The automotive industry has come a long way from the early 20th century when automotive manufacturers (OEMs) sold cars directly to consumers through mail-order catalogs.
Today, the franchised retail model has become the norm, despite being pioneered by Ford in 1913 when it started mass-producing vehicles, including the iconic Model T. Yet, OEMs are now planning or exploring the possibility of using digital tools to reach car buyers directly, much like the mail-order catalogs of the past.
However, this model is not a viable choice for all geographies. For example, switching to the agency model would involve navigating significant state and federal regulatory challenges in the US. Consumer knowledge and demand in different locations are also a differentiation to consider.
In this article, we explore the pros and cons of the agency model and compare its relevance to the franchise model in different geographies.
What is an agency model?
While there are a few different forms of the agency model, we focus on the legally recognizable genuine agency model in this comparison.
Agency models reflect a direct-to-consumer (D2C) approach. The OEM produces a vehicle, sets the fixed selling price, and retails it to buyers. Within this model, dealers remain the point-of-sale contact to undertake test drives and handovers and provide aftersales support, but far fewer outlets will be required.
Dealers typically receive a fixed commission for each transaction and cannot use previous sales tactics, discounts, or price reductions to win sales. They are reliant on the OEM to attract customers with strong marketing.
The two agreements explained:
| Under a franchise agreement: | Under an agency agreement: |
| The retail price of the vehicle is set by the dealer, so haggling is possible. The sale contract is between the dealer and the customer. Stock is owned by the dealer. Dealers can pre-register cars to hit a target. Specific costs associated with the brand, such as signage, are borne by the dealer. Dealers can discount cars by “giving away” some of their margins. | The retail price of the vehicle is set by the manufacturer, so there is no haggling. Sale contract is between the brand and the buyer. Stock is owned by the manufacturer. Dealers can’t pre-register cars. Specific costs, such as signage, associated with the brand are borne by the carmaker. Dealers cannot discount models by “giving away” the manufacturer’s margin. |
While the agency model is not widely operational in countries like the US or UK, brands such as Mercedes-Benz have recently started using it. Recent investments in the UK have shown that despite the reluctance to change, some global brands are not worried about a move to agency agreements.
These two models will attract different customers for different reasons. Still, there are several benefits and challenges to consider before choosing what suits your business objectives and regional market.
Pros:
Customer Experience
- Gives consumers more control over financing options that best suit their needs and does not limit them to what a specific dealership offers.
- The agency model offers a more streamlined and direct experience for customers who prefer handling financial matters independently.
- Creates transparency on true pricing.
Market Approach
- Consumers can save money over the life of a loan with the ability to shop around for the best interest rates and loan terms. For lenders, this means the ability to offer competitive rates and attract new customers.
- With the benefit of direct communication to consumers, organizations can provide better transparency on interest rates, fees, and terms. This, in turn, helps consumers make better-informed decisions.
Reduce Costs & Dealer Risk
- Several significant costs, such as brand marketing and centralized advertising campaigns, become the responsibility of the OEM, and the dealer business can avoid this.
- Stocking finance costs are reduced due to retailers holding fewer new cars in stock.
- Potential for multiple points of earning an agency handling fee if a dealer meets key points.
- High-end luxury brands can be costly on a franchise model. Using agency means the OEM shares costs, meaning dealers can provide the service consumers expect from such brands.
- Depending on the agreement, the dealer can manage the part exchange valuation and upsell finance and other products, such as service bundles.
- The manufacturer will provide demonstrator fleets or manage them on their behalf by a third party.
Cons:
Consumer Complexity
- Some consumers may not be knowledgeable about securing their own financing and may prefer guidance from dealerships. This may also negatively impact customers who prefer a one-stop shop experience as it allows them to complete an entire transaction simultaneously.
- Consumers may be limited to the financial products available from a single financial organization. Dealerships offer customers various financing options as they typically work with multiple lenders.
Regulatory Challenges
- In some geographies, robust regulations are in place to ensure consumer protection, which offers safeguards provided by established dealer practices designed to meet legal requirements.
- In certain geographies, like the US, a high level of state and federal regulations prevents a smooth transition to agency.
- Commission payments must be carefully structured to meet regulations, which differ from country to country.
- Some governing bodies view the agency model as anti-competitive, raising concerns over competition law for some agency models.
Lack of Knowledge & Flexibility
- Typically, dealerships offer consumers additional products such as extended warranties, insurance, and other protection packages. These may not always be as readily available or transparent to customers in the agency mode.
- Experienced finance and insurance professionals are often available at dealerships to support customers through the financing process. This may be difficult to replicate in an agency model.
- To support the sales process, staff must understand regulatory frameworks, be aware of regulatory changes, and comply with financial promotion rules, as they will be considered advertisers.
Agency model: learnings to date
Recently announced delays to planned introductions of agency models may reflect continuing legal issues, increased new car supply, and decreased demand.
Tesla and Mercedes-Benz announced price cuts on some models, with supply outstripping demand for the first time in several years. Sharp discounts contrast with the fixed-price agency model principle but point to a challenge for OEMs of holding excess production on their balance sheets, which they could avoid under the franchise model by offering such stock to their dealers.
Looking ahead
Agency sales are coming, and while some OEMs have said they are committed to the franchise model, the number of brands looking to go direct is so significant that it is hard to see that the current delays in launching are little more than refining the models.
Regardless of your organization’s agreement, the Sopra Financing Solution can help support the entire customer lifecycle, enhance the customer experience, and benefit from global and local knowledge.
We design, build, and run agile digital lending platforms for asset finance lenders, empowering growth, and market innovation. Click here to learn more about how the Sopra Financing Platform can transform your organization’s processes and help you meet your strategic business objectives.
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