Agency Model: Developing Trend in New Car Retailing?

The current chip shortage crisis has helped nearly every dealer set profit records for new- and used-vehicle sales due to an historically unprecedented imbalance of supply and demand, with far more demand than supply across the board.

But a close look at developments in new-car retailing in electric-vehicle sales in Europe, and trends in the U.S., makes it clear that changes of concern to some dealers are afoot.

Fresh from an automotive conference in Europe, where franchise laws generally are nowhere nearly as protective of new-car dealerships as in the U.S., the reality of the “agency” model trend for vehicle manufacturers is very clear and in the process of implementation.

With platforms that provide for a fully digital transaction for vehicle sales, some OEMs are moving to control more of the sales process from beginning to end, focusing on the rollout of new EVs. Volkswagen was first and the most aggressive, proclaiming back in May 2020 that the agency business model would apply to all stores in Germany for all EV sales.

This agency model works as follows: The franchise dealer no longer is the focal point of a new vehicle sale; instead, the customer places an order directly with Volkswagen, whether offline or online, and names a preferred delivery dealer. The price and dealership mark-up or commission is fixed, set by VW, and the preferred dealer is the agent with no sales negotiation responsibility but is simply a test drive, transaction processor and delivery point.

The dealer no longer finances an inventory of vehicles for sale, all floorplan or finance costs are borne by VW and the dealer is offered an attractive lease program for demos and loaners. This is not the future; in many places in Europe the agency model has already arrived.

Daimler was next to introduce the agency model about a year later in the U.K., with other European regions planning to follow.

“The agency model lays the contractual foundation for integrating online business and showroom-based business,” says Holger B. Santel, head of VW sales Germany.

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I note the mood regarding this development among some in Europe is not all negative. As an automotive analyst noted, historically, (before today’s unprecedented inventory shortages) dealers paid for manufacturer “mistakes” in overproduction on their floor plan charges, where wrong build combinations, obsolescence, etc., in dealer lot inventory tended to lead to a “race to the bottom” on new-vehicle margins (dealers have historically made little or no net money on the sale of a new vehicle in the U.S., absent F&I income). 

A fair fixed margin on new-vehicle sales during normal times of ample new vehicle supply might actually raise most dealers’ new-car departments’ net income for the long term.

However, where is the future business model that would exercise a car dealer’s natural entrepreneurial creativity, a talent that has historically differentiated the best of the best in growth, sales and profits, if the new-car side simply becomes a fixed-profit delivery point with the dealer as an “agency?”

Where it always has been: in used-car sales and fixed operations, right?

John F. Possumato (pictured above, left) is an attorney and founder and CEO of DriveItAway, which creates platforms and applications enabling automotive retailers to offer new app-enabled mobility options, including remote rental and rent-to-purchase.