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.