Agency model versus Franchise

Two years ago, it looked like the majority of automotive OEMs would have adopted some form of agency model by 2028. Now less than a quarter of them remain committed to that timetable.

In 2023, the drivers pushing for the Agency model were that OEMs wanted to better control the customer experience and to reduce costs. The agency model was also seen as a means to address the substantial profits of motor retailers and the perception that they were “giving away” manufacturers’ value.

Those drivers have not been enough to create the big shift that we were expecting. Could the sector end up stuck between two stools. Here we take a look at the current situation and whether the Agency model could replace franchises at some point?

Agency model and the current state of play 

Mercedes-Benz do appear to have successfully implemented agency in the UK. They have benefitted from the consultation they undertook with their retail partners, being a premium brand, and allowing retailers to manage used car sales independently. And they are not alone, Volvo, Polestar, and Rockar have also found ways to make it work.
 

However, Lotus and Ford who experimented with the agency model have gone back. Jaguar Land Rover has abandoned agency plans in favour of a ‘refined franchise’ model and BMW has ‘adjusted the timeline’ of their roll-out. In January of this year, Volkswagen Group (VWG) also announced that it would pause its 'direct to customer' retail BEV sales and return to the wholesale model for the short to medium term. The VWG version of the agency model struggled due to the complexity of multiple sales processes which delivered a poor customer experience. /p>

Can the Agency model still work?

The agency model is not fundamentally flawed. However, the UK market with its increased competition, excess supply and margin pressure favours the traditional wholesale model. In addition, retailers’ currently need flexibility to secure sales with an oversupply of EVs.

WG's decision to revert to the franchised sales model is certainly pragmatic in the current market.  It has become clear that manufacturers can’t adopt a one size fits all approach and need to adapt their strategies to changing market conditions and consumer preferences.

The agency model still offers potential benefits but its success depends on effective inventory management, motivated dealer networks and alignment with market dynamics. The role of dealer networks in absorbing excess inventory and maintaining sales momentum cannot be understated.

The ongoing agency-or-franchised debate makes it more important than ever for retailers, small and large, to plan which brand they’re going to be partnering with to safeguard a profitable future. But that’s not the only factor to consider in the long term. 

The Agency model and changing motor retail market dynamics

Some OEMs have read the market better than others when it comes to understanding consumer demand. Car buyers are decreasingly loyal to a particular brand and instead look for the most attractive product and price. Vehicles that are desirable are far easier to sell and both retain a higher margin and higher residual value. 

So, it becomes increasingly important for retailers to be partnered with the correct brands or if they’re large enough carefully select a spread of brands.

The large influx of Chinese-owned brands, with highly competitive products, is taking an increasing share of the market. The new Chinese brands are capitalising on the combination of decreased brand loyalty and the absence of lower cost vehicles from legacy manufacturers. Many of these brands are actively seeking to implement a franchise dealer model instead of an agency. They understand that dealers have the local expertise in markets where they have no experience, and that can help them enter and be competitive in them. 

Effective collaboration between OEMs and their retail networks has never been more vital. However, judging which brand is going to be the next major opportunity isn’t easy and comes with its own investment risks. This has been highlighted by the potential imposition of tariffs, particularly on Chinese-built vehicles.

To further discuss the issues surrounding the changes that might impact your business in the current environment, including the agency model, please contact Chris Bond.