When Americans think of car sales, automakers like General Motors (NYSE: GM) and Ford usually come to mind, as do scenes of parking lots filled with shiny vehicles at local dealerships.
However, most consumers would be surprised to learn that Costco Wholesale (NASDAQ: COST) is one of the biggest car dealers in the country. Last year the Costco Auto Program sold more than 650,000 vehicles, accounting for nearly 4% of the estimated 17.7 million vehicles sold in the U.S. last year. Even more impressive is that Costco's vehicle sales rose more than 25% from the year before, compared to just a 0.6% increase for the overall industry. In a three-month holiday sales event with GM at the end of the year, auto sales rose 22%.
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How it works
Costco doesn't actually sell vehicles directly. Instead, it acts as a negotiator for its members, offering low, fixed prices on a wide range of vehicles from local dealerships. Costco members simply enter their zip code and see a list of available vehicles selling for below the standard MSRP (Manufacturer's Suggested Retail Price). The fixed prices, which save Costco members on average more than $1,000, seem to be the biggest selling point of the program, as they allow shoppers to avoid the usual hassle of haggling over prices and dealing upselling. It also gives them the peace of mind of knowing they got a good deal, as Costco has significantly more leverage than the average customer.
Why it matters to investors
Costco's auto program is just one of many perks to being a member of the warehouse club. Though shopping at its bargain-priced warehouses is the most obvious one, Costco members also get benefits like discounts on vacation packages, cruises, and hotels, and savings on items outside the usual retail fare like gasoline, optical, and auto parts like tires. In many ways, the list of wide-ranging benefits resembles Amazon (NASDAQ: AMZN) Prime -- though a Costco membership is cheaper -- and that model may explain why both companies continue to take market share from other retailers.
Costco doesn't make any money from the Auto Program. Rather, it uses the service to attract members and retain existing ones, much like Amazon does with add-on Prime perks like video streaming. Amazon CEO Jeff Bezos once explained that model, saying, "When we win a Golden Globe, it helps us sell more shoes." If a new member joins Costco to get a deal on a new car, they're likely to start shopping at the warehouse club, adding to Costco's business.
The popularity of Costco's Auto Program is self-evident, as sales have more than tripled in the last decade from just 200,000 vehicles sold in 2008, and the company is investing in it to keep up its strong growth, hiring more than 300 employees.
The auto program is unique among retailers, and one of many examples of why Costco is beloved by members, as it almost always ranks near the top in customer satisfaction surveys. The program also shows why Costco's business model is so hard to disrupt. Its membership base gives it a defense against competitors that most retailers don't have, and its renewal rates range around 90% because of perks like the auto program. If you save $1,000 on a new vehicle with Costco, you only need to buy one once a decade to make a membership worth it.
With deals like that, it's clear that Costco won't be threatened by the "retail apocalypse" anytime soon. In fact, disrupting the auto market just looks like the latest step in making the company nearly invincible.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Jeremy Bowman owns shares of Amazon, Ford, and General Motors. The Motley Fool owns shares of and recommends Amazon and Costco Wholesale. The Motley Fool recommends Ford. The Motley Fool has a disclosure policy.