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

By Rich Duprey – Updated Apr 6, 2018 at 5:16PM

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The warehouse club is the biggest car dealer in the U.S., but maybe not for long.

Buying groceries and a car to take them home in is getting easier after Walmart (WMT -1.93%) 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 off the sticker price on a purchase and every car or vehicle bought through CarSaver includes a lifetime warranty.

Man and woman driving in a convertible

Image source: CarSaver.

Disrupting the traditional car sales system

Buying a car at the grocery store isn't exactly new, as Costco (COST -1.40%) 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 off the average transaction price 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 differences between how the Costco and Walmart programs work. With the Costco program, members "connect with trained and certified contacts at the dealership so they can select a vehicle that is actually in their inventory." They then can get a price in person, over the phone, or by email. 

With Walmart's service, you can get the price revealed to you through an email or from a phone call from the dealer, but when I tested CarSaver, it gave me the quote right online. I didn't have to connect with the dealership at all.

Man and woman receiving key to a car

Image source: Getty Images.

In addition to being able to access the site from your home computer, there will be CarSaver Shopping Center kiosks in Walmart stores. 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 significant appeal. The no-haggle angle is one Costco touts as members get "low, prearranged pricing," and it's one of the reasons Carvana is seeing such great success.

Last year Carvana 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 is a dramatic improvement over the current system the vast majority of buyers use. 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.

Walmart is putting CarSaver Shopping Centers in 250 Walmart locations to start but it has room to grow as it has 4,700 stores in the U.S. that this could be exported to, plus nearly 600 Sam's Club warehouse stores. That compares to the roughly 520 locations Costco has in the U.S. and Puerto Rico.

It might not be as long as you think before Walmart becomes the country's biggest car seller, along with being the biggest grocery store.

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.

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