Agency as the route to happy customers?

The last week has seen a number of conversations with ICDP members and other contacts about the prospects for agency to replace the traditional franchise system in dealer contracts.  It is something that we have looked at periodically in the past – including questioning back in our Autumn Meeting 2005 whether it might become more common with the introduction of the 2010 Block Exemption Regulations!  That didn’t happen, but in the last couple years we have seen some significant developments, and the background challenges that the industry faces make the arguments in favour of agency more compelling than ever.

In a true agency agreement, the agent can take no commercial risk beyond their own time and basic premises.  They get paid on the basis of each sale made, although there is the potential for additional bonuses as long as this does not require additional risk.  Some of the recent agency agreements have focused on specific model ranges or customer segments, such as battery electric vehicles and fleet sales, and whilst directly related investments such as demonstrators are OEM-funded, these still rely on the bulk of the fixed costs of the dealership being covered by the normal franchise arrangements.

The real interest comes from the initiatives by Toyota New Zealand since March 2018 and Mercedes-Benz Sweden from April 2019.  In both cases the full passenger line-up is included, and the OEMs’ results in their respective markets are entirely dependent on managing the new arrangements successfully.  At this point, both cases seem to be on track, with Mercedes recently announcing that they will implement the same model in Austria from April 2021, this time including commercial vehicles up to the Sprinter class in the agency model.  Immediately following the ‘go live’ date, there was some disruption to registrations, but this was quickly recovered, and both brands have shown some modest increase in market share since.  Our understanding is that the net pricing to the OEMs has improved when compared to previous dealer wholesale plus variable marketing expense.  In both cases, customers are able to choose their purchase journey online or physically in a dealership, and move flexibly between the channels.  The price they are quoted will be the same in either channel, and as they will be customers of the OEM, their data is the responsibility of the OEM, though shared with dealers as needed for delivery and aftersales.  It is a true omni-channel environment.

Although there are variations between European markets, in many cases dealers derive only a small part of their overall profit from new car sales, yet a huge amount of management time is devoted to keeping up with campaigns and bonuses in order to ensure that volume targets are met with the lowest possible level of discounting.  Inevitably some take a broad brush approach and disrupt the market with higher discounts than their peers, or take advantage of pack deals in order to achieve a higher profit on the resultant delivery mileage used cars.  In our conversations, we find that many dealer group bosses would willingly swap this chaos for an orderly market where the OEM determines the price that is needed to achieve the desired sales volume, and the dealer concentrates on delivering great customer service, as their differentiator in the market.  Some will inevitably declare that they do better out of a margin and stock push system, but this does not in our view represent a sustainable position for them or the OEMs they represent.

The first move has to be made by the OEMs – though arguably their brand dealer associations could also play a role in getting agency on the agenda.  So many other taboos have been abandoned over the last three months as a result of lockdown – such as virtual showrooms, video walkrounds, distance selling and home delivery, perhaps now is a good time to add the traditional margin and bonus system to the list?  At least for some brands, there is a window of opportunity to take stocks off the dealer balance sheet, remove the complexity of a margin system and variable marketing model that is no longer fit for purpose, and focus on a simpler, more transparent cross-channel deal for customers, delivered by dealers who can focus on customers.