How Costco Has Emerged as One of the Country’s Top Car Sellers

October 6, 2016, 7:56 PM UTC
Costco 2015
Customers push carts through a parking lot after shopping at a Costco Wholesale Corp. store in Nashville, Tennessee, U.S., on Friday, Sept. 25, 2015. Costco Wholesale Corp., the largest U.S. warehouse-club chain, is expected to release fourth-quarter earnings figures on September 29. Photographer: Luke Sharrett/Bloomberg via Getty Images
Photograph by Luke Sharrett — Bloomberg via Getty Images

People flock to Costco Warehouse (COST) to buy everything from paper towels in bulk to its Kirkland house brand of food.

But increasingly, Americans are turning to Costco to buy a much bigger ticket item: an automobile.

Last year, Costco sold more than 465,000 vehicles through partnerships with auto dealers, according to Costco Auto Program. That ranks it up there with the top dealership groups AutoNation (AN) and Penske Automotive Group (PAG), according to Automotive News. And that was nearly double the number of cars sold through Costco just five years earlier.

To drum up 2016 car sales, Costco is again working in partnership with General Motors (GM) for its popular Holiday Sales Event, which began Saturday and runs through January 3, as reported by Business Insider.


Though Costco doesn’t itself sell the cars or book the revenue since the deals are made through its authorized dealerships, the service offers the retailer a crucial advantage: its makes Costco membership all the more attractive and sticky at a time the company is competing with a resurgent Sam’s Club (a division of Wal-Mart Stores (WMT)) and the fast growth of Amazon’s (AMZN) Prime subscription membership program.

“The Costco Auto Program benefits Costco and Costco members by bringing value to the Costco membership and driving new memberships,” a Costco Auto Program spokeswoman told Fortune.

Costco has about 45 million card holders (in addition to tens of millions of small business members) who are more affluent with better credit scores than the American average. (The average household income of a Costco member is about $120,000, compared to $80,000 for a Sam’s Club member.)

Membership fees pumped $2.5 billion of pure profit into Costco coffers last year, making it essential to keep people renewing their memberships. (Last year, 91% of Costco members renewed, accord to its most recent annual report.) And the more people see benefit in membership, the more they’ll shop at Costco. The retailer is clearly feeling the heat from Amazon, whose 50 million Prime members are looking to make the most of their $99 annual fee and can order many of the same items without having to drive to a store.

And of course, people who buy cars need to fill them with gas, which is also big business for Costco. As of the start of the current fiscal year, 473 of Costco’s 686 warehouses had gas stations. Costco doesn’t break out its gas revenues, but 16% of its $116 billion globally last year ($84 billion of that was in the U.S.) came from its gas stations and pharmacies.

Costco has been careful to make sure the auto program links members to dealers who’ll give good service. For instance, Costco doesn’t offer vehicles that are out of manufacturer warranty and has a dedicated team for assisting customers shop for cars. A customer survey by Costco claims 95.5% of members rates the quality of participating dealerships excellent to good.

Consistent with Costco’s bulk-for-the-wealthy reputation, the cars sold via its partnerships skew high-end: some 18.5% of Costco vehicle sales were luxury brands, versus 12.2% nationally. (Lexus, Acura and BMW were the top brands on the luxury side. Among non-luxury names, Toyota, Honda and Subaru led the way.)