The Surprising Way That Costco Is Building Its Member Base

Photo by Carl Court/Getty Images
Carl Court/Getty Images

It’s hard to hate Costco. The company treats its employees very generously, offers great deals on a huge number of products, and is a viable alternative to other big-box stores like Sam’s Club. Hell, you can even get a hot dog and a soda for $1.50, the same price it was 30 years ago. But when company leadership isn’t devising the best way of selling industrial-sized barrels of olive oil, 90-packs of tube socks, or conspiring to dump poorly selling books by outspoken conservative commentators, they’ve quietly become one of the nation’s leaders in another area entirely: car sales.

From a number of news sources this week, we found out that not only does Costco sell cars — which many people had no clue about — but they sell a huge amount, more than 400,000 in 2014, according to Bloomberg. These are vehicles of all different types of makes and models, and that 400,000 figure is double the amount of cars the company sold in 2008, not even ten years ago.

So, if you’re following along: Costco sells cars. A lot of cars. And at an explosive rate.

Per that same Bloomberg report, the number of vehicles that Costco is moving out of its stores puts it up there among the leaders in the country. The nation’s top dealer group, AutoNation, sold 530,000 vehicles in 2014. With the numbers Costco is putting up, it could surpass AutoNation soon, even in the next year or two.

Basically, Costco uses its immense size and clout to get better deals on vehicles, which it can then offer up at competitive rates to its members. Also, Costco uses transparent pricing methods and helpful model comparisons, two things that buck traditional dealership experiences — experiences that people tend to hate.

By utilizing its negotiating power, brought on by 45 million members, Costco is able to save the average car buyer roughly $1,000 on the final price.

It’s no wonder the company’s auto sales arm is seeing such huge growth.

But here’s the real kicker: Bloomberg says that Costco doesn’t even make money off of its car sales. It instead facilitates the sales through another company, and simply uses the discounted vehicles to attract new members. New members do make Costco money, through annual fees that all members pay.

Even without making any money, and member savings in tow, what is likely Costco’s biggest advantage in the auto businesses is the one big thing that separates it from all the other auto sales companies out there. And that is, Costco is not a car dealership.

People hate shopping for cars, as has been well-documented for several years now. Constant reasons cited include pressure from salespeople, confusing pricing and financing, and the general feeling that they were somehow being taken advantage of — all justifiable reasons to hate the process. Surveys show that people hate it so much that they would rather just shop online, even if it meant giving up some savings in the haggling process. In short, it’s the fixed prices that are the true attraction for potential buyers.

In a statement to Business Insider, Costco said that while the company doesn’t actually make money from the sales, it does bring in revenues through its service departments. The sales portion of the equation helps facilitate that.

“The Costco Auto Program helps members purchase new and select pre-owned vehicles from exclusive participating dealerships in their market area that have been selected, trained and certified to provide a top-notch buying experience, and offer vehicles to the member at a great value,” the statement said. “Additionally, we bring more business to our participating dealerships’ service departments; with the 15% parts, service and accessories discount available to Costco members.”

Costco’s taking advantage of consumers’ hatred of car dealers, and it’s hard to really fault them for it. Another example of a business doing the same thing is Tesla, which has retail locations, but does not run them like a traditional dealership. Instead, employees make a base salary, not commission, and an appointment must be made ahead of time to test drive a car. Tesla has had to fight tooth and nail to keep its sales system alive, but it does appear to be winning the fight.

Both Tesla and Costco are using car dealerships’ tactics against them, and it’s working. Costco may not be the first place you think of when you plan to buy a car, but with the stress-free process and savings to be had, it’s likely to be a player in the business for years to come.

Follow Sam on Twitter @Sliceofginger