Have “no-haggle” agency models dented dealer financials?

• Agency model arguably started life as a theoretical strategy for OEMs to reduce network costs
• The types of disruptive agency models that we are seeing vary in type from OEM to OEM
• The most successful businesses thrive when the customer journey is entirely flexible and built around individual needs
• The story is far from over in an era of rapid change

Fears that the agency sales model – where manufacturers set rigid pricing and manage the online relationship between consumer and OEM – may have had a detrimental impact on trading could be misplaced.
 
That’s according to the latest study carried out by financial services group Zeus Capital.

Writing in Cox Automotive’s latest AutoFocus, its latest quarterly automotive insight update, Zeus’ Head of Research Mike Allen says PLC dealer groups all made a solid start to 2023, and that trading continues to look robust.
 
Insisting that the agency model arguably started life as a theoretical strategy for OEMs to reduce network costs, Allen thinks it remains the most pertinent theme in automotive retail.
 
He comments: “Likely spawned by management consultants during the dark days of Covid-19, the agency model has now been implemented in the real world by major OEMs. Mercedes launched theirs in January this year, and the system seems to have bedded in quite well; whether that will be the case from a trading perspective remains to be seen.”
 
“The agency model is here to stay, with more brands likely to adopt this over the coming months. But has the agency model had a material impact on trading? In short, we believe the answer is not yet.”
More so-called “no-haggle” vehicle sales models are set to be launched by several OEMs within the next few years.
 
Philip Nothard, Cox Automotive’s Insight and Strategy Director said: “The types of disruptive agency models that we are seeing vary in type from OEM to OEM and we’re likely to see yet more in the future. And that shouldn’t come as a surprise. The way in which cars are sold is currently undergoing the biggest change for half a century.” 
 
Allen argues that the most successful businesses (whether a PLC, private group, or start-up) thrive when the customer journey is entirely flexible and built around individual needs.
 
He said: “There are advantages to the agency model for the dealer, particularly from quality of earnings perspective. In theory, the dealer does not have to invest in stock. Suppose the unit economics are pitched fairly, with dealers gaining from cost savings. In that case, the theoretical margins and ROCE (Return on Capital Employed) should be enhanced vs the traditional model. If this plays out and impacts Group financials, it should eventually lead to higher valuations. However, this is some way off as it will take time to develop.”
 
Allen reveals that the UK economy’s performance in 2023 has pleasantly surprised his company.

He added: “From a trading perspective, the PLC dealer groups have all made a solid start to the year, with trading in March looking robust as demand has remained resilient. Following a bruising 2022, we suspect many companies had cautious budgets for 2023, and as analysts, we made conservative assumptions around this, causing a “double discount” effect. While we are all mindful that the UK economy is “not out of the woods”, as ever, the dealer model and performance are more resilient than they are given credit for.”
 
Zeus Capital’s look at the latest valuation multiples, show that UK PLC dealer groups remain close to trough levels despite delivering a resilient earnings performance.
 
Allen said: “It’s clear that most of the disrupters have been disrupted and outperformed by omnichannel, with public online car retailers’ share prices falling >90% over the last twelve months in some cases. Independent used car group Motorpoint has also struggled relative to the franchised dealers, albeit they are investing for growth. US retailers also remain at trough levels, with CarMax still in recovery mode as it has suffered from rising interest rates via its lending business.”
 
Allen concludes that the franchise dealer model has retained resilience that investors sometimes overlook.
 
“The perceived cyclicality of the sector no doubt contributes to the low valuations seen across the sector”, he said. “However, looking at the last 23 years, there has been clear aggregate growth in revenues, profit, and earnings. Looking at the next decade, would we bet against the existing companies to continue to these long-term trend lines (albeit with the odd bump)? Absolutely not.”
 
Philip Nothard said: “Many dealers will be breathing a sigh of relief that the agency model has not significantly affected financials. But the story is far from over in an era of rapid change.”
 
Zeus Capital’s analysis can be found in Cox Automotive’s AutoFocus insight update by clicking here.