The Shift to Direct Sales: Is the Agency Model Sustainable for Car Manufacturers?
Car manufacturers are increasingly considering the shift to direct sales, also known as the agency model, as a way to improve profits on more expensive electric vehicles (EVs). The wholesale business model, under which dealers can choose to sell at full list or stimulate greater demand by discounting that price, has been in place for decades. However, car makers are questioning whether they really need to give away all that margin to dealers and country-specific national sales companies – “legacy margins that are 20-25%”, according to Toyota’s head of Europe, Matt Harrison. “There is no way in the move to electrification this type of approach is sustainable.”
The agency model involves selling cars directly to the customer, rather than through a dealer. Mercedes-Benz was the first car maker in the UK to shift to this model, starting on 1 January this year, and its progress has been watched closely. Penske – the US owner of the UK-based Sytner Group – reported that profits made from Mercedes cars at a fixed 5% commission per sale were actually up on pre-pandemic numbers when it was discounting to shift cars. Mercedes has said it is happy with the shift in the UK and other countries.
However, a much greater proportion of Mercedes registrations is coming from demonstrators and showroom vehicles. The reason for that is that Mercedes itself is now responsible for the demonstrators, hence the higher number registered. Claiming victory in the agency shift is premature, argues Steve Young, head of automotive retail consultancy group ICDP. “The lessons learned are limited when supply is restricted,” he said, because everyone has been able to essentially fix prices during recent parts shortages.
The main issue car makers face in the shift to agency is that they have no real experience of selling cars and are finding it hard to generate leads. Young reports that Mercedes in the UK has been paying dealers in the past couple of months on top of their fixed commission to market cars locally. “There’s nothing wrong with that. If anyone knows how to generate sales, it’s the dealer,” he said.
A lack of readiness among car makers that are making the shift has been the problem. “They underestimated the critical role dealers play,” said Young. “They haven’t thought through how to stimulate demand. Somehow, they thought they could just fix the retail price and customers will come hopping.”
Fixing prices is one of the chief aims of direct sales. Without discounting, this increases the car makers’ profit, but they also argue there is a customer benefit. Doing away with haggling reduces the anxiety in the customer that they should have shopped around more. It also reduces dealer anxiety, argues David Brown, head of Smart in the UK: “Dealers like it because it protects them from themselves. It protects them from a rival dealer distress-selling the same cars at lower prices.”
Unsurprisingly, customers are finding old habits hard to break. “I guess the only thing negative you would say is that the customer still wants to negotiate,” said Roger Penske.
Who is switching to the agency model, and when?
BMW will start the process with Mini in 2024, with BMW itself following in Germany by 2026. Ford moved to direct sales in the Netherlands earlier this year ahead of an unspecified European roll-out. Honda is adopting the agency model in the UK later this year with its e:NY1 electric SUV. JLR will make the shift in the UK by the end of 2024, following a trial in South Africa. Stellantis is moving first with Alfa Romeo and DS in the UK in January 2024, before an all-brand trial in some markets from July. The VW Group has been delayed due to a lack of IT readiness, but Audi will go 100% agency in Germany from early 2024.
In conclusion, the shift to the agency model has become the leading topic among dealers in recent months as they try to work out the impact on their profitability when car makers move away from the decades-old wholesale business model. While some car makers have already made the shift, others are still considering it. However, a lack of readiness among car makers that are making the shift has been the problem. They have no real experience of selling cars and are finding it hard to generate leads. They underestimated the critical role dealers play and haven’t thought through how to stimulate demand. Somehow, they thought they could just fix the retail price and customers will come hopping. The agency model may be sustainable for some car manufacturers, but it remains to be seen whether it will work for all.