Agency and derivative models to disrupt traditional franchised retail models

• ‘Tough period’ for OEMs building affordable BEVs to meet consumer demand
• OEMs target B2C sales retail model to reduce costs
• Tesla’s successful VIR model gives traditional OEMs confidence to change
• Unknown whether OEMs will commit to the full agency model

The distribution and retailing of vehicles, otherwise known as the auto-downstream industry, is set to change as much in the next five years as it has in the last 50. That’s the view of both Cox Automotive and Grant Thornton in the latest issue of Cox Automotive’s AutoFocus report.

According to Philip Nothard, Insight and Strategy Director at Cox Automotive, changes to automotive retail could be the most significant the sector has seen for years. He commented: “When you look at the increasing interest from OEMs in agency models, changing consumer sales trends and the recent rise in the popularity of EVs, all signs point towards huge disruption to traditional automotive retail models. As a result, the next few years are likely to bring unprecedented change to the way people sell and purchase vehicles.”

Changing consumer interests

One major contributing factor to the change Nothard speaks of is the global drive towards more sustainable forms of transportation. As a result, OEMs are under pressure from Europe and China to meet intensifying emissions regulations or face significant fines. Simultaneously, consumers are well-aware of the shift towards EVs, with battery electric vehicles (BEVs) increasing in popularity, as countries vow to meet their climate targets and signal an end to combustion engine production in just a few years.

According to recent data from the Society of Motor Manufacturers and Traders (SMMT), the UK’s market share of BEVs reached approximately 25% in December 2021. This again hinted that Britain’s love affair with diesel engines is coming to an end, as the BEV figures were double that of diesel vehicles’ market share data.

Writing in AutoFocus, Owen Edwards, Head of Downstream Automotive at Grant Thornton UK LLP, states: “The decline in the popularity of diesel-fuelled vehicles would’ve been unthinkable just a few years ago. But while the market share of BEVs continues to increase, the retail price and production costs of BEVs aren’t falling enough to improve the growth of this sector over the coming months and years, which is one of the key factors that will prevent an even faster take-up of BEVs in the short term.

“It’s a tough period for OEMs because they’re trying to build affordable BEVs to meet consumer demand, while at the same time having to invest heavily in BEV and low-emission vehicle technology, which negatively impacts on their bottom line. This leads to OEMs reviewing their costs to meet financial targets. One of the areas several OEMs are evaluating is their cost base in the supply chain and the distribution and retail of vehicles.”

Introduction of agency and derivative models

The B2C sales retail model is currently undergoing change, as OEMs look to reduce costs by selling directly to consumers. Historically, OEMs including Audi, BMW, Volkswagen, and General Motors have directly sold to fleets. However, selling directly to customers is less straightforward, leading to the success of the dealer-centric model for many years.

New electrified automotive marques such as Tesla and Polestar have implemented the direct B2C model. However, Tesla has retained ownership of both the distribution of vehicles and all the dealer outlets through its vertically integrated retail network (VIR).

Tesla’s practice of matching VIR with the sale of BEVs has been a successful B2C selling route for the company, significantly increasing its UK market share. Impressive results published by the SMMT showed that the Tesla Model 3 was the UK’s best-selling vehicle in December 2021, at 9,612 vehicles with 8.8% of the market share. However, most OEMs will struggle to become VIR due to their legacy distribution processes.

Edwards said: “Stellantis, Mercedes Benz and Volkswagen have reported that they will be implementing a direct B2C process, also known as the agency model, but it’s unknown whether this will be the full agency model.”

Full agency models occur when all transactions are undertaken online, and the dealer receives a handover fee as part of the process. The alternative is a derivative model, which includes some of the characteristics of the current franchise model. However, the OEM still sells directly to the consumer, with the dealer contributing to a smaller part of the sales process.

Edwards added: “We believe that the full agency model is unlikely to be implemented by all OEMs; instead, the agency derivative model will be preferred. The reason for our thinking is that all OEMs and their dealer networks are different, and to fulfil the required growth strategy of each of the OEM and its dealer networks, each OEM will need a different model; there will be no single standard agency model that fits all.”

Understanding customers better benefits OEMs

One significant benefit of both agency and derivative models is that they provide the OEM with greater insight into buying habits because the customer becomes more central in the sales process. This also gives the OEM greater scope to provide additional omnichannel services, creating seamlessly integrated customer relationships that include multiple touchpoints from vehicle sales to service and repair.

It also allows OEMs to have a greater understanding of customer requirements and gives the opportunity to upsell to the customer. The OEM would also partake in the part-exchange (PX) transaction when the customer returns to purchase their next new vehicle. The knowledge of what vehicle is returning and its PX price could enable the OEM to undertake direct sales in the used car market. Currently, the fate of the PX vehicle is determined by the dealer.

Philip Nothard, Insight and Strategy Director at Cox Automotive, concluded: “Edwards raises the question whether OEMs could go down the direct sale route for used vehicles, a market that’s widely understood that OEMs want to play a more significant part in. This would generate more profits through the sales of additional car finance and additional spare parts, which are profitable for both the OEMs and their national sales companies. Presently, some OEMs already are, with one example being the used online marketplace HeyCar, currently owned by Volkswagen and Mercedes Benz.

“Cox Automotive and Grant Thornton both believe that the downstream industry will be affected by the rise of subscription market, which, while small at present, fits well with the agency model and omnichannel process. Customers benefit from this model by paying a monthly fee for all services for 9-12 months. In addition, reports from subscription provider OnTo suggest that subscribing for a BEV can often work out cheaper than leasing. It’s clear that subscription will be slow to take off, but with BEVs on the rise, it’s another way that flexible customer service can be offered by OEMs, dealers, and independent used car operators.”

We reveal the answers to these questions and much more in the new issue of AutoFocus.
Read more here.