If manufacturers switch to agency, will they also change their behaviours?

The momentum of the switch to agency contracts for car dealers seems to be gathering pace, with agreements being reached for some brands and markets, and formally proposed in others.  Although there are dissenting voices, it does seem that manufacturers and dealers will find enough common ground to strike deals, and agency arrangements will become commonplace in the next two to three years.  The expectation is that this will bring a range of benefits to manufacturers, dealers and customers, but this is dependent on behavioural change on the part of the manufacturers – as they direct the sales process, they have the ability to make it work … or fail.

The principal source of direct financial benefit from agency relates to the elimination of inefficiencies in pricing, promotions, network and inventory.  There is the opportunity for benefit from leveraging the customer data that the manufacturer now has direct access to, but that is dependent on how well they do this, compared to the current performance of their dealer network under a franchise system.  There may also be opportunities for some economies of scale by centralising some administration activities, but this is small beer compared to the more effective management of the sales funnel.

A question that came up in discussions this week with one pro-agency dealer group CEO is whether the manufacturers really understand the changes that are required on their part.  Under agency, the responsibility for driving registrations transfers to them from the dealer.  If they over-price the new car, under-value the trade-in, or do not ensure the right volume and mix of cars to the market, they will miss their sales volume targets.  If they continue to insist on ever-higher standards of CI and other brand-related investments, these costs should be carried by them under a genuine agency agreement – though there are indications that some manufacturers will try to dodge this liability.

What is interesting to consider is what might happen if a manufacturer gets it wrong.  If you are the MD of a national sales company and have a sales target from HQ to meet, what levers are available to you if the month or quarter is not going quite as well as you hoped for, and how does this affect the operation of the agency model from the perspective of all the affected parties?  The fact that your network is operating under agency does not actually prevent a manufacturer using the same levers as they do under a margin system – it’s just that the effect is more immediate and directly felt, and that this will hopefully improve discipline.

If we take pre-registrations for example, the manufacturer could do this themselves, creating a stock of zero km cars that then need to be retailed, or if the agency agreement only applies to new cars, they could offer dealers special terms to buy and register excess stock, which the dealers would then be free to retail at the prices they chose.  Either way, those cars will come out onto the retail market in the following weeks, competing with the new car offer, and if they are in dealer stock, nobody should be surprised if the dealers push those rather than an agency sale of a new car.  At the end of last year, we saw high volumes of pre-registrations on battery electric vehicles – one of the product segments that is most likely to go to agency early – as manufacturers sought to achieve lower CO2 fleet averages for the year.

Similarly, there is nothing to stop a manufacturer selling more cars through parallel channels such as brokers, but although that will not result in direct competition in the dealer channel, it will result in there being a contradictory, lower price offer in the marketplace.  This puts pressure on the manufacturer’s own new car pricing, and totally dilutes the principles of a consistent brand and price offer, with direct end customer contact.  Despite this, will all manufacturers be able to hold their nerve and cut this channel off completely?

The third main ‘safety valve’ that remains is fleet sales, and this is commonly used in Israel for example where agency is used by a number of importers.  The problem is that fleet customers do not take long to realise that there is always a better deal to be done at the end of the month or quarter, driving discounts up as manufacturers scrabble to reach their sales target with increasingly savvy professional buyers.  The deeper the discount, the more flexibility the fleet operator has on pricing when they come to defleet, so whilst the residual value damage maybe delayed, it is still there, and this affects the opportunity of the manufacturer to provide competitive finance offers on new cars.

So all the same options are available under agency as franchise.  Manufacturers could choose not to use these now, and restrict supply to better match demand, but semi-conductor shortages aside, that does not seem to be the case.  The effective implementation of agency critically depends on alignment of goals from top to bottom in the manufacturer organisation, and the willingness of the top management to accept that life will not be as predictable as in the past.  That may be a greater influence on whether an agency implementation is successful or not, rather than contractual or operating details at the market level.