The end of the 'agency'?

Seeing the advantages of a higher influence on transaction prices we were wary of the lower selling power of an agency system. A dealer who is fully invested in a franchise and his new car inventory will fight harder to sell the last unit even if it goes to a customer from far away – with the transaction price as his ultimate tool and the year-end target bonus of the OEM as the justification.

Overall it seemed to us back then that an agency system is somewhat of a nice weather solution for an OEM, one that shines brightly in a powerpoint presentation but will show its shortcomings when the going gets tough.

The combination of the pandemic and the supply-chain crisis created such a nice weather period: production output was restricted, while demand remained surprisingly strong. Inventories fell to all-time lows and transaction prices rose to all-time highs for most brands and models, simply due to the lack of availability and choice. The still low interest rates of that time made the transfer of low inventories to the car makers’ balance sheet a minor issue.

As expected¹, even in that honeymoon period some agency transitions got off to a rocky start – too big are the fundamental changes in the underlying operational processes and supporting IT systems to not cause some disruption. And any new pricing function, be it human or big data / AI based will need time to hone its skills to the levels achieved by experienced sales managers over decades. But with a bit of goodwill and a few human work arounds the new systems were made to work and got better month by month. Nothing major happened that would have discouraged other brands from following. So, more announcements of agency transition plans were made.

But Covid inevitably ended, production constraints eased, and soon after the car supply again matched and quickly exceeded demand. New car inventories refilled quite quickly, and customers returned to long-learned behaviours, hunting for bargains and deals instead of patiently taking whatever car they could get and paying list price or above.

In an agency system this growing new car inventory sits on the balance sheet of the manufacturer and its National Sales Companies. And combined with the much higher interest rates now causes much more pain. There are also strong indications that our forecast was correct: agents will not and cannot fight for market share as effectively as dealers – their commission system does not reward it, and their lack of pricing authority severely curtails their ability to do so. Therefore, any temporary weakness of a brand which is proactively mitigated by dealers turns into a share decline quickly in an agency system, be it overambitious retail pricing or a less than perfect new model. A slowing order intake immediately reinforces the inventory problem. We have witnessed OEMs reacting by placing excessive demo fleets into agencies, but it is obvious that such actions are not a real cure of the root cause.

It is no surprise then that several brands have slowed down or halted their transition plans. Or even reversed their decisions, confirming our long-standing belief that there is a lot of remaining life in the dealer model and that it is not easy to find a better solution – after improving the dealer system over many decades.

However, if we conclude that the dealer model is here to stay, this is no justification for OEMs and dealers to sit on the status-quo. Quite the opposite – there is lots to do:

OEMs must guard and improve the financial viability of their franchises by systematically reducing its inherent cost, from dealer operating to facility and CI standards. The increasing digitalisation of the purchasing process and new tools and methods enable such structural cost reductions without a detrimental impact on selling power. Moreover, few brands have yet reached the optimal outlet and ownership structure yet.  

Dealers must continue to improve their operations, optimally integrate their processes into the brand’s omnichannel world – and get their teams to drop old counterproductive habits. We have seen that there is room for improvement in EVERY retail operation, but the improvement doesn’t happen without a dedicated push.

And OEMs and retail partners must work together to align their interests to free up energy to win over the real competition, other brands. From our client work we know that a jointly planned and consistently managed lead funnel with matching vehicle supply is on the very top of that list. Late corrections always cause extra incentive cost that can be saved in a properly demand-oriented sales channel. Oversupply creates excessive working capital between the two parties – and is best avoided in the first place. And lastly, a streamlined and optimised incentive system is another element of a better alignment and helps to ensure that both parties pull in the same direction.