The Pros and Cons of the Agency Model
The Pros and Cons of the Agency Model
Read time: 7 minutes
The agency model has reached notoriety because not only does it have the potential to substantially disrupt retailer profitability, but also because agreements differ between manufacturers with varying parameters. For dealer groups partnered with several different automotive brands there is the potential they could end up operating multiple agency agreements alongside existing franchised agreements from brands who stick with a more traditional way of selling cars and vans.
On top of this, some brands are discussing running both franchised and agency agreements in parallel with some model lines (usually battery electric vehicles) being sold under the latter and other models continuing under a franchised system. Clearly this is likely to add complexity and cost to shopfloor processes and back-office administration.
Agency continues to be driven at OEM level by the desire to cut distribution costs once the vehicle has left the factory gates through better sight and control of the customer journey. From the OEM point of view, record retailer profitability in 2021 has illustrated that in pre-COVID-19 times dealers were ‘giving away’ too much of the manufacturer’s margin. Retailers would counter that, pre-pandemic, margin was only given away because of manufacturing push to register cars.
Either way, OEMs are looking to offset rising manufacturing costs due to inflationary pressures, higher production costs of electric vehicles and increased in-car technology demanded by both customers and regulators.
Timing and circumstance have also illustrated how agency could be of benefit now, by way of the cost of living crisis and a move to online sales forcing change in how we sell cars. Leasing is also likely to become more popular as this lessens the impact of fluctuating used car values which impact PCP deals; something captive finance houses dislike.
Genuine or non-genuine
To further add to the complexity of running parallel arrangements within the same group, some OEMs are looking at what has been termed pseudo, or non-genuine, agency agreements that allow more flexibility – particularly around discounting by the retailer – than a true agency agreement. Given agency agreements come with legal obligations, particularly around price setting, it’s not yet clear how these pseudo-agency plans will operate.
With a mix of agreements in play, in the case of those brands using agency for their electric vehicles, we would expect agency to gain ground by stealth as we head toward 2030 and when the sale of new internal combustion engined cars are banned.
Adoption
The wider uptake, development and acceptance of agency, however, is likely to be determined by level of early adopter success (or not). If retailers engage with the new agreements and demonstrate both customer and financial benefits, other brands are likely to follow suit.
Agency is not yet widely in operation in the UK, although it is already being used by a handful of lower volume, premium, brands including Lotus, Polestar and, most recently, Mercedes-Benz. Retailers must remember that if an OEM decides to pursue an agency model, and they’re selected to continue with the brand they only really have two options; to continue under the new arrangement or stop representing that brand.
Our advice would be to run numbers, assess the returns against the risks, consider the contingencies and then decide to sign on the line (or not). As this is a significant decision for any business it is important to take independent advice to make sure the numbers are right and objective.
For those going ahead, we’d urge retailers to work with OEMs so they can mould the agency agreement into its most successful form.
Valuation
One factor to dial in to any agency impact assessment is the impact it could have on the valuation of a retail business. Current expectations are that several significant costs will be taken out of the retail agent’s business and taken on by the OEM. Some brand marketing costs will move to the manufacturer, but local retailers will still want to drive physical and digital footfall to their own location depending on the metrics that govern how agency fees will be earned.
Retailers will be expected to hold far fewer new cars in stock resulting in significant stocking finance costs reductions. Rising interest rates mean this will be increasingly attractive to retail businesses.
Final values will depend on the individual agency agreement. As a broad point cash generation and EBITDA improve and with no change in multiple it follows that values would also increase.
However, any uncertainty over the long-term security of an agency agreement around who owns the customer, the ability to transfer to a new operator and the lack of control over pricing and allocation of earned agency fees may cause multiples to be discounted.
Multi-franchising
Mid-size and larger groups are increasingly moving toward a multi-franchise site arrangement in order to reduce overheads because they’re easier and more cost effective to manage and allows sales to be kept within a group (if not a brand).
How dealers choose to divert customers at a multifranchise location will depend on the agency fees on offer or the unit profitability where no agency exists.
Customers tend to be well informed before entering a dealership so the ability to switch customers between brands may be limited, but that will come down to the skill of the salesperson and listening to customer needs. Monthly finance payment is highly likely to be a key factor going forward and more of an influencing factor than the brand.
Customers also already switch between new and nearly-new (and back again) depending on delivery times, specification, price and a host of other factors. Most brands have an approved used programme and control over PCP changeovers, with direct customer relationships on new cars it may be inevitable that nearly-new will come within a similar agency type agreement.
These cars will still need to be stored, prepped and displayed and dealers have the space to do it, not the OEMs. Again, it comes back to the terms of the agreement and the reward to dealers for providing this sales outlet.
Away from the physical showroom, even cars sold purely online will still need to be prepped, delivered and handed over. If OEMs still value the handover process as generating brand loyalty and excitement in the customer, then the dealers remain well placed to do this. That said, why not have a central PDI location, bespoke delivery process and a dedicated handover team that fulfil online orders in a truly specialist way.
Agency fees
As set out in last year’s BDO Motor 150 Report, the point at which an agency handling fee is earnt has yet to be decided but will be a key point to an agreement. It is likely there will be multiple points with a possible uplift if a dealer delivers on all points. In one similarity with the franchise system, how each of these trigger points are earned and at what level will determine how dealers train and deploy staff.
Questions still remain around how the fee structure will work, particularly if a customer buys purely online or shops around several retailers in either the hope of a discount on the new car (this could be in the form of a better trade in valuation) or a better buying experience.
There will clearly be some tough decisions for both OEMs and retailers when it comes to agency fees. Get them right and everyone’s happy and the transition from the franchised system will be smooth. Get them wrong and retailers will either not continue with the brand, deliver a less than desirable customer experience or sideline a brand in favour of a competitor. However, one thing is almost certain; it is unlikely an OEM will offer a rate that’s judged too high.