Proposed moves to agency models are a hot topic in our industry, yet many questions remain about how the model will work in practice.
The move by some OEMs to a fixed price agency model is by far the most topical issue in the new car retail sector. We have seen brands like Toyota in New Zealand and Mercedes-Benz in South Africa move to this model in which Dealers cease to own the stock and are merely facilitating the sale of a vehicle at a fixed price on behalf of the OEM.
Honda moved to a fixed price agency model on 1 July 2021 after rationalising their network, while Mercedes will move to the model on 1 January 2022. After making the switch, Honda recorded a record decline in vehicle sales of 62.6% in July. With a total of 822 vehicles, Honda only sold half of its forecast. While some teething issues were expected in the early days of this fixed price model, the significant drop in sales is well below what other brands battling similar challenges are experiencing.
Agency is a major change to the current model and Dealers are being asked by long-term business partners to embrace this change. The fact that some scepticism is emerging over elements of the agency model should not be read as Dealers rejecting change. Dealers do not shy away from change, but they have a lot at stake after years of investment. They are also experts in retail and expect to play a key role in shaping any future retail models in which they participate. Part of that involves asking the important questions that need to be answered.
Dealers have questions over the fixed price element of the model. Will the inability to negotiate cause some customers to simply walk across the street to a rival brand which is prepared to negotiate? OEMs tell us they have research which shows that consumers do not wish to haggle. However, AADA has commissioned an independent survey which shows that more than 90% of consumers value the ability to negotiate a discount. It will, of course, be left to the Dealer to explain to the customer why they are no longer able to negotiate a discount. The other major question is whether a fixed price model can operate effectively when almost every new car transaction involves the trade-in of a used vehicle.
Another question Dealers have relates to performance standards and particularly sales targets. Will there still be components of remuneration linked to such targets? With the Dealer having no ability to discount the product, their ability to influence the sale is greatly diminished so surely sales targets would fall away.
What about the Australian Consumer Law? Under the current laws Dealers as suppliers are responsible for responding to and remedying claims made under ACL consumer guarantees. Does the Dealer maintain this responsibility under an agency model? Given the agent will merely be facilitating a transaction on behalf of the OEM, is the OEM the supplier and thus solely responsible for compliance with the ACL? The ACCC in its submission to the franchising Senate Inquiry alluded to such a streamlined approach.
There is also further uncertainty around the issue of tenure. Unlike Dealers in the US and the EU, who enjoy perpetual agreements, Australian Dealers are on fixed term agreements which usually run for five years.
nfortunately, some brands have started offering shorter terms, the worst example being Mercedes who moved its entire network onto 12-month terms as it sought the flexibility to move to agency. Will this trend towards shorter agreements continue under the agency model?
These are only a few of the important questions that inevitably come with a move to a new business model. There are, no doubt, many other issues which will have to be worked through. Ultimately, Dealers will only want to participate in a model that is financially viable. What will the margins be? Which of my current profit centres will be affected? It is concerning to hear reports that some OEMs are using a move to agency model to compel their Dealers into using certain suppliers. The fact that the cost of supplies has been found in some instances to be some 50% higher than what Dealers are currently paying is a bitter pill to swallow. This is not good for Dealer profitability, and it is not good for consumers.
We can talk and talk about the various elements of an agency model. owever, the fact remains, that more often than not, these Dealers who are being asked to transition to agency have represented a brand for years. They have often invested vast sums of capital. The value of their business has been diminished as they have lost the ability to capitalise on the goodwill which they have spent time, money and effort creating. These Dealers deserve to be compensated, particularly in cases where the OEM is seeking access to the customer database. This customer data is confidential and is acquired and maintained by the Dealer. There are serious legal and ethical concerns about an expectation by OEMs that under an agency model, Dealers will simply hand it over.
Dealers respect the fact that OEMs have the right to implement alternative distribution models. They have done so before and it is reasonable to expect they will do so again in the future. It is their right. However, when such changes are made, they have a duty to their Dealers. They should flag such changes well in advance. They should work with their Dealers to address all of the contentious questions and allow Dealers to have a say in how the final model works. Most importantly they need to understand the material effects these changes are having on their Dealers. The value of businesses will likely be affected and Dealers deserve fair and adequate compensation for these changes.
This article is written by James Voortman, CEO, AADA.