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Costco's CPO Program Centers on Providing Value

The concept of your local Costco as a resource for car-buying in addition to being a market's goods-in-bulk outlet is not a new one. In fact, the Costco Auto Program has been around in one iteration or another for more than two decades.

But in the last few years, the program has expanded to include certified pre-owned vehicles.

To shed some light on this, Auto Remarketing recently talked to a couple leaders of the Costco Auto Program about the company's in-roads within the CPO market. As Rick Borg, vice president of the Costco Auto Program, put it: "It goes back to our central core mission, which is creating value."

And apparently, that value is spreading for dealers.

How it All Began

The Costco Auto Program has existed since 1989. And years later, the program noticed the burgeoning presence of the certified pre-owned market and saw an opportunity.

Jim Newbery ? the executive vice president of industry initiatives and strategic planning for the Costco Auto Program ? said that around 2003 or 2004, "we saw that CPO was becoming an increasingly important part of the dealer's and OEM's approach to marketing cars."

They also noticed how leasing had become "very aggressive," he said.

"Dealers have always looked at various operations in their stores other than new-car sales to generate absorption numbers and to assist in running what was becoming a bigger and bigger and more aggressive dealer network within the United States," Newbery said.

"We looked at certified pre-owned, and we felt this was an opportunity for us to tell our members that there is another avenue to purchase a vehicle that is going to be supported by not only our very strong dealer body, but also by the manufacturer," he added.

He added: "We looked at that as an avenue by which to promote more vehicle purchases by our members to support our dealer body, because obviously, when you have CPO, you have a whole new avenue through the used-car side of the business; and you support the fixed operations side because a vehicle that a dealer sells that has 25,000?30,000 miles on it is a vehicle that is going to require more service sooner in its lifecycle for the new owner."

The program was piloted in 2008 and 2009 before being rolled out fully in 2010.

Steps of Costco CPO Buying

On the Costco Auto Program's website, the company offers a step-by-step on how exactly the process works for a Costco member interested in buying a certified car from a participating Costco Auto Program franchised dealer.
It begins with a "locate and contact" process online.

Members can visit CostcoAuto.com. After clicking the 'Locate a Dealer' tab, the visitor is asked to provide the make/model of vehicle in which he or she is interested as well as his/her name, phone, Costco membership number and email, the company explained.

Once the member clicks 'locate a dealer,' there is a page that appears containing contact information of the nearest Costco Auto Program participating dealer offering that specific make and model. He or she is also provided next steps.

The Costco Auto Program also sends all this information to the email address provided.

The Costco Auto Program said participating dealers can also be located through a toll-free number, 1-855-220-SAVE (7283), where call center agents are there to help with the CPO dealer search.

An Authorized Dealer Contact from that particular dealership will contact the member within 24 hours and schedule an appointment. (They also have the option of contacting the authorized contact themselves instead of vice versa.)

Then, the Costco member meets at the participating dealership with the contact, who can help them choose a factory CPO car to buy. The customer must show his or her Costco membership card.

The website also explains the Costco Member-Only Price Sheet, "which shows your exclusive savings on the vehicle you selected and indicates any other applicable documents needed to view your exclusive prearranged Costco member price," the company indicated.

"After that, have the Authorized Dealer Contact complete the Member Pricing Form with you so you can see how much you saved as a Costco member," the website notes. "The Authorized Contact will have a copy of the Member Pricing Form at the dealership. In addition, the Member Pricing Form will be included in the confirmation e-mail we send you after locating a dealer."

If a Costco member buys a factory CPO vehicle and then completes a member satisfaction survey within 30 days, he or she will be given a voucher to put purchasing parts, service and accessories at the same dealership.

Structure of Dealer Body

So, how exactly, does the Costco Auto Program have its participating CPO dealers set up? First, Newbery explained that to be part of the CPO program, the dealer must be part of the overall Costco Auto Program and be a member of its dealer network. It also has to be a franchised dealer.

He then went into more details of how the program would work in a given market.

"Let's just assume there are three Costcos in a market. And let's just say for the sake of discussion there are six Ford dealerships in the market. We are going to pick ? at most ? three of those six Ford dealers to serve the three Costcos," he explained. "But in some metro areas where a couple of the Costcos may be relatively close together, we may only take one or two. So we do not have multiple same-franchise dealerships represented to a Costco member.

"A Costco member is basically assigned to a warehouse. When the member comes through the program, we direct them to the participating Costco Ford dealer. That Ford dealer is wed to that particular warehouse or warehouses; therefore, the member will be directed to that specific dealer and to specific member contacts within that dealership," he added.

And when a dealer wants to sign onto the program, they're reviewed for qualities like aggressiveness with inventory levels, pricing ? "there needs to be a value there," Newbery said ? reputation within his or her market and CSI scores.

The program "take their time in selecting dealer" and their turnover is very low, he added.

Benefits to Consumers & Dealers

When asked why it would be advantageous for a consumer to buy a CPO ride through the Costco program versus simply walking onto a dealer's lot, Newbery had this to say.

"Obviously, one of the big advantages is that there is a value, that you know going in how the pricing is going to be structured. Also, the way the program works, the members have to come through our call center or through our website. We're going to direct them to a specific member contact within that dealership," he said, adding that since the member contact is familiar with the program, "there's not a lot of bouncing around."

Additionally, there is the Member Advocacy Group, which can "confirm to that member that everything was done correctly," if any questions or concerns pop up during the whole process.

Though these types of concerns do not happen very often, Newbery said, having the MAG for support can help to increase the "comfort level of the purchaser."

"And should there be any form of performance measurement, that individual is going to grade the dealer in a stronger, more positive manner," he added, referring to CSI and other industry criteria that results in a measurement of buyer satisfaction with the vehicle purchase process.

Newbery went on to discuss some of the dealer benefits of the overall car-buying program, starting with the new-car side. He said, "There is a known quantity of referrals that we're going to send to that dealership each month," and this can help the dealer when there are stair-step programs or when certain vehicles are on allocation at a stronger or a more restricted percentage.

"There's the potential that our program can support the allocation process so that the dealer is comfortable that he or she is going to see vehicles at a certain rate," Newbery noted.

The second benefit, particularly seen for CPO, is on the fixed operations side.

Given the strict reconditioning schedules from OEMs, "that generates business through the service department, labor sales and parts sales," Newbery said.

"We can also affect the turn rate for some of these departments, because we're going to be sending people to them," he added.

He noted that the average Costco warehouse has 115,000 members attached to it. So within that one warehouse, any of those 115,000 members looking for, say a Ford CPO vehicle, will be sent to that one specific Ford dealer.

The company also has a stand-alone parts and service program, and it tells all the members to go to that same dealer, as well, for any same-brand units they already own.

Sharing more points, Borg said: "The value (for dealerships) is increased volume, not only on the new-car side, but now, as an extension, into the CPO side as well. And the more volume we can bring that dealer, everything trickles down and cascades from pushing more business to that dealership."

He went on to adde "It's a value for members, but it's also a value for dealerships: increased turn, lower cost of acquisition, conquest sales and exclusivity in their markets versus other dealers."