How the motor retail sector interacts with its customers has seen a significant change since the introduction of Covid-19 restrictions in March 2020. Retailers have adapted to utilise online sales tools and shifted focus to used cars as a consequence of supply issues.
The business model for some brands will continue to evolve and be accelerated due, in part, to the way retailers have successfully embraced technology to meet customers’ requirements. One significant evolution is the move towards retailers becoming sales agents instead of franchise operators.
Mercedes, Stellantis and Vollkswagen are all taking steps towards introducing an agency model and Lotus in the UK has completed its transition. Others are likely to follow at varying degrees of speed.
The agency model is not a new concept, either in the wider market or within motor retail. But, as with any major change, there are concerns among many existing dealers who fear the move may be detrimental to the profitability and even viability of their business. One thing is certain, OEMs will have greater control over the customer, removing an element of autonomy that most dealers enjoy and utilise to their advantage. With that control comes greater risk and cost for the OEM.
What will it mean in practice
Subject to the fine detail of the agency agreements, acting as an agent for new car sales places legal obligations on both OEM and retailer. True agency agreements move the onus for brand investment onto the OEM, as well as the need to set prices at a level that ensures volumes are achieved across a whole nation. These are not risks taken lightly and OEMs will need to invest significant sums in analysing data and determining how best to position themselves in the market.
Should an agency agreement be withdrawn from an agent, compensation is likely to become payable so picking the right agent from the start will be essential from brands. Just because a dealer holds a franchise agreement, it may not necessarily secure an agency agreement.
One of the key outcomes of a move to agency will be a reduction in price competition between neighbouring dealers selling the same brand. Set pricing should benefit both OEM and retailer as margin is not eroded from retailers pursuing a volume target. The OEM takes the risk in getting the pricing wrong but if they do, the retailer could also suffer from reduced agency fees.
The consequences
Allocation of margin will be critical and can be expected to form a key part of the agency agreement negotiations. Retailers are not powerless here. OEMs are pursuing agency agreements because they value the service provided by the dealer network, from product knowledge, physical presence for test drives and after sales servicing. If these aspects were not valued by OEMs then why not just pursue a direct sales model and cut retailers out altogether?
With that in mind, agency fees must be set at a level that compensates the retailer for the service it provides, this may be irrespective of actual volumes where the retailer cannot influence selling prices in a competitive market. However, we do not see a situation where retailers will be demotivated to the extent that that service and standards decline, ultimately impacting brand value. The customer must remain at the centre of the process.
If we assume overall net income can be maintained at levels comparable to the current franchise model, there will still be movements in both gross income (from agency fees) and costs.
People, as one on the main costs for a retailer (especially skilled salespeople with an ability to manage stocks) mould customer buying decisions and shift units. These skills, for new cars at least, are likely to be less in demand in favour of a customer service, less sales focussed offering. Such staff will not be volume driven and will operate on a more fixed salary basis. Whether this allows the retailer to reduce cost or introduce a service-based incentive structure will be determined by the agency fee structure and the staff themselves.
One cost that will reduce will be the cost of funding new stock, which will now fall under the responsibility of the OEM.
The experience of visiting a dealership (should that be needed at all) will change and the terms of the agency agreement will have an impact. A generous agency fee will improve customer service as the agent wishes to ensure the customer chooses its brand. Low agency fees and the customer may be directed towards a used car or even to an alternative brand within a dealer group portfolio with a more generous agency fee. Retailers are likely to have competing objectives.
Should volume targets be removed, dealer loyalty to a brand may diminish. Deal by deal profitability will dictate the retailer’s focus, driven to maintain the level of profit generation required to increase shareholder value.
The structure of retailer balance sheets will also change, alongside the values that are NOT recorded on the balance sheet. New car stock will become a thing of the past, alongside the funding obligation that goes with it. Intellectual property values will be under scrutiny. Whether a franchise agreement would be valued higher by a buyer than an agency agreement remains to be seen, as many factors such as brand, agency fee, brand investment and volumes all come into play.
So who benefits?
An agency model will give OEMs far greater control over the customer but can benefit retailers provided the agency agreement is drawn up fairly to remunerate each party for what they bring to the customer journey.
There will be winners and losers. Smaller independent retailers will be able to compete on a more level playing field with regards to price competition being removed. However, larger groups will have the resources to provide a slick customer experience and maintain a larger used car operation to supplement the agency income.
The transition to agency will be an interesting journey. There remains uncertainty over so many areas on the side of both OEM and retailer. What will be the effect on pricing when there is agency and non-agency competing brands in close proximity, or even within the same group? At which point does an agent earn its fee – at test drive, customer product session, order take, fulfilment or a combination? Who determines which agent will fulfil an order where no actual customer engagement has taken place - postcode, customer preference, OEM discretion?
Given the direction of travel, it feels inevitable that agency agreements will form a major part of the motor retail landscape in the very near future. While retailers may question the motives of such a move and resist strongly, securing a seat at the table from the outset to ensure any agreements reflect their interests would be advisable.
At the centre of this movement must be the customer. Retailers are vital to this relationship. While retailers remain relevant and valued by the customer then an appropriate agency fee can and will be earned. Maintaining relevance must therefore be one of the key objectives of retailers, irrespective of trading model.
Agency agreements will become the norm for some. Retailers are skilled at adapting but the handing over of price and customer control to OEMs with no direct retail experience does introduce risk that retailers will need to manage alongside the OEMs in close partnership.
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