Agency and derivative models to disrupt traditional car retailing

THE distribution and retailing of vehicles is set to change as much in the next five years as it has during the past 50. That’s the view of both Cox Automotive and Grant Thornton on the auto-downstream industry commentating in the latest issue of Cox Automotive’s AutoFocus publication. 

It’s part of the accelerating change in the new car market. Leasing brokers, with their digital first strategies and expert marketing, have been responsible for much of this change. In many ways, the Covid lockdown actually played into the hands of brokers, emphasising the importance of a digital marketplace, rather than physical showrooms.

But there may be disruption for the disruptors, a point Gary S Vasilash makes in his guest post The Netflix approach to vehicles. And he’s not the only one.

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.

Philip Nothard, insight and strategy director, Cox Automotive

Changing consumer interests

A combination of factors is helping accelerate this trend. Nothard points out there’s the global drive towards more sustainable forms of transportation along with intensified emissions regulations. Consumer tastes are making a rapid pivot from diesel to electric.

Owen Edwards (left), head of downstream automotive at accounting and management consultants Grant Thornton UK LLP, adds: 

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 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

And it’s this B2C sales retail model is currently under the microscope, as OEMs grasp the opportunity to reduce costs by selling directly to consumers. Historically, OEMs have directly sold to fleets. However, selling directly to customers is less straightforward, which is why the dealer-centric model has been so popular 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 points out: 

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 adds: 

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.

One other way to sell directly is via the subscription model – and that’s something Volvo – owned by Chinese auto group Geely – has been exploring, along with Lynk & Co (also Geely owned) which we’ve referred to earlier as a Netflix approach.

So there’s plenty coming onto the market that may disrupt the leasing broker model, not to mention dealers offering broker-style leasing portals.

Nothard – pictured right – sums up:

Cox Automotive and Grant Thornton both believe that the downstream industry will be affected by the rise of the subscription market, which – although 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 nine to12 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.