What will a move to the agency model mean for motor retail?


16 December 2021

The franchise model has long been established within the motor retail industry. Though the dealer is linked to the manufacturer in terms of branding, know-how and regional exclusivity, it sells cars as a separate business, buying vehicles from the manufacturer and selling them on to customers itself.

At its simplest, its profits on the sales side of the business derive from the mark-up it charges customers over the price it pays the manufacturer. A familiar set up to all.

But recently there has been a move towards a very different business model (partly driven by electric vehicles), and as it gains traction, dealers will have to adapt quickly. This is the agency model. The dealer operates more fully as a representative of the manufacturer. Its showrooms will still function as a physical touchpoint with the customers, but it is essentially the manufacturer’s touchpoint, not the dealer’s. The dealer will not own stock, and it will conclude contracts with customers on behalf of the manufacturer. The contract for sale will be between the manufacturer and the end customer. The dealer will earn a commission on the sales it makes, but if it is a genuine agency (rather than some sort of hybrid) the dealer/agent will have no control over prices and discounts.

From a legal perspective the two are very different beasts and governed by different legislation. This will impact on the running of dealership businesses. There is legislation in place to prevent a manufacturer from exerting too much control over its franchisee dealers. Admittedly the block exemption rules for vertical agreements allow practices which would otherwise be seen as anti-competitive.

Nevertheless, a manufacturer cannot (for example) set minimum prices for its franchise dealers, which would be a hardcore breach of anti-competition law. An agent, however, is essentially a mouthpiece for the manufacturer. The manufacturer is therefore free to dictate the end prices which customers will pay; after all, it is the manufacturer which is ultimately contracting with the retail customer.

The manufacturer is also much more likely to exert control over its distributors’ practices, even more than it does to protect its brand under the franchise model. An agent will use the manufacturer’s terms of sale, not its own. Customer bartering and showroom discounts may become a thing of the past.

Why are manufacturers keen on the move to agency? On the face of it, one might question the appeal of a model in which the manufacturer maintains the burden of the inventory, and cannot offload this risk to its distributors. But agency is seen as the best approach to enable effective omni-channel retailing. Meanwhile, the payback for additional risk tends to be a bigger margin. With agency, the manufacturer will retain all of the margin for sales to customers, and the commission it pays its dealer agent may be lower than the margin earned by a franchised dealer. So the manufacturer potentially benefits from lower costs, better returns on sales and better value for the customer.

Equally important will be the appeal of more directly and completely owning and controlling customer data. Manufacturers will no longer be one step removed from much of the information received from customers. Properly managed, in a data-driven world, this will be an even more valuable asset. Customers will more likely make even more decisions about vehicle choices online, and with more sophisticated “virtual” showrooms likely on manufacturer-controlled websites, manufacturers will quickly get greater insight about customer choices which can be influential on product decisions. Of course the dealer showrooms will still be an integral part of the customer experience. For example, no amount of online interaction will replace physical viewings and test drives.

Will the agency model benefit dealers? Dealers will likely still keep a central position in the sales process – including vehicle handover – and the prospect of a more consistent pricing strategy and less risk will be attractive, particularly as (prior to the recent extraordinary situation arising from semi-conductor shortages, for example) profit margins on new car sales have been trending downward for years. Certainly, dealers should be able to protect their sales margins in a commission-based system, and we expect that manufacturers will remain heavily reliant on them. Of course, the extent to which a switch to agency impacts on a dealer’s aftersales business will be critical too – with dealers having a model where they are successfully selling service plans (as well as extras such as paint protection) at the handover.

Whatever happens, we expect that dealers will keep a central position in automotive sales. As agency models develop, dealers will need to adapt so that their expertise in the manufacturers’ products will be paramount. Providing they can embrace the cultural shift that this may entail, we believe that the future is still promising for dealerships.

The content of this article is for general information only. It is not, and should not be taken as, legal advice. If you require any further information in relation to this article please contact the author in the first instance. Law covered as at December 2021.

Contact

* denotes required fields.