4 Articles - The Franchise to Agency Shift
Article two from our Linkedin Series "A Disrupted Future in Retail Automotive"
Retail automotive is arguably in a period of transition unlike any before. Sure, we're just emerging from Covid and microchip scarcity will obstruct new car production for many months to come, but longer-term themes obscure the future including:
Expanded digitalisation and enhancement of on-line and on-forecourt customer experiences,
The introduction of connected, autonomous, sharing and electric technologies ("CASE") and
The evolution of alternative "as-a-service" models ("MaaS") like ride hailing, car sharing and car subscription.
In responding to razor-thin profit margins, OEMs are engaging these and other themes as a catalyst in shifting from the traditional franchised dealer model to an agency paradigm in which local service points earn fee-for-service whilst woven into the manufacturer's "omni-channel" direct-to-customer relationship.
While a number of OEMs already undertake forms of agency in fleet sales and electric vehicles, they're far from defining the specific model that will capture retail demand and it's precisely this lack of clarity that troubles heavily invested franchisees.
To be fair though, it's a hugely complicated issue given legacy relationships, sunk investments and regulatory issues (e.g. block exemption, etc). However, the formerly franchised dealers that thrive in an agency paradigm will be those that successfully identify and steward local resources of value to the OEM's "direct-to-customer" proposition.
Defining the Omni-channel Relationship
The popular wisdom, derived from more eCommerce-oriented sectors, is that manufacturers best fulfil pricing, stocking and promotional activities while local service agents undertake more "human" touch activities. Customers don't like to haggle, do like to do their research in a convenient on-line environment and do like the security of a local touchpoint.
As a simple thought experiment, the table at right considers a re-allocation of responsibilities between the OEM and local agent. Assuredly, the inaccuracy of the table itself should raise spirited response from experienced franchisees.
The model generally assumes that customers begin their journey online with research on brand, lifestyle, vehicles and pricing.
While customer engagement begins directly with the OEM, the agent backfills with local service on behalf of the OEM. A more proactive agent may also sell or deliver ancillary services not otherwise available from the OEM.
Spotlight on Dealer Operations
Franchised dealers generally do business in three discreet segments including new cars, used cars and after-sales.
As shown below, margin earned on new car sales don't necessarily merit the sizeable investment in stock and showrooms.
However, those critical new-car customer engagements secure both:
Secure used car stock acquired in part exchange and
Cement customer relationships for after-sales services.
In the best case, agency retains that key relationship with the new car customer, while de-risking the dealer group's balance sheet. All other things being equal (which is far from clear at this point), even a lower per/car contribution to gross profit on agency-based new car sales could significantly enhance return on assets and investors' capital.
Pro Forma Agency Returns
Dealer groups must evaluate the pro forma impact of the franchise/agency transition. Though difficult to accomplish with so little model definition, the exercise below provides at least a little clarity.
In 2020, Marshall Motor Holdings PLC sold just under 90,000 cars equally split between new and used with an average gross profit of just under £1,500/car (about the same for both new and used). On a total asset base of about £850 million, the company earned gross profit of 11% and EBIDTA of just 2.5%.
The analysis below assesses pro forma impact of a full franchise/ agency transition based on only a few simple assumptions:
New car inventory transitions back to the OEM at par (with a corresponding reduction in stocking debt),
While agencies require a much smaller PP&E base (fewer large "high-spec" showrooms, etc.), OEMs offset none of the "wasted" investment and
Contribution per new car sale is reduced by about 50% to £750 and such reduction is no greater than the corresponding reduction in operating costs related to new car sales.
Despite a 14% reduction in gross profit, return on total assets (before operating costs) increases by 15%.
In this new paradigm, the agent undertakes no stock risk, requires only a much smaller real estate burden, has no influence over pricing and bears no responsibility for volume targets.
To perform, successful agencies will likely move away from investments in large stylish showrooms and heavily commissioned remuneration towards the development high-service and resources that support the OEM's direct-to-customer relationship at the local level.
Most believe that lessons learned in the locked-down Covid economy have only accelerated the sector's transition to a more digitally focussed customer experience. While a precise definition of the coming agency paradigm is uncertain, most see it as inevitability.
The more proactive dealer groups will see agency as an opportunity to maintain profit contribution while reducing asset burden. Those that are ultimately successfully will:
Identify core resources required to provide agency services,
Reinforce existing resources while supplementing the outstanding ones and
Fight to demonstrate the utility of their fee-for-service to OEM's distribution models.
Grace Automotive can help franchised dealer groups to evaluate their agency-related resources and undertake the journey to success in a disrupted retail automotive sector.