The Agency Distribution Model

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.

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.

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.