Future of the car trade: agency vs. Authorized dealer

The future of the car trade agency versus authorized dealer

Corona has hit the car trade, and digitalization is also forcing the industry to rethink its approach. That’s why manufacturers are considering alternatives to the traditional sales channel. One solution: the agency model, which VW, for example, is relying on for its ID.3 sets. But what exactly is it and what are the advantages??

The corona crisis hit the automotive industry with full force. In all respects. And so the pandemic has also clearly shown the weaknesses of the car trade. The logical consequence: a high degree of pressure to adapt the business models that manufacturers are relying on in cooperation with dealers. A simple continuation of the more than one hundred year old and correspondingly proven sales representative strategy? Unthinkable at the moment, even after the pandemic has subsided. With regard to the latter, the situation does not allow any solid forecasts anyway. Advancing digitalization and the resulting changes in customer behavior – even the automotive market is not spared from online shopping – are doing the rest. The market players must act.

"agency model" this is not only the buzzword on everyone’s lips among manufacturers and dealers, but also the most promising solution for many of them. For example, at VW, where the distribution of the ID.3 as a lighthouse project for the new strategy. But what exactly distinguishes the agency model from conventional sales via authorized dealers??

The manufacturer sells, the dealer mediates

In theory, this is quite simple. In the agency system, the dealer does not act as the seller of the vehicle, as would be the case in the business model with a classic authorized dealer. Instead, the customer is more or less just an agent of the manufacturer. In return for a commission payment, he takes on the role of intermediary. An important interface between the manufacturer and the customer, he accordingly remains. However, the main areas of activity are customer consultations, test drives, car deliveries and services. By the way, you can find out how various dealers have fared in this respect over the past year in our photo show.

The manufacturer itself handles vehicle sales with the end customer. Of course, the dealer still acts as a salesman in some respects. In accordance with § 84 of the German Commercial Code (HGB), he sells the vehicle on someone else’s account and in someone else’s name, namely that of the manufacturer.

Who will then set the prices??

The current business model is different. Here, the dealer purchases a certain contingent of vehicles from the carmaker. Subsequently, however, the dealerships must bring their inventory to the customers themselves. In this case, the dealers are also responsible for the final pricing, as the manufacturer only provides a non-binding price recommendation. However, since customers buy their cars directly from the manufacturer in the agency model, the manufacturer also has its thumb on the pricing and can enforce it at its own discretion. A vehicle will then cost exactly the same in online direct sales as it does in a car dealership.

The advantages for all parties

The big advantage for customers: absolute price transparency. There is no need for time-consuming comparisons of offers before a purchase, and no need for lengthy price negotiations. For the dealers, meanwhile, the discount battles, i.e. the mutual outbidding of price reductions to win customers, are eliminated. Theoretically, the business model also benefits them – not least because they no longer have to factor in risks such as overly large vehicle orders. And the provsion compensates for the loss of profit from vehicle sales. In addition, the administrative effort is lower. The agency model makes it easier for the manufacturer to unify online car sales with physical sales at the sales partner’s premises. In the end, all parties are networked and the manufacturer is closer to the customer.

Real or fake

The sales contract is concluded in the agency model between the buyer and the manufacturer. According to the law, not only all obligations arising from the contract itself, but also all associated warranties, theoretically lie with the seller, i.e. the manufacturer. These include discounts, used car trade-ins, residual values and the marketing of demonstration cars. If this is what actually happens, it’s called a real agency model.

And in practice? The issue is often a bit more complicated. When manufacturers set discounts, they sometimes require their dealers to deduct the price reductions necessary to win customers from their commissions. Or to put it another way: the intermediaries will then pay the manufacturer rebates out of their own pockets. Even with regard to residual value risks, carmakers may not fully indemnify their dealers, nor with regard to costs arising from trade-ins, demonstrator cars or their marketing. If such features characterize the agency model practiced, it is considered a fake one.