Franchise vs agency model: What’s next for OEMs and Dealers?

OEM agency model ‘failing to meet expectations’ – what’s next?  

Volkswagen Group, BMW, Genesis, Honda and Mercedes-Benz have all announced plans that could usher in an automotive sales transformation by implementing an OEM agency model. However, many manufacturers have expressed no such plans, while others have reverted to the traditional franchise model, after making the switch.

It's clear then that this new approach to automotive retail hasn’t taken as well as originally hoped. According to Steve Young, Managing Director at ICDP, a few factors are causing this false start. Still, as explained in our Q2 Insight Quarterly Report, he believes that with further development, the OEM agency model has the potential to meet the industry’s evolving needs.  

Franchise vs. Agency model  

As mentioned, the agency model is an alternative automotive distribution strategy to the traditional franchise retail sales model.

Under this new retail model, the OEM acts as a direct seller, setting their own prices and removing the retailer commercial risk. However, this switch means that pricing is centralised and inflexible compared to the traditional franchise model which allows dealers to adjust prices in line with their margins and successfully close deals.

One of the reasons behind this switch is to help cut distribution costs and mimic Tesla’s distribution strategy, which is understandably seen as a huge success at 15%. However, Young argues that this promise has proven to be overly optimistic, and Tesla’s low distribution costs were actually a result of their unique market conditions.

That’s not to say there’s no benefits to the agency model for both dealers and OEMs without meeting this promise. For dealerships, this model removes commercial risk, as the OEM retains ownership of the vehicles until they’re sold to the customer, rather than dealerships purchasing the inventory from OEMs.

The benefit for OEMs on the other hand, is the ability to control the price of the sale, as well as cutting down distribution costs significantly – even if not quite matching Tesla levels.

Challenges of OEM agency model implementation -  

Despite these potential benefits, the agency model roll out hasn’t been as successful as hoped. According to Young, this has a lot to do with the supply-demand balance in the automotive market.

"Pricing is the key lever for balancing supply and demand," explains Young. Given the importance of residual values in maintaining a strong used vehicle market and effective lease rates, maintaining flexibility in the system is crucial. Young argues, "In theory, a centralised dynamic pricing tool should replace dealer price negotiations, but in the near term, some flexibility is needed based on a hybrid model where OEMs can make adjustments to reflect market conditions, and dealers can still apply a final discount where needed to close a deal."

As it stands however, OEMs are continuing to push excess supply into the market without a dynamic pricing mechanism in place. This approach then forces dealers to discount stock and take a potential financial hit just to stay in line with demand fluctuations.

While centralised pricing offers transparency for the customer due to prices not being dependant on where they are purchasing the vehicle, the lack of negotiating possibility can be just as frustrating to them, as it is for the dealership.

For the dealers, this frustration comes from the lack of flexibility needed to adapt to supply and demand, while also changing how they approach financial reward. Under the traditional franchise model, dealers can set their own prices which would, in turn, impact the commission they receive on a sale. However, the agency model sees them receiving a single fee, set by the OEM. Because of this, there’s understandably a lot of dealer pushback to implementing the agency model. 

Pushing the automotive agency model forward 

Implementing the agency model in the automotive market requires a carefully planned and strategic approach to ensure success. For Young, this means focusing on supply and demand, centralised dynamic pricing and better OEM and dealership collaboration.

Supply and demand  

As it stands, the agency model is causing an oversupply within the market. This has the potential to cause a price crash while driving excessive discounting. Both of which can impact new car sales and residual values.

To create an effective OEM agency model, supply management needs to be as precise as possible, while also allowing some flexibility in sale price to match demand fluctuations.  

Centralised dynamic pricing 

For the model to benefit both dealers and OEMs, there’s a need for more sophisticated dynamic pricing tools that continuously adjust prices to balance supply and demand. Certainly, in the interim, and perhaps even after developing and implementing these tools, some price discretion at the dealership level is required to allow them to respond to the market.

Dealer and OEM collaboration  

Regardless of using an agency or franchise model, dealers still play a critical role in the customer experience and after-sale service. Because of this, collaboration between OEMs and dealerships is essential to ensure successful vehicle supply chain management.

For this relationship to be effective, both parties need to find it beneficial and as we know, dealers currently feel reluctant to work under an agency model due to a sudden lack of control. A good way to resolve this issue is to allow dealers the flexibility to make adjustments within an agreed framework, enabling some negotiation and tailored deals to meet customer needs and supply issues.

Cox Automotive Insight Director, Philip Nothard, concludes: “With consumer spending under pressure and demand for a seamless buyer journey on the rise, the agency model must evolve to meet these needs. Flexibility is key, allowing OEMs and dealers to adapt and retain alternative models if better suited. This will lead to greater efficiency and improved experiences for all stakeholders. Similarly, there’s a need for digital investment from OEMs to refine the model to better manage supply management and allow for centralised dynamic pricing.”

 Read Steve Young's full contribution to Cox Automotive's Insight Quarterly.