There’s a shift coming to the way we sell cars. It started with Honda twenty one years ago in New Zealand, and three years ago Toyota adopted the same model. Now Mercedes-Benz are about to do it. We are talking about the agency model. But why make a shift at all? The dealer model isn’t broken is it?
Let’s look at why the shift to agency is gathering pace, the risks and pitfalls, as well as why it’s just become a bigger challenge to make the change.
In the run up to introducing the Drive Happy Project (as Toyota named their seismic shift), Toyota was, in the retail space, a heavy discounter, especially to fleets. However they usually had a relatively high MRRP.
This meant the man on the street got a great trade for their old car (often an over-trade) or a good discount on their new car. In the final quarter before the introduction of Drive Happy, Toyota was offering consistently high nationally advertised discounts across nearly all their vehicles. This was to ensure that the transactional price was very close to the incoming (but as yet secret) Drive Happy price. In reality the transaction price that consumers paid varied little pre and post agency. How dealers and customers got to that transaction price wasn't always clear before Drive Happy.
Surprisingly this high MRRP helped make competitor cars more expensive. Why? Because competitors base their MRRP on their competitors price and their specifications. When a dominant player like Toyota had, lets say, ‘expensive’ cars, it pushed the average selling price of their competitive set up, and so when a competitor was trying to work out where to price a vehicle, it looked at individual and competitive set pricing (specification adjusted) to set their price relative to the competitive set. The higher the average then most likely the higher their price.
As a competitor, previously we were only able to estimate competitor discounts through mystery shopping. Seeing these high discounts available publicly was alarming. I was working on pricing for Mercedes-Benz X-Class at the time. We had (we thought) pretty good pricing signed off and then Toyota dropped $15,000 off the price of a Hilux SR5 Limited, making our product look much less competitive just weeks before launch.
Ultimately, agency is good for consumers. And what is good for consumers is good for business. The naysayers would have it that the switch would decimate volumes.
Let’s look at Toyota’s market share over the last four years, and as a comparison.
Whilst one would hope that their market share would improve, what’s clear is that it hasn’t declined. This is important to bear in mind with the strong volume growth of Kia and Mitsubishi in NZ. Additionally, the market is buoyant. Up 38% YTD at the time of writing (YTD October 2021).
It has been reported that Honda’s volume has collapsed by 50% as a result of Honda moving to agency in Australia. This is unlikely to be the cause and is unlikely to be long term. Toyota struggled with the detail of its fleet policy early on, but soon recovered. Honda’s range is light on SUV’s, its model range is old and Jazz has disappeared (in Australia). No manufacturer gives up on volume unless it is uneconomic volume. Plants must be busy to make money, and if plants aren’t running closely to peak efficiently then the whole automotive model struggles. Honda’s performance should be watched carefully as new models come on stream.
While it would be useful to have insights into dealer margins or GP, that information, rightly so, is held tightly. But anecdotally, I’ve heard from one large metro dealer and one provincial dealer. The metro dealer was very positive; significantly less overhead, less stock holding, broadly similar retained margin, similar volumes, better sales experience, better CSI. The provincial dealer was less positive. They thought that the model suited metro dealers who retained less new vehicle margin, whereas their gross margin had been reduced, while accepting that the overall business was still in very good shape.
What has also become clear is that Honda's model pricing and Toyota's model pricing is now very competitive in consumers eyes, and competitive in a transparent way. The fact there is no hidden discounts or bloated MRRP, means that both brand’s products stack up very well when a customer is doing their research online. Which is how customers now do their research.
None of this is a compelling reason to move to agency however. It simply proves that the change was not a disaster. The real reason is buyer behaviour.
In an increasingly online world, buying a vehicle is one of the few transactions that is difficult to do online. It can be done but it is a long way from being seamless. It is also messy. Dealers don’t want to give ‘their best price’ without a customer visit, customers don’t like visiting dealers. Test drive bookings require multiple emails, follows ups are not guaranteed. Processes are not automated or streamlined, CX is not a topic that has been considered from end to end. At the time of writing there are still only two major brands who will sell me a car online (without multiple emails to a dealer). Honda and Tesla.
Both brands are pioneers. Tesla, is the new kid on the block. In NZ it has just one showroom, and only three service centres, but is clearly an online first business. Honda was the first brand to offer agency model, and the only mainstream brand to offer online sales. What’s more Honda is revising its agency model to introduce neighbourhood Honda stores in the provinces. Like Click and collect.
Few stores offer an immersive and authentic brand experience. Telsa is close, MINI Garages feel authentic and Mercedes-AMG stores feel pretty special. But generally brand experience is watered down. There is room for improvement.
Here are the key features of a typical agency model:
For the purposes of selling new cars, dealers become agents.
Dealers no longer own new car stock for sale therefore they no longer need to fund new car stock.
Stock is held centrally, improving access and stock utilisation for all dealers, as well as removing the need for dealers to ‘stock swap’.
As agents for new cars, the dealers are selling on behalf of the brand or national distributor.
The price for any car is the same for any dealer anywhere in NZ.
Dealers are paid a flat fee for handling the transaction.
Volume targets are typically eliminated.
Quality of customer service become more important
This last point is mission critical for the brand and for the dealers. Behavioural change. No dealer has ever set out to offer a poor customer experience. Excellent customer service and brand experience are not comfortable bedfellows for a sales target driven business.
Dealerships are primarily driven by sales targets. CSI or NPS plays a role with some brands in terms of KPI payments, but volume remains king in New Zealand. The pursuit of sales goals is often short term. Not because dealers don’t think long term, but simply because dealers are ranked on sales performance. We manage what we measure. We create sales volume focussed businesses, and sadly that is a one dimensional measure for many.
The ability to switch to an online sales model, and a renewed and aligned focus on a better customer and brand experience are the dominant drivers of the change. New brands entering the market, without a legacy of a dealer network are more likely to go direct or an agency model. Despite some resistance to change, agency might well be the switch that protects the dealer network, because it is a forward looking move.
No brand can offer online sales without fixing a retail price. That's why pricing in dealerships and on websites is recommended. A dealer is free to sell at a price below the MRRP. As soon as the distributor has a fixed minimum price for dealers to sell at, it falls foul of the Commerce Commission, unless all the stock is owned by one entity (i.e. the distributor).
As more entrants arrive, so does the likelihood that they will have a sharper MRRP. This will put pressure on margins and retail pricing. The brands that move to agency are able to reduce their MRRP.
If we don’t think this is an issue, consider that Tesla sells more Model 3, than Audi A4, and A5, Mercedes-Benz C-Class, BMW 3 and 4 combined. If you think that this is irrelevant because medium luxury sedans are a dying segment, consider that Tesla do this, in a dying segment, and then became the best-selling sedan in September in New Zealand. And outsold every SUV too. Imaging what they could do if they had a decent SUV.
Despite the reluctance to adopt online selling whole heartedly, it is surprising how quick other brands have been to adopt Tesla’s ‘online deposit model’ for new model launches.
Lastly, no brand or product is immune from online transformation. Ten years ago it was difficult to imagine how libraries could ever offer an online service for lending books. Just because we can’t see the obvious answer, doesn’t mean to say that change isn’t coming.
In our next blog we will outline why Agency is a hard sell right now.