the exact same consumer.

Investors will have to wait and see if the match between Wal-Mart and vehicle sales works and rolls out nationwide, but the real question investors should be asking is, "Why the heck is TrueCar not powering this platform at Wal-Mart, instead of CarSaver?"

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Daniel Miller has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Costco Wholesale. The Motley Fool recommends TrueCar. The Motley Fool has a disclosure policy.