Some manufacturers, like Mercedes and Volvo have already adopted direct sales, whereas others, like JLR, Mini and Stellantis have put plans on hold. VW have gone for a blended, hybrid option and a handful, including Mazda, Toyota and Kia, have stated they’re sticking with the traditional franchise model for now, with no plans to change.
The slow rise of the automotive agency model
There’s much debate in the auto industry looking at the agency versus franchise approach, leading some manufacturers to take a cautious stance and currently stick with the traditional franchise model. The hope is that lessons can be learned from the early adopters. The diagram below outlines the key differences between the models, but at Loop we believe a more hybrid approach could be the most immediate change..png?width=800&height=600&name=July%202024-agency%20model%20vs%20franchise%20model%20(2).png)
We’ll explore the pros and cons that the agency model in automotive and examine the viability of a more hybrid blend.
Opportunities of the automotive agency model
Customer experience:
Buying a car is unlike any other purchase. Not only is it a high-ticket item, but there are many important considerations, including reliability, safety and aesthetics. Brands that adopt the agency model set uniform, transparent pricing, so customers aren’t faced with the challenge of negotiating to get the best deal. Instead, customers can purchase their preferred vehicle online in the comfort of their homes, only needing to visit the dealership for test drives, collection and aftersales support. From the manufacturer’s perspective, they can manage more of the customer journey and therefore take more control of the brand’s reputation. Mercedes-Benz ex-CEO Gary Savage shared his thoughts with Car Dealer Magazine six months after making the switch to direct sales:
“It’s easy to lose sight of the fact that customers didn’t always enjoy the older process of buying a car. There were geographical pricing variations, the time of the month could dictate if there was a discount available, as could the amount of inventory on site at a particular location.
“Now, that worked, and I’m not here to knock the distribution model, but we’ve moved to provide a better customer experience and improve the viability of the dealer network. So far, all the metrics suggest we are achieving both.
“Customers are buying our cars, and the feedback is overwhelmingly that they are enjoying the process.”
Operational efficiency:
As outlined above, the manufacturers control the inventory when selling direct, so logistics are more streamlined and cost-efficient. Data can be more easily centralised with fewer disparate data sources to worry about. With more accurate metrics in place, better analysis is possible and in turn, data-led decisions can be made with confidence.
Increase control for OEMs:
As well as manufacturers being able to control the customer experience more effectively, they can also ensure consistency in processes and workflows, and ensure the brand is presented professionally. In the franchise model, it’s the dealer’s responsibility to cover branding costs for their sites. Can you reliably expect them to use all the marketing materials as intended? In an agency relationship, where the OEM covers these costs, set materials can be provided, which the dealer is obliged to display.
Improved dealer support:
Since OEMs reclaim the responsibility of the assets and risks with the agency model, the dealerships are more likely to survive in challenging times. The direct sales approach means reductions in overheads for the dealers, as they utilise shared service centres and resources. Dealers can focus on providing excellent customer service and capturing leads, which can be incentivised on top of receiving their agency fee. With improved, centralised data, OEMs can easily identify which dealers may need additional support in delivering their set KPIs and put action plans in place to address these.
Challenges of the automotive agency model
Dealer resistance:
As with all change, there comes uncertainty. Dealers are concerned that the auto agency model makes them too reliant on the commission fee OEMs set, and many doubt the ability of manufacturers to successfully run a consumer-facing operation. The Hendy Group, shared their opinions in BDO’s Motor 150 Report:
“Agency isn’t the problem, it’s the complexity of having multiple agreements.
“And this is particularly an issue when there are so many other big issues for the whole industry to tackle, particularly electrification, the state of the economy and low emission zones.
“What we can’t accept under any model of sales is lower returns because they’re thin and fragile at best.”
They go on to explain that they believe the agency model will work well for luxury brands but has concerns about volume brands. They strongly believe that at present, no one agency model fits all.
Customer confusion:
Changing long-standing working processes is often rife with complexities and therefore time-consuming to achieve. During the transition period, it’s likely there will be moments of confusion and mixed messaging, most worryingly for the customer. OEMs and dealers must work together to mitigate this. The use of a business performance management solution, accessible by both parties, will help achieve this.
Implementation difficulties:
A successful transition relies on software that can share insights and actions across your network to improve growth, compliance and standards. Selecting the right data management tool requires careful consideration, but opting for a business performance management (BPM) solution over a business intelligence (BI) tool will help optimise performance across the network.
A hybrid approach
Working with Volkswagen Group UK, we’ve witnessed first-hand the ‘non-genuine’ agency model, also referred to as the hybrid approach, that they’ve adopted for new electric car sales. In the short term, as customers adjust to the new way of working, we see hybrid as a workable solution, as discussed here by the team:
So, it would seem that this blended approach will appeal to a wider audience, especially the older, less tech-savvy generation, but it will also be operationally challenging to deliver.
The market will certainly be keeping a close eye on what its competitors are doing, especially the newcomers to the market, such as the Chinese EV manufacturers. At present, it’s not clear what success looks like so we can expect iterations as lessons are learned. However, what’s clear is that communication and collaboration should be at the heart of the manufacturer/dealer relationship and that the infrastructure put in place will be integral to drive forward improvements.
Useful resources:
- Loop describes how OEMs have used software to help with the transition to direct sales
- Advisory firm, BDO, have published the Motor 150 Report 2023 exploring the current challenges the motor industry face.
