By Nathan Cooper
The Impact of the Agency Model on UK motor retail
Yesterday we attended the latest Auto Retail Conference, which discussed the impact of the Agency Model on UK motor retail. We heard from a range of speakers on the potential challenges and what retailers, suppliers and OEMs thought of the biggest change in over 100 years to how automotive retail sells cars.
For anyone that doesn’t know what Agency Model means, below is a brief summary:
“The Agency Model is where the OEM (manufacturer) removes the franchise dealer’s ability to purchase and then sell new vehicles. Instead, the OEM owns and sells the vehicle directly to the consumer.”
What does this mean for the customer?
It means that customers get a single price point for new vehicles that is set by the manufacturer. Currently, different franchise dealers set the sale price themselves and can negotiate on costs with customer. The Agency Model removes this option and sets a single price that applies nationally.
What does this mean for the retailer?
Retailers will in effect become “agents” of the OEM in the sale process and be responsible for things like test drives, arranging the finance, part exchanges, etc. They will no longer purchase the vehicle from the OEM wholesale to then resell to the customer as they do today.
Some OEMs have started using this model already, with Mercedes Benz being the first. But not every OEM is jumping on the Agency Model straight away. A number of others are keeping track of what happens before putting their plans in place. Below is list of what’s happening with each OEM:
https://www.auto-retail.co.uk/agenda/which-car-brands-are-adopting-agency-agreements/
Why are OEMs making this change?
The current franchise model has been in place for over 100 years, with retailers buying new car stock directly from the OEM to then resell to the consumer – the same as many other retail operations from food to sporting goods. The model isn’t perfect, but it has worked well for a long time. OEMs are looking to make the change to provide more clarity for customers by offering a single price point nationally and to manage production and stock flow over the longer term.
What are the challenges being faced, and what questions does the franchise network have about the change?
Legal challenges:
The legal position regarding the agency model is very complicated (three senior legal experts on the day underlined this reality). What is evident is that there is plenty of scope for legal debate and pitfalls, not least of all on whether the arrangement is a ‘genuine’ agency model or not. With this caveat firmly in place, here is my brief and very high-level précis of the legal challenges as I understand them.
- As the retailer no longer owns the vehicle before they sell it to the customer, the retailer staff will need to be aware of the OEM’s sale processes, terms and conditions, configurations available, etc. This may result in questions on liability during the sale process, especially if anything is described incorrectly by the salesperson. This may lead to many salespeople being disengaged with the sales process and simply referring the customer to the OEM website for any information on the vehicle or focusing their attention on the “easier sale” like used cars or brands that do not have an agency agreement in place.
- There were also question marks over upsell items on the vehicle – things like gap insurance, service plans and paint protection, for example. As the retailer no longer owns the vehicle before selling it on, they could be at risk of including add-ons that the OEM deem not appropriate for the vehicle, which could lead to disputes between the retailer and OEM should any customer complaint arise.
- One of the biggest challenges is around who owns the customer data. The vehicle is sold by the OEM in this case, so the OEM is the data controller and the retailer the processer. This would mean the retailer wouldn’t be able to contact the customer for future upsell/aftersales unless they had express permission to do so. This gets more complicated when considering part exchanges, as the retailer does own the customer data in that instance. One final piece to consider is what happens if that customer was an existing customer with a long history of using that retailer. Does the retailer retain ownership of the customer data or does it shift to the OEM upon purchase of the new car?
- The advice given on the day was for retailers to get solid legal advice beforehand and ensure all their teams are aware of the impacts of the change. They also recommended that OEM and retailer work very closely with each other during the transition to make sure all roles and responsibilities are understood.
Financial challenges:
- Retailers will need to look at their balance sheet differently when the change happens. Data that they own which may be seen as an asset may no longer be in place. Retailers will also no longer own the stock, so they will not have the cost of those vehicles sat on their balance sheet.
- Retailers’ revenue streams will also be different. As they won’t be taking any money for the new car directly, they will no longer make money on the “metal” as they have done before. Instead, they will be commissioned on sales, as well as on finance. This will impact retailer revenues, especially retailers that perform better that the network average. However, some retailers that underperform may see an uplift.
- The changes will mean that retailers will need to put more focus on other areas of their business – aftersales and used cars being the main two opportunities for revenue generation. However, with the change to EV impacting aftersales revenues already, this may be a challenging environment in the years to come.
Technology Challenges:
- Retailers will be faced with some technology changes in how they work. As customers will be ordering direct to the OEM, retailers will need to have visibility on order times and factory updates. The customer will continue to see the retailer as their point of contact, so ensuring the retailer can provide that single view will be vital for a smooth transaction.
- The challenge with this is for multi-franchise locations as not every OEM is on the agency model, so these mixed sales process locations will need to be able to facilitate data from different places.
- The good news is technology will be able to meet the challenges as long as the customer is kept at the heart of everything developed. To do this, OEMs will need to make data readily available and easy to integrate. Any closed-door policies would slow this down and ultimately impact customer experience.
Change is often seen as a negative, especially changing something that’s been in place for over 100 years. But it’s not all bad news, however, for the retailers.
It gives them the opportunity to look at their current business model and see where they can make changes and improvements. It will also give them access to more new car stock without the financial risk or large sales targets to chase.
We do expect a bigger focus on aftersales, and retailers will need to work hard to retain customers and keep them coming back. There will also be a shift to selling more used cars for many retailers. So, ensuring that stock is priced correctly will be important and retailers will need to keep on top of this.
The above is just my understanding of what was discussed on the day and on the Agency Model as whole and may be subject to change. I strongly recommend you investigate this in more detail in your own time as the landscape of what agency is and how it will impact the industry is changing every day.
Below are some blogs written on the subject to get you started:
https://www.auto-retail.co.uk/blog/2021/11/07/agency-agreements-whats-in-it-for-the-retailer/
