Who’s up for a 40% revenue cut? The implications of agency

To many commentators, the official announcement last week by Volvo Cars that they would move to an ‘online only’ model (their press release headline) coincident with a move to only pure electric models being available from 2030 marked the end of the dealership.  However, the press release also referred to the further development of the Care by Volvo offer, which is effectively a more flexible lease, rather than a subscription as most people understand such a term, and to their retail partners remaining a ‘crucial part of the customer experience” and continuing to be responsible for “selling, preparing and delivering and servicing cars.”  As the release also states that Volvo will use “transparent and set pricing models” the combined implication is that Volvo will move to an agency model with its dealer network by 2030.  There are questions as to how this can be implemented in markets like the US where there are legal constraints to manufacturers selling direct, but even those might be resolvable on this timescale given the cracks already appearing in US state franchise laws.

This timeframe is one that Volvo have set themselves, and makes sense given the strong linkage to their brand environmental values, but the rest of the industry is not able to avoid the same move towards 100% BEV models over the following years, at least in Europe, due to the way in which the European authorities have dictated the technical solution to meet the environmental standards rather than simply a zero emissions standard.  In our current research we are modelling the effect across the value chain of electrification, and without anticipating the outcome too much, it is clear that 100% electrification will force major changes to the approach to rewarding dealers, whether that is through a margin and bonus system or agency commissions.  It is possible that progressive reductions in electric vehicle product cost and stabilisation of technology, capability and residual values will help to reduce the negative effects of growing battery electric vehicle (BEV) mix, but it feels like something must change.

This is before you take into account the transparent and consistent pricing objectives that Volvo has also referred to, and which are needed to address the most fundamental challenge that we have in building consumer trust – that every sales discussion today starts with the lie about the price of the car.  Customer and dealer then go through a ritual dance of chipping away at the MSRP, and through one mechanism or another try to come up with a deal that is mutually acceptable.  The seamless omni-channel customer journey depends on pricing being consistent across all channels for a given deal, and that then dictates that either you own distribution channels (the Tesla model) or you adopt an agency contract with your dealers.  The third alternative of pushing a traditional franchise model to the boundaries of agency with highly compressed margins is theoretically possible but may not be able to withstand the pressures of a 100% BEV mix.

As a very simple “what if” exercise, I looked at some data from a number of the large UK dealer groups which are fairly transparent in terms of financials and volumes.  There are complications around inventory payment terms and trading of pre-registered vehicles as zero mileage used cars, but simply taking the net revenue from new car sales and replacing it with a total commission of 5% (equivalent to around €1,400 per unit in my simple model), means that the total revenue for a dealer group is cut by around 40%, so a one billion euro turnover business now has a revenue of around €600 million.  Assuming that this commission has been fairly set as replacing the combined effect of previous margin and bonus payments after any adjustment for risk, the return on sales will then increase from the 0.8% of my sample to 1.4%.

These changes are all fairly mechanical accounting, but lying behind them are fundamental changes in behaviour on the part of both the manufacturer and dealer.  I believe that these changes will be more challenging to implement than setting fair commercial terms.  The latter is a one-off exercise that you might return to on occasions.  The behavioural changes will be acted out many times a day in both the manufacturer and dealer, every day, for ever.  We need to embed these changes, to make them second nature, as quickly as possible, and be prepared during the transition period to jump immediately on anyone, at any level, who is not walking the talk.  Buying into the 40% revenue cut will probably be a walk in the park by comparison.