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Home›Volkswagen Emissions›Agency and derivative models to disrupt traditional franchise retail models

Agency and derivative models to disrupt traditional franchise retail models

By Raymond J. Nowicki
March 4, 2022
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The way cars are sold to consumers is set to see the biggest change in fifty years, according to an analysis by Cox Automotive and Grant, as agency models disrupt traditional approaches to car sales and subscription services also gain traction, according to Dornton. Their research indicates that the auto downstream industry will change as much over the next five years as it has over the past fifty years.

Philip Nothard, Insight and Strategy Director at Cox Automotive (pictured above), commented: “When you look at OEMs’ increasing interest in agency models, changing consumer sales trends and the recent increase in the popularity of electric vehicles, all the signs are pointing to huge towards the disruption of traditional automotive retail models. As a result, the next few years are likely to see unprecedented changes in how people sell and buy vehicles.”

Changing consumer interests

The report indicates that OEMs are being pressured by Europe and China to comply with stricter emissions regulations or face significant fines. At the same time, consumers are aware of the shift towards electric vehicles, with battery electric vehicles (BEV) growing in popularity as countries promise to meet their climate targets and phase out internal combustion engine production in just a few years.

Recent data from the Society of Motor Manufacturers and Traders (SMMT) shows that the UK market share of BEVs reached around 25% in December 2021.

Owen Edwards, Head of Downstream Automotive at Grant Thornton, said: “The decline in popularity of diesel vehicles would have been unthinkable just a few years ago. But while the market share of BEVs continues to increase, the sales price and production costs of BEVs are not falling enough to improve the growth of this sector in the coming months and years, which is one of the key factors that will prevent an equilibrium in the short-term faster BEV adoption .

“It’s a difficult time for OEMs as they try 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 OEMs to review their costs to meet financial targets. One of the areas that several OEMs evaluate is their cost base in the supply chain and in vehicle distribution and retail.”

Agency and derivative models

The retail model of B2C selling is undergoing a transformation as OEMs seek to reduce costs by selling direct to consumers just as they have historically sold direct to fleets.

EV specialists that have recently entered the market, such as Tesla and Polestar, have implemented the direct B2C model. However, Tesla controls both the distribution of the vehicles and all dealerships through its vertically integrated retail (VIR) network.

Tesla’s practice of aligning VIR with sales of BEVs has been a successful B2C sales avenue for the company, with SMMT data showing the Tesla Model 3 topping the list in December 2021 with 9,612 vehicles and an 8.8% market share was the best selling vehicle in the UK.

However, the report suggests that most OEMs will struggle to become VIR due to their outdated sales processes. It’s also not clear if they’ll find it easy to transition to a full agency model, where all transactions are processed online and the merchant receives a handover fee as part of the process.

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

The alternative is a derived model that incorporates some 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 the full agency model is unlikely to be implemented by all OEMs; Instead, the agency derivative model is preferred. The reason for our consideration is that all OEMs and their dealer networks are different, and in order to fulfill the required growth strategy of each OEM and their dealer networks, each OEM needs a different model; there will be no standard agency model that fits everyone.”

Cox Automotive Article 1

customer information

A key advantage of both agency and derivative models is that they give the OEM better insight into buying habits as the customer becomes more central in the sales process. This also gives the OEM more leeway to provide additional omnichannel services and create seamlessly integrated customer relationships that span multiple touchpoints from vehicle sales to service and repair.

It also allows OEMs to have a better understanding of customer requirements and offers the opportunity to upsell to the customer. The OEM would also participate in the Part Exchange (PX) transaction when the customer returns to purchase their next new vehicle. Knowing what vehicle is coming back and its PX price could allow the OEM to take over direct sales in the used car market, rather than the dealership.

Finally, the report indicates that subscription services could start to attract more customers.

“Cox Automotive and Grant Thornton both believe that the downstream industry will be impacted by the rise of the 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

9-12 months. Additionally, reports from subscription provider OnTo suggest that subscribing to a BEV can often be cheaper than leasing. It’s clear that subscription will be slow to catch on, but with the rise of BEVs, this is another way OEMs, dealers and independent used vehicle operators can offer flexible customer service,” concluded Nothard.

The Cox Automotive Auto Focus report is here

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