Costco is working with new-vehicle dealerships to expand its members-only discount program beyond auto purchases to service and parts sales.

That effort is working: Costco says the auto program's transaction volume, including service and parts, increased by 7 percent over the previous year.

Rick Borg, executive vice president of program operations for the warehouse retail chain's auto program, credits that growth to learning from experience what drives participating dealerships' business. More than 900 franchised dealerships are enrolled in the service and parts program, Costco says, along with 475 independent garages.

"It's a win-win-win," Borg told Fixed Ops Journal. "It's good for our members, good for dealers and good for Costco because it helps us retain our members."

Victory lap

On the retail end, executives at Victory Toyota in Seaside, Calif., say partnering with Costco has become a major driver of their business. The dealership has steadily built service and parts volume through Costco's coupon program since it started participating three years ago.

More than 900 new-vehicle dealerships accept coupons that give Costco members service price breaks.

Each month, about 15 service customers redeem Costco coupons for 15 percent off the cost of service and repairs at Victory Toyota, said Jeremy Carter, vice president of service and parts for the dealership on California's Monterey Peninsula.

The coupons also boost sales of parts — for instance, Costco customers who bought vehicles through the discount program can get half off accessories.

"The service program really benefits the parts and service department," Carter says. "Our return on investment is good because we add new customers. Anytime we make a new customer, that's a lifetime value of $600,000 to $700,000 to the enterprise."

Coupon rate

Club members can go online at Costco.com, select a local participating dealership or independent garage, and print a coupon for a 15 percent discount on service and parts, with a maximum savings of $500.

The offer's exclusions are crafted to avoid pinching dealerships on competitively priced services. Discounts are not available on oil changes, state-mandated inspections or airbag repairs.

And no discount on tires, though for a different reason, Costco's Borg notes. "We sell a fair amount of tires ourselves," he says.

"It's a win-win-win. It's good for our members, good for dealers and good for Costco because it helps us retain our members."
Rick Borg, Costco

Victory Toyota has been in Costco's vehicle buying program for more than a decade. But the dealership initially passed when Costco added discount parts and service coupons to the auto program in 2011.

Like most other franchised dealerships, Victory already heavily promoted parts and service with its own discount coupons and merchandising.

"We didn't start participating immediately when Costco added service," says George Czechowski, the dealership's general sales manager.

Many other dealerships that took part in the sales program also passed on the service expansion. Yet Costco's surveys of its members showed they also wanted to save on reliable service and repairs. So the retailer "devoted more resources to the service program," Borg says.

High standards

Costco limits its auto purchasing program to franchised dealerships that it has extensively vetted and that agree to uphold the retailer's quality standards.

But Costco now includes independent repair centers in the service and parts program. "The first few years, we just had automaker franchises," Borg says, "but we're trying to backfill to get brands not represented by franchises in" metropolitan areas.

Costco maintains stringent guidelines for participants in the program, Borg adds.

"We check their online reputation, check their social networks," he says. "We want them to have the ability to make a range of repairs, including alignments. They must have a minimum of six bays, restrooms, a lounge and a great customer service attitude."

Costco added a full-time staff member in 2014 to recruit more independent shops, as well as dealerships in the vehicle purchasing program that didn't initially add service and parts. The company hired three more recruiters by 2016.

Casey Ivins, a regional manager of field staff for Costco, says his team trains dealership service and parts personnel in the program's features and provides ongoing support. Five out of six dealerships that take part in the buying program now are in the service program as well, Ivins adds.

No charge

Beyond nominal fees to cover promotional materials, Costco does not charge participants in the service program or share revenue. Instead, the company says its efforts are about adding services that keep its members happy.

Borg says company surveys suggest that 93 percent of Costco members consider the auto programs a valued service.

Victory Toyota says the program attracts new customers who tend to boost the dealership's customer satisfaction scores in factory surveys.

"And some of those service customers buy new vehicles another time," Carter says. "It happens frequently.

"Like the old saying, the front end makes the first sale, service sells the next three."