Should Costco Be Worried About Walmart's New Car Buying Service?

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Buying groceries and a car to take them home in is getting easier after Walmart (NYSE: WMT) expanded its car-buying service from 14 pilot locations to 250 stores across the country.

Through a partnership with CarSaver, a network of dealerships, banks, and insurance companies, Walmart customers can search an online database of new and used cars, apply for financing, and shop for insurance all at the same time. According to the service, car buyers save on average $3,500 on a purchase and every car or vehicle bought through CarSaver includes a lifetime warranty.

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Disrupting the traditional car sales system

Buying a car at the grocery store isn't exactly new as Costco (NASDAQ: COST) has long had a car-buying service at its warehouse clubs. Through the Costco Auto Program, club members can search for a variety of vehicles, including cars, motorcycles, jet skis, and even RVs. Once they find a car they like, they're directed to a participating dealership to complete the service. Buyers save about $1,000 and get a 15% discount on parts, service, and accessories at participating service centers.

Costco has become the biggest automotive retailer in the country. Last year it sold over 520,000 vehicles, up 6% from 2016, which is rather surprising considering total auto industry sales fell 1.8% last year.

That figure also puts it well ahead of more traditional car dealers such as AutoNation, which sold 329,000 vehicles in 2017, a 2.5% drop from the year before, and Penske Auto Group, which sold just under 502,000 vehicles last year, though its sales were up 10% from 2016.

Independent but together

There are significant differences between how the Costco and Walmart programs work. With Costco, you have to go to the dealer to find out how much of a discount you're going to get. Afterwards, Costco will review your contract if you want to make sure you got the right price.

With Walmart's service, you know upfront what the price will be, though it may be revealed to you through an email or from a phone call from the dealer. When I tested CarSaver, it gave me the quote right online.

In addition to accessing the site from your home computer, there will be CarSaver Shopping Center kiosks near the supermarket's checkout lanes, which sounds similar to its Jackson Hewitt tax prep services. They will be run independently of Walmart and have their own staff. There are also plans to expand CarSaver to include helping customers sell their vehicle by providing an "instant cash offer" from a network of dealerships that bid on the car.

Doing away with having to haggle with a car sales seems to be one of the biggest draws for Walmart's CarSaver as it is arguably one of the most dreaded aspects of the car buying process. Knowing up front the price you'll pay could give it a significant advantage as it is one of the reasons why Carvana is seeing such great success.

Last year it sold 44,252 cars, more than double the year-ago number, and it goes even one step further and will deliver your car to your door. Carvana could be threatened by Walmart's expansion as the rollout to hundreds of stores immediately gives the retailer four times the number of locations Carvana has.

This could be big

Being able to buy a car, finance it, and drive away with it without having to engage with a salesman makes the car buying service a dramatic improvement over the current system. While you still deal with a dealership through Walmart, taking the negotiation factor out of the equation and making the transaction every bit like buying groceries gives it a step up.

CarSaver could also crimp Costco's lead. Although 250 stores are small in comparison to what Costco currently has in place, Walmart has the advantage of having over 4,700 stores in the U.S. this could be exported to, plus nearly 600 Sam's Club warehouse stores. Costco has fewer than 500 locations.

Price transparency also puts it ahead of Costco. It probably won't be in 2018 when Walmart surpasses its big-box rival in car sales, but it might not be as long as you think before the retailer becomes the country's biggest car seller along with being the biggest grocery store.

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Rich Duprey has no position in any of the stocks mentioned. The Motley Fool recommends Costco Wholesale and Penske Automotive Group. The Motley Fool has a disclosure policy.