What does Agency Selling Mean for Car Dealers?

Agency selling is something that’s been coming down the pipeline for a while. Consumers want a more consistent experience with more online purchasing options while still maintaining that personal touch they get from a dealership. Ten years ago, consumers visited dealerships seven times before making a purchase decision. Now it’s barely 1.5 times.

In Europe, many dealers are on board with the concept, but their point of contention is, obviously, pricing. Allowing one price that the automaker chooses takes away a lot of the control that dealers currently have over their profits.

Some European automakers have already started rolling it out. Instead of selling dealers cars at wholesale prices the cars are basically stored on their lots until sold. Then the dealer is paid a commission per unit sold instead of choosing its own margins.

According to some, like Honda NZ, setting a price across the board, reduces vehicle value depreciation and guarantees higher resale values down the line, which, in our opinion is “trash talk!” It is really hard to believe that Volkswagen dealers have already agreed to agency selling when it comes to the ID electric line of vehicles.  Look where that leads them: Tesla has used set prices and direct sales since its commencement. We seriously question whether this shift is inevitable. Obviously this sales process will lead to a Tesla Model of NO DEALERSHIP FRANCHISING!! 

So what does it mean for dealers when this sales model becomes more widespread?

It means almost total factory control.

They already control how your building looks, how your website looks and in many cases the sales and service processes. Now the OEM will take control of profit margins. Some automakers are paying only 2.5-5% commission per vehicle sold. That means the dealership would be doing a lot of legwork to make a measly $1000 on a $40k vehicle. Honda NZ pays dealers 4-7% commission, which is dependent on customer satisfaction scores and sales volume, still holding onto ultimate margin control.

It means more online sales.

That’s no problem!  Consumers have wanted an online experience. With increased online marketing, digital communication and even virtual test-drives, the market has been  making the shift to online retail for cars. Many dealers have embraced this process as Covid-19 safety protocols have pushed the retail market in that direction, but online sales don’t mean loss of control by the dealer. Plus it saves them big employment expenses in the variable ops. The trend to vastly increased online sales volume has been and will continue to be good for dealers, but agency selling is not and never will be! 

Agency selling promoters will tell you that the agency model will give consumers a more consistent experience from online into the showroom. They say that even if a customer never sets foot in the dealership, they will still get commission for the sale. But, with the current online sales model, which often includes contactless delivery, that is already true!

It means less overhead and reduced financial burden/risk.

Dealers won’t have to buy cars from the OEM. If a certain model isn’t selling, it doesn’t affect the bottom line. Floor plan costs would be a thing of the past. Dealers are already in control of what they take from the OEM today, and they get to choose what they feel is best for their marketplace. 

Going back to the Honda NZ example, another feature of agency selling is that each dealer is given demonstration stock for customers to tour and test drive. Then each car is custom-ordered when the customer is ready to buy and ships from a centralized distribution center. This puts all the financial risk on the factory. But this central distribution center concept has been tried many times over the history of our business and has been abandoned each time.  The OEMs stock what they want and in the numbers they want, without acknowledgement of where the market is or what the consumers want. A dealer considers all those factors when stocking vehicles in order to have the “right” vehicle in stock thus facilitating greater retail volume.

And we all know that smart dealers actually carry very little risk when they manage their floor plans properly. Most dealers’ financial composites show a credit because the dealers have control of their inventories to the extent that floor plan credits from the OEM exceed their monthly floor plan costs.

It means reducing staff.

Promoters will say that another feature will be decreased overhead because of less staff. With an omnichannel approach, dealers will no longer need multiple sales managers to run deals. Salespeople will be a thing of the past. Instead dealers will only need a few “product experts” on staff in the showroom.  But dealers did this themselves during the peak of the COVID crisis and made huge profits by reducing staff. Agency selling also means F&I will be significantly reduced as all financing will be handled by the OEM and more deals will happen online. What dealer in his right mind would allow one of the MAJOR dealership profit centers to disappear?

Further, these promoters say that dealers could retain some additional staff by beefing up BDCs, so they can have consistent handling of inbound leads and follow-up after test-drive appointments. That is if OEMs don’t centralize these tasks as well eliminating yet another profit center, despite seeing that dealers have already implemented these strategies successfully on their own.

It means less competition.  

They say competition between dealerships will be diminished, which is obviously not good for the consumer. As we’ve seen in recent years, it would be an even bigger shift to the focus on customer service, which is where the new “competition” would be rather than with pricing. If a customer can buy a Ford at any dealership for the same price, then reputation will be more important than ever. Having good reviews will not only be the only way to attract customers, but it would also likely affect commission rates.

How could a restriction on pricing competition be good for the consumer? Dealers? It isn’t. This model eerily reminds us of the CFSB Financing Model attempted during the Obama Administration, which gave all buyers the same fixed interest - a high one to cover credit challenged consumers

Is this a restraint of trade? In our opinion it certainly limits the open market. Most buying decisions are made based on price. NADA partnered with Gallop, a major survey company, to poll  the consumers, and they unequivocally voted 76% in favor of the negotiation process in order to obtain the best price for a vehicle. For example, the same toaster is for sale at Walmart, Target and Amazon. Amazon’s is $2 cheaper and has free shipping. Which one are consumers going to choose?

Maybe agency selling addresses the concerns of an increased online market and the consumers’ desire for a consistent, personalized experience, but at what cost? “If it ain't broke, don’t fix it!”  All the benefits agency selling advocates have proffered are in place already using FRANCHISED DEALERS. They have not offered any additional benefits to the process but rather are proposing to shift these benefits to the OEMs. In fact the only difference to what is happening now, which is driven by the “market economy,” is, essentially, that the OEMs get to eliminate franchise dealers. That is NOT an alternative to the present day model, which benefits dealers and the consumer alike!  That is most clear. Only promoters who do not understand that the US is a “market driven” economy believe that failure is “just around the corner.” Every time that is forgotten in the legislature the alternative fails, and the consumers and business owners suffer.

What do you think? We would  love to hear your thoughts. Reach out to me, Gordon Wisbach, on LinkedIn to share your opinions.