How will agency sales change the look and feel of car dealerships in the future?

  • Several manufacturers have now announced their intention to switch to agency sales
  • With this came the news that Mercedes-Benz will be reducing its global network by 10 per cent
  • Car Dealer spoke to industry experts who warned that ‘agency is a blunt instrument that if applied without care could cause trauma’

Time 5:32 pm, June 9, 2022

Mercedes-Benz is one of many car brands to announce they will be shifting to an agency sales model but it’s so far the brand to give away the most of what this will look like for its dealers.

Last week it announced that it would be reducing its network size by 10 per cent globally as it makes the switch to agency sales.

The shift looks to change how car dealers operate on a number of levels, and these could change the face of dealerships as we know them today.

From this potential reduction in sales sites and a wider reach for each dealership, to changing the way dealers sell, increased technology and customer service.

Car Dealer spoke to automotive industry experts to get their view on what impact agency sales could have.

Will Blackshaw, managing director of car dealership Blackshaws, told Car Dealer: ‘I see it as part of a three stage change. 

‘Short term, the continuation of petrol and hybrid vehicles with electric cars growing. This will slowly swing in the favour of electric motoring and during this period agency sales models will creep in, but strong aftersales and used car sales will balance things. 

‘In the medium term it will be important to retain servicing, repairs of petrol and hybrid cars for as long as possible, as the electric market will have grown providing less aftersales revenue putting pressures on the franchise business model.

‘Finally, longer term in around 10 to 15 years time, I see service intervals increasing on electric cars with less aftersales income. Less brake work, wear and tear, filters alongside agency model means there will be less needs of today’s franchise business.’

Suzuki UK boss Dale Wyatt echoed these sentiments on a LinkedIn post where he shared his own views on the shift to an agency model and what that could really mean for dealers and customers.

He wrote: ‘The transition from a traditional franchise agreement to a new agency agreement appears to be gaining favour and momentum. My personal opinion is that we should be careful about what we wish for!’

While he explained the potential opportunities, he also referred to the agency model as ‘a blunt instrument’ that without careful consideration ‘could cause trauma’.

‘The arguments for the agency model appear to focus around pricing consistency and the opportunity to improve marginal profit through more efficient inventory management and a reduction in fixed expenses,’ Wyatt said.

‘My view is that agency is a blunt instrument that if applied without care could cause trauma for both parties. The economic indicators suggest that we are entering choppy waters and I believe we need certainty in our business model to enable robust business planning.

‘Now is not the time to divert our attention away from today’s priority which is to navigate our way through a period of supply constraints, new technologies and legislation. This task is very challenging and we must accomplish this against a backdrop of inflationary pressures and falling customer confidence.’

David Kendrick, partner at UHY Hacker Young, said that while agency is an ‘interesting concept’ he asks how will it work when oversupply returns?

Kendrick said: ‘One thing dealers are exceptional at is shifting an over supply of vehicles for OEMs, the agency model removes this, meaning will they become even more reliant on brokers which they say they want to avoid? 

‘As for network representation it will undoubtedly have an impact with reduced locations longer term, possibly why we are seeing such a large number of owners exit due to this uncertainty, especially in more marginal locations. Used cars and aftersales remains a huge opportunity for those businesses however which ultimately is where in a ‘normal’ market the majority of profit sits! 

‘Agency will no doubt come in, but it really wouldn’t surprise me if we see it back to how it is today in a number of years, unless someone finds a model that works. As it stands, a huge number of questions remain unanswered from speaking to most dealers representing a vast array of brands.’

Jim Holder, editorial director at Haymarket Automotive, publisher of What Car? and Autocar, says that cutting dealerships is nothing new though.

‘Mercedes’s announcement is headline grabbing but not surprising: the majority of – but notably not all – manufacturers are cutting their new car dealership networks, reasoning that online sales advances, home delivery potential and a greater propensity to buy if you get to the showroom means that less are needed,’ he told Car Dealer.

The Autocar boss said: ‘The benefits are profit-driven, of course – it cuts costs and gives the remaining network a broader geographical base to cover, as well as reducing operational complexity. Arguably, it also strengthens the fixed pricing aspect of the Agency model, as it means potential buyers have less scope to trade off deals between operators.

‘Inevitably, this will change the look and feel of the surviving dealerships – but only along a path that is already well developed, with showrooms becoming as brand focused as sales focused, and potentially operating from smaller but more central locations. But the complexity of offering test drives and walk around experiences will still be required.

‘That said, operations such as aftersales and used car sales could long have been hived off to less glamorous locations away from the main dealership – but few operators have taken this approach to date.’

However, the Suzuki boss says that a relationship that is mutually beneficial is vital to the franchise model.

‘For most customers the dealer is the physical embodiment of the brand and introducing a new agreement that reduces the relationship between customer and dealer should be implemented with caution and care,’ Wyatt explained.

‘A shared risk franchise model is a fundamental that has enabled mutual success for over 100 years. Both parties have ‘skin in the game’. Manufacturer and dealer are interdependent and this dual dependency keeps both parties on track.’

He added that while ‘many argue that agency enables online sales’, he would argue that ‘almost every sale is digitally assisted; the vast majority of customers seek the advice and help of a trusted dealer to complete the transaction.’

Wyatt concluded: ‘The priority should be to reset and refine roles and responsibilities in the common pursuit of customer centricity and the removal of duplicated effort and expense.’

‘A pure genuine agency is an enticing mirage but the negotiated compromise agency agreement that will emerge will test relationships and may well leave both dealer and manufacturer with the winning ingredients for both parties neutralised.

‘We could see a new agreement that changes very little and as such will neither please nor offend.’

Zeus Capital head of research Mike Allen agreed that the strong brand presence and customer service will still be key to car makers success. However, car dealers play a vital role in this and he adds there is potential for success.

‘I personally have not seen any detailed financial plans related to the agency model, but anecdotally Mercedes-Benz appear to be using this to reduce capacity,’ he said. ‘They have a strong brand, but in my view still need strong well capitalised dealer groups with attractive facilities to give customers a good experience. 

‘To execute the model well in this way they will also need strong technology to support this process. 

‘I think other OEMs looking to adopt this process may take longer to implement this model and may also want to take more of the network with them but lets see. 

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‘The real bone of contention will be used cars under three years ago and how this will work in the agreement as we know this is a key driver behind dealer profitability, and who controls the part exchange vehicles. 

‘It’s likely to certainly reduce dealer capacity, but the real yardstick of success for dealers will have an impact on ROCE (return on capital employed) as such business should become more asset light and profitable if executed correctly for both sides.’

What do you think the future of car dealerships will look like? Have you say by emailing [email protected] with your comments. 

Rebecca Chaplin's avatar

Rebecca has been a motoring and business journalist since 2014, previously writing and presenting for titles such as the Press Association, Auto Express and Car Buyer. She has worked in many roles for Car Dealer Magazine’s publisher Blackball Media including head of editorial.

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