9:42 am, February 27, 2023
As OEMs continue to switch to agency sales, it remains unclear whether the model can actually be profitable for retailers, a leading expert has told Car Dealer.
Iain Larkins, founder of Radius Law, says that manufacturers want to ‘take a bigger slice of the pie’ by controlling the final selling price of vehicles.
However, by doing so, he says they will also take on greater costs and higher risks.
The likes of Ford, Stellantis and Volvo have already made announcements regarding switches to the model but it remains to be seen how dealers can continue to make money.
Mercedes switched to agency at the start of the year and it has been met with a mixed reaction. Market share for the brand dropped significantly in January.
Larkins, who previously spent 15 years working for the legal team at Mercedes, believes that ‘in theory’ there are benefits to retailers but it remains too early too tell whether agency sales can be a success.
‘Before, the dealers had a lot of risk but potentially a lot of upsides,’ said Larkins.
‘Now the agents have much less risk but the OEMs will be saying instead of a 10 per cent margin opportunity plus bonuses, they will get a five per cent opportunity, for example.
‘There will also be a lot less costs but I think the thing is that no one really knows yet exactly what that deal will look like.
‘We’ve spoken to Mercedes-Benz dealers who are still not really clear. They know ultimately what the commission is but it’s not clear exactly what the scope of their job is, what their costs are and what the volume is going to be.
‘If you are on a commission model it’s all going to be about volume and there was a significant drop in volumes for Mercedes in the first month of trading under agency.
‘There are also knock-on-effects of that because they are not getting the part-exchanges in so the used car business is struggling.
‘It is probably a bit too early in the day to know whether this is a profitable business for the agents.’
Record dealer profits have not affected switch
Several dealers have expressed the opinion that OEMs want to make more money for themselves after seeing dealers make huge profits in recent years.
However, Larkins does not believe that the sky-high figures will have affected the decision to switch to agency.
He says that it is understood that 30 per cent of a car’s cost is added ‘after it comes out of the factory gates’ and that’s ‘too much’.
‘OEMs want to get those costs down to make their own businesses more viable, Larkins told Car Dealer.
‘It’s worth remembering that the whole business model is being challenged particularly with the transition to electric.
‘Having said that, I don’t think manufacturers are looking at the last few years and saying they should have more of those bumper profits made by retailers.
‘Everyone, in my experience, accepts that it has just been a pretty incredible two years that has never happened before and will probably never happen again.
‘For me, it is more about that 30 per cent it needs to be addressed to prepare the sector for the future.‘
Agency sales will form a large part of the discussions with car dealers and manufacturers at Car Dealer Live on March 9. A handful of in-person tickets are available as well as unlimited streaming tickets.
Car Dealer Live – the future of the car dealer – exclusive conference features talks from leading car dealers, Google and Auto Trader among much more. Find out the full event details and book tickets.
