What will happen if you hit reverse on agency?
At a time when all the talk – in Europe at least – is about moving from franchise to agency as the best approach to enabling effective omni-channel retailing, it may seem odd to write a blog about the effects of going to agency, then changing your mind. This question was already on my mind a couple weeks ago, but a UK dealer group CEO also expressed his opinion to me last week that some manufacturers will do exactly that – implement agency, then revert to franchise after a period. I agree with him that this is a real possibility, and it is interesting to think about why that is the case, and what the implications will be.
In the work that we have done on agency as part of our research programme, and also for specific OEMs who are looking to implement it, we have been able to find commercial terms that work for the benefit of both OEM and dealer and deliver the desired customer benefit of a seamless omni-channel sales process. The challenge is not the ‘on paper’ business case, but how robust this will prove under different scenarios of supply and demand, and the non-financial pressures that arise on both the OEM and the dealers.
Under an agency arrangement, the dealer supports the OEM in selling the cars, but is not party to the sales contract. There is no wholesale step that allows the OEM to record a sale and a profit, so the safety valve of dealers taking stock whilst the OEM maintains production does not exist. Ignoring the current extraordinary position where the semi-conductor shortages mean that new cars are like gold dust, we generally live in a position of over-supply. OEMs do not have to respond immediately to fluctuations of demand as they can push stock through dealers and other channels such as brokers and daily rental fleets. This is not good for residual values or the brand itself, but it is how the industry has worked for decades and allows them to post sales and profits even whilst the related stock is sat on an airfield somewhere. Under agency, this will be impossible, or at least hurt the OEM much more quickly. Cars that cannot be wholesaled to dealers could still be pre-registered and then sold by the dealer as ‘nearly new’, and brokers and daily rental companies will still be happy to take stock at the right price. It will however very quickly rebound on the OEM who is trying to move the next month’s production out to retail at the lowest possible discount.
The soft side of the transition is also challenging however, and much more difficult to model. How easily will OEMs adapt to ‘thinking retail’? Will they be able to assess the retail environment, set pricing at the optimum level and flexibly adjust production to match fluctuations in retail volume and mix. Will dealers be able or willing to adapt to being a service provider to the OEM, with more limited degrees of freedom to do deals, relatively rigid processes, OEM-supplied IT platforms, and open questions about the impact on the valuation of the business? If adapting to these behavioural and cultural changes fails, then market share could fall, hoped-for improvements in pricing could be elusive, and the OEM brand could become less attractive to dealers, thus risking representation.
As a result of this, we could easily see agency being implemented either as a pilot or as what is intended to be a more permanent transformation, but then being reversed. Whether that happens, and how quickly, will depend on the senior OEM and dealer management understanding the risks of going into agency, and their determination to work through challenges. It is unreasonable to expect a totally smooth transition, and with a growing sense of some broader economic disruption in the near future, the backdrop to agency implementation may bring its own challenges that will also affect traditional franchise networks.
This leaves us with two key questions about approaching agency with the option of selecting reverse gear if the results are disappointing in some respect. Firstly, is there a realistic expectation of how big a part is played by the soft factors, and has sufficient effort and time been allocated to support this transition at both OEM and dealer level? Secondly, are the criteria against which success will be measured appropriate, differentiating between agency-specific factors and external factors that would have had an impact anyway? It will be too easy to declare either victory or defeat for the wrong reasons, and hitting reverse might look an easier option than working through some issues with the implementation. However, the path back could be a dead end – still leaving open the question about how best to adapt networks for an omni-channel age.