The Rise and Impact of the Agency Model in the Automotive Industry

The shift to an agency model in the automotive industry represents a significant change in how cars are sold and distributed. In this new paradigm, the role of the dealer evolves from being a traditional salesperson to acting more as an agent for the car manufacturer.

What is the agency model in the automotive?

In the agency model, dealers follow up on leads and provide customers with information, but the control over pricing, inventory management, and customer experience largely rests with the original equipment manufacturers (OEMs). This is a departure from the conventional dealership networks, where dealers purchased cars from the manufacturers and then sold them to the customers at a price they set.

Why are automotive companies shifting toward the agency model?

This shift towards the agency model is driven by several factors. It allows manufacturers to maintain uniform pricing across all channels, eliminating price competition between dealers and improving price transparency for customers. It enables manufacturers to directly control the inventory, leading to more efficient production planning and faster response to market changes.

The agency model also lays the foundation for integrating online business with showroom-based business, which is particularly important in today’s digital age. It offers the potential to substantially disrupt retailer profitability, with the enterprise value at car retailers that switch to the genuine agency model forecast to rise by as much as 12 percent.

The transition to the agency model may not be smooth for all parties involved. Some car manufacturers are reportedly rethinking plans to transition their retail networks to an agency model due to potential challenges and resistance from dealers.

Overall, the agency model signifies a major transformation in the automotive industry, with implications for manufacturers, dealers, and customers alike.

The shift to the agency model in the automotive industry is being driven by several factors

• Improved Customer Experience
• Increased Enterprise Value
• Reduced Economic Risks for Dealerships
• Potential for Transforming Car Buying Market
• Adaptation to Digital Transformation

However, this transition also poses significant challenges for automotive dealerships and original equipment manufacturers (OEMs), making preparation crucial for success.

What does this agency model mean for car buyers?

A significant shift in the car buying process, with online platforms is becoming increasingly popular. It started with resellers, but automotive giants are aiming for similar solutions. Here’s what this means for car buyers:

Convenience and Flexibility: Online platforms like Vroom, Carvana, and Cars.com provide a seamless and convenient way for buyers to purchase cars. They offer high-quality cars, easy buying processes, and even home delivery services.

Trade-In Options: Many of these platforms not only allow you to buy cars but also offer options to trade-in your old vehicle. This can make the process of upgrading your car simpler and more streamlined.

Selling Your Car: If you’re looking to sell your car, platforms like CarBuyerUSA, Peddle, and Family Car Buyers offer easy and efficient ways to do so. These platforms will pay cash for cars in any condition, and they handle pickup & payment for you.

Wide Range of Choices: Online platforms provide a wide range of choices for used and new cars. They also allow you to compare prices and explore financing options, helping you find your dream car within your budget.

Market for Junk Cars: Even if your car is in poor condition or non-working, there are platforms like Copart Direct that are ready to make an offer. They buy used and salvage vehicles all over the United States.

What are the benefits for automakers in agency models?

The shift to the agency model in the automotive industry offers several benefits for car makers:

• Direct Customer Relationship: The agency model allows car manufacturers to have a direct relationship with their customers, leading to better understanding of customer preferences and behavior and consequently improving customer service and loyalty.
• Uniform Pricing: In an agency model, the manufacturer sets the price, ensuring uniform pricing across all channels. This eliminates price competition between dealers and improves price transparency for customers.
• Inventory Management: Under this model, manufacturers control the inventory, which can lead to improved production planning, reduced inventory costs, and faster response to market changes.
• Brand Consistency: Since the manufacturer controls the sales process under the agency model, it ensures brand consistency across all touchpoints, providing a unified brand experience for customers.
• Increased Profitability: The agency model can also lead to increased profitability for manufacturers. With direct control over sales and less dependence on discounting to drive sales, manufacturers can maintain healthier profit margins.
• Adaptation to Changing Market Trends: The agency model also allows car manufacturers to adapt more quickly to changing market trends, such as the shift towards electric vehicles and the growing importance of software and connectivity features in cars.

Will the car dealership lose its profit?

The profitability of car dealerships depends on a variety of factors, including market trends, vehicle sales, and the shift to new business models such as the agency model in the automotive industry.

It appears that car dealerships have been quite profitable recently. In 2022, profits reached an estimated $6.5 million per location for dealerships owned by public auto retailers, more than triple the pre-pandemic levels. The average profit for new-car dealerships was estimated at $7.1 million.

Some industry experts predict that dealership profits may decline in the future. According to a report, owners of hundreds of dealerships expect profits to decline by 10 to 15% in 2023. This could be due to a variety of factors, including changes in consumer behavior, market saturation, increased competition, and the impact of the shift to the agency model.

In the agency model, car manufacturers have more control over pricing and inventory, which could potentially reduce the profit margins for dealers. The impact of this shift on dealership profits is still uncertain and may vary depending on specific circumstances.

Ultimately, whether car dealerships will lose profit in the future will depend on how they adapt to changing industry trends and business models.

What opportunities might there be for dealers in an agency model?

• Improved Customer Relationships: As agents, dealerships can focus more on providing support and building relationships with customers, rather than competing on price. This could lead to an improved customer experience and higher customer loyalty.
• Stable Revenue Stream: Under the agency model, dealerships receive a fixed commission for each car sold. This can provide a more stable and predictable revenue stream, compared to the traditional sales model where profits can fluctuate based on pricing and negotiation.
• Reduced Inventory Risk: Since OEMs control the inventory in the agency model, dealerships face less risk related to unsold inventory. This can reduce costs and financial risk for dealerships.
• Integration of Online and Showroom Business: The agency model can help dealerships better integrate their online and showroom businesses. This is increasingly important as more and more consumers start their car buying process online.
• Opportunity to Focus on Other Profit Centers: With less emphasis on vehicle sales, dealerships can focus on other profit centers such as service, parts, and used car sales.
• Adaptation to Changing Market Dynamics: The agency model can help dealerships adapt to changing market dynamics, such as the shift towards electric vehicles and the growing importance of software and connectivity features in cars.

It’s important to note that the transition to the agency model also presents challenges for dealerships, and its success may depend on the specific circumstances and how well dealerships can adapt to this new model.

Which car companies are already testing the agency model?

Several car manufacturers have adopted or are transitioning to the agency model. These include:

• BMW: The German automaker has been implementing the agency model in select markets around the world.
• Ford: Ford has also been experimenting with this model, particularly for its electric vehicle sales.
• Mercedes-Benz: Mercedes has been one of the leading proponents of the agency model and has implemented it in several markets.
• BYD: This Chinese automaker, known for its electric vehicles, has also adopted the agency sales model.

Other brands reported to be adopting agency agreements include Abarth, Alfa Romeo, Citroen, Cupra, and DS.

It’s important to note that the specifics of the agency model can vary by manufacturer and market. The transition to this model is a significant shift in the automotive industry and is being closely watched by industry observers.

Read about The Role of The Agency Model in Cutting Distribution Costs

What should the automotive industry know about moving to an agency model?

The shift to the agency model in the automotive industry is seen as a significant change, and there are several key points that the industry should be aware of:

• Control Over Pricing and Inventory Management: The agency model allows Original Equipment Manufacturers (OEMs) to maintain control over pricing and inventory management. This means they can set consistent, non-negotiable prices and manage inventory more efficiently, aligning production more closely with demand.
• Role of Dealerships: In the agency model, dealerships act more as agents, providing customers with information and support rather than negotiating sales. This can improve the customer experience and allow dealerships to focus more on service and after-sales activities.
• Integration of Online and Offline Sales: The agency model can better integrate online and offline sales channels, providing a seamless shopping experience for customers. It lays the contractual foundation for integrating online business and showroom-based business.
• Potential Impact on Dealerships: The shift to the agency model could potentially increase the enterprise value of car retailers that switch to this model by as much as 12 percent. It also presents challenges and restrictions for dealerships, as they have less control over sales and pricing.
• Resistance from Stakeholders: Some car makers and dealerships may resist the shift to the agency model. There are concerns about the impact on dealership profitability, the loss of control over pricing and sales, and potential legal and regulatory issues.
• Cutting Distribution Costs: The agency model is driven at the OEM level by the desire to cut distribution costs once the vehicle has left the factory gates through better inventory management.
• Pros and Cons: Like any significant business model change, the agency model has its pros and cons. While it can provide benefits in terms of improved customer experience, consistent pricing, and efficient inventory management, it also presents challenges related to dealership profitability, adaptation to the new model, and potential resistance from stakeholders.

Given these points, it’s crucial for both OEMs and dealerships to carefully consider the implications of the shift to the agency model and develop strategies to manage the transition effectively.

If not the agency model, what are the alternatives for automotive companies?

If not the agency model, car companies have several alternatives they can consider for their business models:

• Traditional Franchise Model: This is the conventional model where dealerships buy vehicles from manufacturers and sell them to consumers. Dealerships have the freedom to set their own prices and negotiate with customers.
• Direct Sales Model: Under this model, manufacturers sell directly to consumers, bypassing the dealership. This gives manufacturers complete control over the sales process and customer experience. Tesla is a notable example of a car company that uses the direct sales model.
• Car Subscription Services: Car companies can also offer subscription services, where customers pay a monthly fee to use a car without the commitment of ownership. Volvo, for example, has a subscription service called “Care by Volvo”.
• Rental and Car Sharing Services: Car companies can provide rental and car sharing services as alternatives to traditional ownership. Examples include Zipcar and Getaround.
• Peer-to-Peer Car Sales Platforms: Companies like Turo and Vroom provide platforms for individuals to buy, sell or rent cars directly to each other, offering an alternative to traditional dealership sales.
• Company Car Alternatives: For businesses, alternatives to providing company cars can include car allowances, mileage reimbursement, or fixed and variable rate reimbursements.
• Trade-in Alternatives: If a customer is looking to dispose of their old car, alternatives to trading it in at a dealership can include selling it privately, selling to a used car superstore, or donating the car.

Each of these alternatives has its own advantages and disadvantages, and the best choice may depend on a variety of factors including the specific needs and goals of the car company, market conditions, and consumer preferences.

The future of the automotive industry: the only fix is adaptation

The agency model can significantly improve supply chain processes by enhancing inventory management, optimizing operations, mitigating risks, and improving coordination and visibility. It can enable a faster response to economic shocks and aid in the digital transformation of the supply chain. However, its effectiveness largely depends on the adaptability of manufacturers and dealerships to this new approach.

Be an agency model or not, automotive faces the challenge of transformation to streamline its complex supply chain on the one hand and to retool with changing consumer expectations on the other. Digitization of business processes is crucial.