Agency versus Dealership in car distribution
Strategic and regulatory framework, comparison of choices, and impact for dealers – results from a 2022 study by Quintegia on the Italian market
Executive summary
This study is a deep-dive investigation into an agency option for car distribution. It is a topic that is not new, but it has received wide speculation in recent years from many carmakers, motivated by economic reasoning (efficiency and margins) and the relationship with the end customer. It has stimulated great debate and mixed reactions among dealers who are the backbone of the car distribution system.
The European competition has included agency in its reviews, however agency remained unchanged and is still outside VBER - but only on the condition that the agent (or the commission agent) does not take on financial and commercial risks and costs. The new VBER leaves more room for carmakers to govern the networks (via the use of online channels, protecting investments and the territories of "physical" dealers from competing online stores) and also places limitations on dual distribution (when the carmaker sells to end customers both through dealers and directly) and on the dual role (when the franchised dealer is also an agent for the same carmaker).
As for national regulations, agency differs among EU member states by the commission agent option (not always provided) and by certain elements such as: exclusivity (which can be waived), collective economic agreements on termination benefits, and tax aspects.
While the dealer operates in his own name and on his own behalf, the agent acts in the name and on behalf of the carmaker (principal). The commission agent (the intermediate form) operates in his own name and on behalf of the carmaker (principal) with some restrictions.
From the carmakers’ point of view, Quintegia estimates that by 2030 more than 50% of the current dealerships in Italy are likely to be involved in agency. Simulations made through assumptions and hypotheses suggest that the transition from dealer to agent may result in a significant decline in profitability. In fact, assuming that there is a shift to agency for new sales with all brands represented and that used sales and after-sales service activities remain unchanged, this would imply a reduction of more than half of total sales, for a shrinking pre-tax result of around 30% if commission is paid at similar rates to those being implemented in Northern Europe. However, this is against the benefit of no longer having to bear commercial and financial risks for the sales activity. Business sustainability will depend both on the levels of commissions and fees chosen by the carmakers, and on how much the agent will preside over ancillary areas, including F&I and used cars. After-sales is not affected by rule changes for now, but is an area to keep an eye on. Agency appears less attractive to dealers who have pursued expansive strategies for economies of scale, which could be absorbed by the manufacturer.
Agency implies a significant commitment from the carmaker with focus, investments, risks as well as necessary expertise, including complexity and timing of the transition (e.g. pre-existing investments). It cannot be ruled out that in some cases, a franchised dealer-based upgrade, might prove more effective.
Quintegia’s DealerSTAT 2022 survey - public summary available for download below.