Vehicle-purchase programs offered by members-only warehouse retailers are becoming increasingly popular with dealers as a way to add incremental sales, even though they can squeeze profits.

Costco, Sam’s Club and B. J.’s Wholesale Club provide such programs offering near-invoice prices. With a call or click, customers select the make and model and are directed to a dealer who locates the vehicle and completes the transaction for a predetermined price.

Dealers typically pay a monthly subscription fee based on their locations. The retail stores do not collect a per-sale commission.

In charging a marketing fee but not taking a commission, the stores bypass the issue of operating as a dealer or broker in states permitting that practice.

“Most of these companies try to avoid that, because they would be subject to the enforcement and regulation of whatever agency is responsible for enforcing those laws in that state,” says Rob Cohen, a Los Angeles attorney who represents dealers.

“Also, if a warehouse paid a fee, and it was disclosed, it could be perceived not to be in members’ best interest,” he says.

Cohen says these programs operate more through a joint marketing agreement with dealers, with the warehouse negotiating set prices or percentage mark-ups for specific vehicles.

“The dealers who participate in the program simply agree to a fairly low price and certain issues and prices related to aftermarket products,” he says. “The club acts as a referral service. The participating dealership then takes care of the customer, honors the negotiated price and performs the transaction.”

The Costco Auto Program began in 1989 in California as part of the former Price Club. When Price Club and Costco merged in 1993, the auto program was carried over and re-branded with the Costco name.

Today, the Costco Auto Program is managed by Affinity Development Group, a San Diego-based marketing firm that operates similar programs for the Navy Federal Credit Union and American Automobile Assns. in Northern California, Nevada and Utah.

The plans offered by Sam’s Club and B. J.’s Wholesale Club are managed by Arkansas-based Member Services Inc.

With 430 warehouses and 2,800 affiliated dealers, sales from the Costco Auto Program are expected to exceed 350,000 units in 2012, up from 285,000 in 2011 and 255,000 in 2010.

When a new warehouse opens, Affinity researches the market and solicits participation from local dealerships. Those that respond must demonstrate an understanding of Costco’s value proposition of low pricing and high customer service, and explain how they would apply those values to members who visit their store. 

“We select dealers who are going to treat the member right and give them a good value,” says Gina Paolino, president of the Costco program. “In turn, we send dealers a volume of members so they can benefit from the relationship.”

Once selected for the Costco program, dealers receive administrative assistance from zone business consultants and member advocates, training and local-market price monitoring. 

“We comparison-shop local dealers and other programs that offer services similar to ours, and we currently beat them 97% of the time,” Paolino says. “We also check our prices against true market value. If we find a vehicle that we don’t believe is a value, we will exclude it.”

In most large metropolitan areas, the Costco program represents all vehicle brands except for exotics.  

Attorney Cohen says warehouse auto programs generally are mutually beneficial, as long as dealers can handle the pricing pressures.

“Dealers benefit from the programs insofar as they are exposed to a fairly large membership base,” he says. “The club benefits from the monthly fee revenue, and it’s another benefit they can offer their membership.”

“These are generally good programs as long as they don’t get too aggressive in trying to take too much of the profit out of the transaction,” Cohen adds. “Dealers are forever trying to maintain profitability, and if these clubs get a little too aggressive in their pricing, that makes it very difficult for dealers.”

Luk Blackwell, general manager of Pierre Chevrolet in Seattle, pays a monthly fee of about $1,500 as a Costco Auto Program dealer and averages six sales per month through the plan. He says it’s worth it, low prices notwithstanding.  

“You have to be willing to accept the margin compression because it’s a wholesale proposition,” he says. “You either accept that you’re going to allow people to purchase your product for no margin or you don’t. If you accept it, you’re going to go find alternate ways to make a living, whether it be from the finance side or profit from the trade-in.”

Blackwell says a regular dealership customer might be able to match the Costco Auto Program price if they enjoy haggling and can find a dealer that’s willing to do it.

“But Costco has taken all the legwork out of it for you,” he says. “They’ve found the dealer, they’ve pre-negotiated the deal for you. It’s really a much easier purchase experience for the customer.”

Costco customers automatically assume store prices are as low as it gets, says Jim Delgado Sr., general manager of Darcars Chrysler Dodge Jeep in Silver Spring, MD, and a 20-year Costco dealer.

“That’s the mindset with a lot of Costco customers,” he says. “When you explain the process and show them the factory invoice and the price, you can pretty much put the deal on the board because you’re going to deliver that car.”

Delgado’s dealership sells 12 to 15 vehicles a month through the Costco program. He says the closing ratio with Costco customers is 55% to 60%, compared with 20% for dealership walk-in buyers and 12% to 14% for Internet shoppers.

Delgado acknowledges lower margins, but he sees long-term benefits in return for his $1,200 monthly fee. “It gives you a quality customer who will come back to your service or parts department, or when their kid needs a used car, they come by,” he says.

Incremental Costco car sales help the Darcars dealership hit monthly objectives for sales and stair-step incentives offered by auto makers.

“In a regular month, say my objective is 85 but I’m only going to sell 65 or 68 to regular walk-ins and Internet people, so that cushion of the Costco people can get me to the next level,” he says.

Although Costco primarily partners with dealers, occasional auto maker promotions can sweeten deals.

A year ago, General Motors launched its first promotion with Costco, offering “GM Preferred Pricing” on ’11 and ’12 Chevrolet and GMC trucks, along with a $500 Costco Cash Card.

“Ten thousand members registered for that program and we sold 5,400 vehicles, two-thirds from the West Coast,” Paolino says.

GM now is bringing the promotion back, offering prices equivalent to discounts GM employees get. 

Subaru of America has sold 10,000 vehicles through a promotion that also offered a $500 Costco Cash Card.

“People trust Costco, and that brand aligns well with the Subaru brand,” says Michael McHale, Subaru’s director-corporate communications. “The promotion brought our vehicles to the attention of an audience that might not normally have considered them.”