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Intensifying competition and changing consumer behavior are chipping away at the profitability of automotive manufacturers. In response, OEMs are reassessing the current dealership distribution model to see how it can be improved. Several are pursuing the alternative agency distribution model (ADM), albeit to varying degrees, depending on how willing they are to assume costs and reimburse dealers. Although such a transition holds out the promise of both reduced costs and also control of prices and customer data, it also carries substantial risks if not implemented with due care. Our own client experience suggests that OEMs should certainly think twice before introducing a blanket solution for each territory in which they operate. Instead, they ought to embark on a structured approach, based on a detailed profitability, legal and tax assessment, which can first identify and then validate the most suitable ADM for a given market and region. In this way, OEMs can achieve the best possible outcome in each territory for customers, dealers and themselves - a win for all parties.
Rethinking the distribution model
Various factors are coalescing to call the current dealership distribution model into question. Third-party intermediaries, such as Finn.auto and Carwow, have entered the position between OEM and the customer. At the same time, new OEM entrants, such as Tesla, NIO and Polestar, have started online sales direct to the customer. With average discounts offered by platforms and intermediaries set to exceed 20% on a routine basis, the pressure on price and profitability will only escalate further.
The choice facing OEMs is stark. They can either resign themselves to growing sales costs and the resulting downward pressure on profit margins. Or as seems inevitable, they will take on the challenge.
Indeed, the difficult process of finding the right solution to their predicament is already being played out in the marketplace. OEMs are now cautiously gravitating towards agency distribution models as a way to recover profitability and reassert their position. Such a change entails a significant shift in roles and responsibilities for both dealerships and the OEM.
In the dealership model, the dealer acts for himself and has his own margin responsibility, while the OEM only participates in limited interaction with the end customer, who is invoiced by the dealer. With the agency model, on the other hand, the agent acts for and is compensated by the OEM, which maintains direct touchpoints with the customer throughout the sales process.
ADM: the pros and the cons
The agency model offers several potential advantages for the OEM. Most significantly, they can manage end-customer discounts themselves, in this way achieving price consistency and avoiding competition between dealers of the same brand. They can optimize costs through centralization, capitalizing on the scale effect of transferring responsibilities from individual dealerships to the national sales company (NSC). As the agency model is implemented, the distribution network could be reduced by 5-6% each year, depending on the market.
The overall potential impact is reduced sales costs, and an improvement in return on sales for the NSC. Indeed, if an agency model is adopted in full, savings of around 10% are possible, resulting in a boost to profitability of between 1.5% and 3%. Moreover, through control of the customer relationship, OEMs can also gather a wealth of data to enhance insights, enabling them to provide tailored products and services directly to customers.
The dealership can gain from the arrangement too. As the OEM takes over responsibility for inventory and administration, the dealership not only enjoys reduced financial risk, but also the freedom to spend more time with customers and focus on what they do best - selling products and services.
Customers, meanwhile, get the benefit of one clear, fixed price across all channels, and can make a purchase safe in the knowledge that they are not missing out elsewhere. They get consistent service too, replacing the assortment of interfaces they would have encountered in the old dealership system. With the pure ADM, they would speak on all channels only with the OEM, as the agent is acting solely on behalf of the manufacturer. This is nothing less than what customers have to come to expect in their other retail experiences – uncomplicated and high-quality communication, with online and physical channels seamlessly integrated.
In summary, the ADM allows OEMs to increase sales efficiency while at the same time connecting all digital channels with the physical channel. Although some have experimented by allowing traditional dealerships themselves to implement and manage a multichannel approach, the OEM lose the advantage of controlling the price, one of the main goals of the agency model.
The pure ADM may therefore seem ideal on paper. In the real world, however, there are also inherent risks. Before they are sold to the customer, the actual vehicles themselves now become the sole responsibility of the OEM. If, for example, the agent does not sell the expected number of vehicles in a given period, the remaining cars linger on the OEM’s balance sheet, with negative implications for the perceived financial health of the company. The dealership might even request reimbursement for the costs they have incurred in attempting to reach the number of predicted number of sales in the previously agreed contract with the OEM.
Moreover, the OEM could lose the entrepreneurial edge, for example missing out on opportunities to cross-sell accessories to a given customer at the point of sale that a dealership in the old model would grasp. Such intuitive and flexible sales capabilities take some time to develop. It could also be the case that OEMs that maintain price levels through the ADM lose out in the short term in competition with other brands still allowing major discounts under the traditional, yet ultimately unsustainable, dealership model.
ADM Genuine or ADM Light?
In its purest form, the agency model has the potential to transform the car buying market by ceding full price control and ownership of customer data to the OEM. However, there are versions of the model that are more relaxed and mitigate some of the dangers, although at the same time blunting some of the opportunities. This is what we call ADM Light (as opposed to ADM Genuine). Under the ADM Light model, the OEM shares control of the price and the customer data, as well as the business risk, with the dealership.
There are potential variations too not just in the form of the relationship between the OEM and the dealership, but in what ADM covers. For example, a step-by-step approach is possible, whereby the ADM can be applied to battery-electric and fleet vehicles, while the dealership distribution model continues in the short term for internal combustion engine vehicles until being eventually phased out. Alternatively, ADM could be made to work for all new car sales, while used cars continue to be traded through dealerships.
Indeed, we have observed that some OEMs have pursued the ADM to a differing extent depending on the specific car market. For example, in Sweden and Austria, Mercedes-Benz has gone down the ADM Genuine route across its full vehicle range, maintaining fixed prices across all channels and wholly owning customer data, while also taking on all sales costs. For its part, Volkswagen has adopted an ADM Light approach in Germany and Austria, following the agency model for its battery electric vehicle range only, and thus gaining only partial control of overall pricing and customer data in these countries.
Winning for all parties
So how exactly do OEMs decide how far to take the ADM? How do they balance the opportunities and the risks? We believe that there is no one approach that works for all OEMs in all markets and regions. Rather, they should aim for a specific solution that offers the most beneficial outcome not just for the OEM in any particular market, but for its dealerships and customers there too. Indeed, for any strategy to be successful and to avoid harmful friction, all stakeholders must be persuaded that the journey will ultimately work in their favor. The transformation must be collaborative.
Each of those parties is naturally looking for different things from any prospective ADM. The OEM wants direct access both to customers and to customer data, control over pricing, and higher profitability by reducing cost of sales and intra-brand competition. The dealer, or would-be agent, seeks an agreed fixed commission for each transaction and significantly reduced working capital through ceding responsibility for inventory, while still retaining their profitable after-sales and service business. The customer, meanwhile, wants a highly attractive product and price, a seamless experience across all channels, and personalized communication.
The ideal state of affairs for all stakeholders cannot be reached overnight, and the road towards it should be approached with care, caution and sensitivity to local conditions. Strategy& has therefore developed a systematic and comprehensive process by which to judge the most appropriate solution, considering the aspirations of all parties in a given market or region. Indeed, each market will have its own unique existing retail environment, including aspects such as the current profitability of dealers and the number of active multi-brand dealers.
This process firstly involves a financial model which assesses the implications if the OEM assumes control of various areas of the business from the dealership. Would the potential benefits for the OEM outweigh the cost of commission payments, and the cost of taking on the former responsibilities of the dealership?
The process also examines the legal, tax and technology implications of any transfer of responsibilities in a specific market, before finally setting out practical steps for realizing the transition in an operational plan.
This structured process allows OEMs to be proactive, to get one step ahead of the competition in the industry’s bid to eliminate price competition among dealerships and limit the discounts offered by platforms. It also paves the way for a phased and prudent approach towards ADM, with an intelligent and efficient reallocation of resources, resulting in a transition that minimizes unavoidable risk and maximizes profitability.
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