The United Kingdom’s automotive industry has long been a significant contributor to the nation’s economy and a source of pride for the country. However, the industry is facing a transformative period due to various factors, including technological advancements, changing consumer preferences, and global economic shifts. Whilst a lot has been made of the march towards electrification, arguably the biggest challenge facing the sector is the move by OEMs to adopt the agency model for their dealer networks.
Franchise to agency
A Cap Gemini survey of motor vehicle buyers established that :
- 75% of customers expect to purchase their next vehicle online;
- 77% of customers prefer fixed prices;
- 86% of customers claim they are open to sharing their data with the manufacturer.
Traditionally, OEMs have operated a franchised dealership network through which dealers sold direct to the public. However, the above stats might explain why manufacturers now appear to have the confidence to move forwards with their proposals for adopting an agency basis in connection with their dealer appointments. In short, by adopting an agency model, the OEM retains more control over the sales process, pricing, and customer experience.
With Mercedes-Benz becoming the first major manufacturer to bring in the agency model in the UK (full agency not hybrid and in relation to its EV range) in January this year, the model appears to be gathering momentum.
It will, therefore, be crucial for dealers to understand the potential implications of any such seismic shift sooner rather than later.
Whilst in the early stages of its evolution, some of the key issues and considerations of this transition are likely to be:
■ Reduced control and autonomy: Under the agency model, dealers may have less control over pricing, stock and sales strategies. Likely to become more reliant on OEMs for new car stock and pricing decisions, which will impact their flexibility in running their businesses.
■ Profit margins: Moving to an agency model may affect profit margins, as dealers are likely to receive fixed commissions rather than having the ability to set their own prices.
■ Stock and stock management: With an agency model, the OEM rather than the dealer will, until sold to the customer, own stock. Dealers will lose the right to pre-register stock and to discount stock (as they don’t own it). This in turn means customers will potentially lose the ability to purchase discounted pre-registered cars (i.e. where dealer pre-registers to get volume bonus and then sells as pre-registered at a discount).
■ Transition costs: The transition to an agency model can be costly, involving changes in business operations, staff training, and potentially pivoting of marketing strategies. Dealers are likely to want and/or need to invest in technology and systems to support the new model. There is also talk that signage/branding etc. costs will be borne by the OEM, but this will relate to brand advertising rather than dealer advertising and be limited to new car sales areas – dealers may well want to retain their individual identity and the associated goodwill (particularly given the prevalence of struc- turing auto deals as asset transactions).
■ Legal and regulatory compliance: Potential for Commercial Agents Regulations (CAR) to apply. The distinction between vehicle sales and after sales service might encourage the adoption of two separate agreements to pull at least the service element out of CAR. Pure marketing or referral agents (who simply promote without any authority to negotiate terms or pricing) can be caught by the CAR if their role is to develop and enhance the goodwill or reputation of the principal.
■ Competition: Competition law issues relating to price fixing/no intra-brand competition.
■ Training and education: Employees may need training to adapt to the agency model. Understanding new pricing structures, customer engagement strategies, and the role of the dealer in the sales process is crucial.
■ Customer experience: Maintaining a high level of customer satisfaction is vital. Dealers must ensure that the transition does not negatively affect the customer experience, including factors like test drives, vehicle delivery, and after-sales service.
■ Manufacturer relations: Strong relationships with OEMs are essential in an agency model. Dealers will need to work closely with manufacturers to align their strategies and ensure a smooth partnership.
■ Market dynamics: The automotive market is evolving rapidly, with trends such as electric vehicles and online sales gaining prominence. Dealers must adapt to these changes and incorporate them into their agency model strategies.
■ Economic uncertainty: Economic factors can signifi- cantly affect the automotive industry. Dealers under an agency model may face more significant challenges in adjusting to short, sharp economic downturns or fluctuations in demand.
Opportunities
Whilst dealers may need less physical space for new vehicles, manufacturers may need more to accommodate regional distribution centres where vehicle stock is held before being delivered to dealers following a sale to a customer (e.g. Toyota New Zealand has three distribution centres for 63 agency dealers). Dealers might, therefore, look to offer spare space to manufacturers on this basis.
It is worth noting that not all automotive OEMs are adopting the agency model. Many continue to rely on independent dealerships.
However, there is no denying that the potential shift to agency is the number one issue facing franchised dealers right now. Dealers will need to carefully assess their specific circumstances, adapt their business strategies, and work closely with OEMs to navigate this change successfully while ensuring continued profitability and customer satisfaction.
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Tom Redman is a corporate partner at Howes Percival LLP and routinely advises top 50 franchised and independent motor dealer groups on their UK M&A acquisitions and disposals programmes.
For more information, contact: tom.redman@howespercival.com
For more information on Howes Percival’s commercial contract services contact Chris White: chris.white@howespercival.com
To find out more about Howes Percival visit www.howespercival.com
