IQ

Insight

Quarterly

Q3/2024

Looking back, it seems that by some miracle, I have not written previously in IQ (or AutoFocus before it) about agency, despite it often being the first topic of conversation when meeting with dealers over the last couple of years in almost any part of the world.

Over that time, we have seen many agency implementations come, and a few go, but the overall picture is one of adjustment and tuning rather than a total change in direction.

The underlying issue is that whilst a few OEMs carefully planned and considered their switch from franchise arrangements to agency, many rushed into it, seduced by a message from big consulting firms that this would allow them to slash the cost of distribution.

Just as a very brief reminder, under agency, the OEM is allowed to set prices like a direct seller. Still, the retailer can carry no commercial risk and must be financially viable. This is a fairly clear definition, and any arrangement which fails to meet this test is not agency, and the OEM cannot set prices. There are options in terms of the detail of how agency is implemented, but there is no such thing as a ‘non-genuine agency’ – that is, a franchise.

Behind the many implementation issues related to incomplete or missing processes and IT that does not actually work when launched, the more fundamental issues have related to how OEMs can drive sales from the centre. This is mainly related to new vehicle supply and pricing. The pitch for agency was that it would allow established OEMs to cut their cost of distribution in half to match the reported 15% level of Tesla, with ‘fixed’ or ‘transparent’ pricing preventing dealers from ‘giving all our money away’. This is wrong on every count.

Tesla probably did have a much lower cost of distribution until around 2021, but that was when there was very limited choice of premium BEV product and capacity still lagged demand. That has now changed, and Tesla has repeatedly slashed prices in a highly visible way and now sells from inventory rather than from the order pipeline. Its volumes have dropped for each of the last two quarters, and it has slashed headcount by 10%. It has become ‘normal’.

Pricing is the key tool to balance supply and demand in any market, so cannot be fixed other than in exceptional cases. In automotive, where residual values are key to initial leasing rates and a strong used car market, the opaquer any new car pricing support and other stock disposal actions are when new, the better it is to protect residuals down the line. In the traditional franchise system, manufacturers wholesaled cars at notionally fixed prices to dealers, who then – deal by deal, face to face with customers would use some of their margin and additional support made available by the OEMs to discount on each deal to the point where they could get a sale. No dealer has ‘given away’ more money than they need to in order to close a deal. Yes, there are inefficiencies and losses in the system, but there are positives as well as negatives.

The almost universal problem with agency implementations to date is that OEMs continue to push excess supply into the market, and they have not developed new pricing mechanisms that allow them, or the retailers on their behalf, to achieve a matching demand. Beyond the unlikely scenario of OEMs following a strategy of matching supply to real demand, the theoretical answer is a sophisticated, centralised dynamic pricing approach that adjusts the offer continuously through promotions and deals that result in a supply-demand balance on each model line to meet the targeted volume. This is effectively a more precise approach to metering out how variable marketing funds are applied compared to current approaches that often result in knee-jerk reactions that result in deep discounts in some fleet channels and pre-registrations by retailers.

Even in an ideal scenario driven by enhanced visibility of the sales funnel and control of all inventory, it is unlikely that a purely central pricing model will achieve the objective of perfectly matching supply and demand at the lowest possible cost. In the near/midterm, whilst OEMs acquire and refine their central pricing tools, some discretion is still needed at the retail level. Few of the existing agency models allow for this, which is frustrating for retailers and customers alike, and solutions are possible that remain compliant with agency requirements and consistent with one of the agency principles of removing inter-brand competition.

It remains possible that brands that rushed into agency rush back out again as they struggle to reconcile their real-world experience with the finely crafted PowerPoint that seduced them into it in the first place. However, for those still prepared to invest time and effort in the core building blocks of agency, attention to new vehicle supply, centralised dynamic pricing, and the capability for local retailer deal-making could pay dividends.