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Agency – Friend or Foe?

Car Retailer

There was a flurry of excitement following the announcement by Volkswagen AG, in May, of their sales plans for the new ID3 electric car. In Germany, they intend to use the agency model from launch. This comes at a time when we are hearing about consumers’ increased appetite for online channels and when both OEMs and car retailers are announcing and launching online services.

So what exactly is the agency model, and how might it affect retailers? In particular, how might it help them?

We are talking here about an agency model in the UK which is a hybrid model. It is a partnership between the manufacturer and the agent (the retailer) where they share the human and physical resources in the sales process. By contrast, in a full agency model, the manufacturer would own the whole shooting match.

The relationship between the manufacturer and the retailer is governed by an agency agreement, i.e. an agreement for the retailer to sell the manufacturer’s products. The car remains on the manufacturer’s books until it is sold.

It is handed over by the retailer, to the customer, for a commission from the manufacturer. The retailer is also likely to be involved in static demonstrations and test drives for customers. Typically, the retailer receives fees for PDI, delivery, and so on. The retailer may also receive a bonus for meeting certain performance targets.

The price is set by the manufacturer. While the sale of the vehicle maybe facilitated by the agent, the sales transaction is between the manufacturer and the customer.

You can see that this is a ‘multi-channel’ experience for the customer and a collaboration between manufacturer and retailer.

Where is agency used?

In the UK, most fleet business is conducted via agency. Approximately 40% of registrations are categorised as ‘true fleet’. This includes manufacturers’ own fleets and rental but does give a sense of the scale of agency sales.

Typically, only a proportion of a manufacturer’s network participates. The criteria include the size of the business, fleet parc, appetite for fleet sales and so on. The network is still responsible for prospecting and representing the brand.

In Europe, the agency model is not as common yet, even for fleet sales. Germany is really the only market that compares to the UK in its use. Not related to car sales, but an agency model nonetheless, is Volkswagen’s Trade Parts Specialists business. This was established in 2007 as the first trade operation run by an automotive manufacturer.

There are multiple drivers for the use of agency for fleet sales. There are potential benefits for all stakeholders, depending on the manufacturer’s motivation:

  • The customer – simplified pricing and administration, better access to ad hoc deals for cars
  • The retailer – ends the slide in margins as volumes have increased over time, reduced working capital
  • The manufacturer – better able to respond to the market, more effective use of discounts
Traditional FranchiseFleet Agency Model
Contact to buyContract to sell
Prospects, quotes, and secures customerProspects, quotes with manufacturer system
Negotiates sale priceNo say in price, although some offer incentives
Earns margin from saleEarns handling fee
Vehicle owned by the Retailer until saleVehicle owned by the manufacturer until sale
Selects and orders all stockRole in stock selection varies with manufacturer
Performs PDI, delivery, etc.Performs PDI, delivery, etc.
Part exchanges agreed with customerNo change
Aftersales arrangements agreed with customerNo change
Table 1 Agency and Franchise Models for Fleet Sales Compared

Agency model in retail

There are versions of retail agency that have been tested around the world but, typically, only on sections of a range. For example, several manufacturers have trialled agency for the sales of electric cars, including BMW and Mercedes, and most recently Volkswagen.

The retail model is like the fleet version in some respects. The operation and the commercials are likely to be similar. But the manufacturer and the retailer will be in contact with individuals rather than companies.

There is likely to be a more substantial online component due to the volume of customer contacts, but it is most likely to be a multi-channel approach. That means the customer will use the web and the showroom as they do now. Ideally, it will move to omni-channel in due course, where the customer journey seamlessly moves between clicks and bricks.

A significant difference from the fleet model is that all retailers must be agents. Manufacturers may choose a model line, as some have tried with electric vehicles. This is really the only practicable way of transitioning to a retail agency model. Anything else would confuse and frustrate customers.

Traditional FranchiseProspective Retail Agency Model
Contact to buyContract to sell
Prospects, quotes, and secures customerProspects, quotes with manufacturer system
Negotiates sale priceNo say in price, although may offer incentives
Earns margin from saleEarns handling fee
Vehicle owned by the Retailer until saleVehicle owned by the manufacturer until sale
Selects and orders all stockRole in stock selection varies with manufacturer
Performs PDI, delivery, etc.Performs PDI, delivery, etc.
Part exchanges agreed with customerValuation moves to the manufacturer
Aftersales arrangements agreed with customerNo change, customer may select a preference
Table 2 Franchise and Retail Agency Models Compared

The benefits to the customer, the retailer and the manufacturer will be similar. There will be an increased challenge for retailers, however. Retail agency means the manufacturer becomes a B2C operation and, therefore, they become much more involved with the retail customer, through both their journey and their data.

Control over the part exchange price and who buys it may change. The price will be set as part of the quotation step and it is usually an online tool that is used. Then there is a choice whether the retailer or the manufacturer buys the car. Models may be different, and it will affect the sales process for the retailer.

There are potential cultural challenges too for the retailers. The agency model gradually removes their ability to ‘deal’ while their role as brand representatives and product demonstrators increases. We can only speculate how that will affect skills, knowledge and experience needed to run a profitable new car business as an agent.

Deployment benefits

Why, then, might agency be deployed in retail sales? This is the 64 million dollar question, but there are drivers for both customers and retailers:

  • There is growing evidence that customers are prepared to use a new process to buy cars. Surveys show a minority of people would buy a car online without seeing it in the flesh. But 40-50% (depending on the survey) would buy via an omni-channel process
  • It should shore up retailer margins and it would reduce working capital

Let’s be clear, agency relies on the retailer networks being in place. The manufacturers’ brands require a physical presence: they need to be able to display cars, facilitate road tests and have the cars prepared for sale.

But, in 2019, the UK retailer network returned the lowest return-on-sale for eight years. The research by automotive consultancy ASE in February 2020 showed an average overall return of 0.81%. The current crisis only exacerbates this situation. When retailers open again in June, does the industry really want to go back to the 0.8% bunfight?

This article was first published in the June 2020 edition of www.auto-retail.co.uk