Set pricing, agency model gain steam outside U.S.

Agency sales models, in which auto manufacturers sell vehicles directly to consumers and use dealerships to deliver the cars, are gaining steam outside of the United States. While there are barriers to full adoption of the agency model in the U.S., several manufacturers are pushing for more set pricing on EVs and selling cars directly to purchasers online. Genesis established an agency model in Canada in 2016 in which vehicles, accessories and protection plans are ordered directly from the automaker online, Eric Marshall , director of Genesis Motors Canada, told Auto Finance News . The agency model “ removes the negotiation aspect of the acquisition process, which we found to be the No. 1 pain point among vehicle shoppers,” he said. Other manufacturer aims with the agency model are to enhance customer experiences and get closer to consumers through online transactions, DriveItAway Holdings Chief Executive John Possumato told AFN . DriveItAway offers a rent-to-own subscription model for EVs and works with several automakers, including Chevrolet , Ford and Polestar . “Manufacturers jumped into the agency model figuring that it would streamline operations in a way that they would control the pricing, customer experience and the resale of EVs,” he said. Defining the agency model Under an agency model, manufacturers typically sell vehicles directly to consumers at fixed prices in transactions that include little to no negotiation, according to Cox Automotive . Dealer partners in this setup act as agents, handling tasks such as acquisition, sales consultations, test drives and delivery of the vehicle. Traditionally, dealers make a large portion of their profit on finance and insurance products, and those profits are retained under the agency model. At Penske Automotive , for example, dealers are still paid commissions on financing under the agency model enacted in the United Kingdom, Chairman and CEO Roger Penske said during the retailer’s first-quarter 2023 earnings call in April. “The commissions we get paid on our financing are exactly the same,” he said. “We can still have add-ons from the standpoint of things that would come under the F&I banner.” Genesis Motors Canada provides financing through its captive lender and trains managers who work with consumers on product offerings, Marshall said. The OEM manages the supply and sale of new vehicles while dealers deliver the cars. Genesis has 30 distributors across Canada. “Distributors are compensated following the completed acquisition of the vehicle, then based on a fixed margin for the suite of standardized F&I products included,” Marshall said. “Through working with a captive lender, we endeavor to streamline and standardize the experience nationally for transparency and peace of mind.” "W e endeavor to streamline and standardize the experience nationally." -- Eric Marshall, Genesis Motors Canada Lower costs While a true agency model allows the manufacturer to set vehicle prices and have more control over the relationship with the consumer, hybrid approaches afford dealers flexibility. OEMs employing an agency model typically manage the vehicle assets, Frank McCleary , partner at Porsche Consulting , told AFN . “There's reduced financial risk [for dealers] in an agency model [compared with] a dealer model,” he said. “You have floorplan financing, which is a cost . ... In an agency model, the assets are not held or managed by the dealer.” Penske Automotive does not have floorplan costs associated with Mercedes units sold through the agency setup in the U.K., Penske said during the Q1 call. Vehicles are allocated to Penske based on leads gathered online, with the retailer receiving a fee from the manufacturer for the sale and delivery of a new vehicle, he said. “All the fleet sales are handled by the OEM. ... We have no marketing costs,” Penske said, adding that there is no change to used-vehicle sales or service and parts business operations under an agency model. Agency models gain ground Honda , Hyundai and Mercedes-Benz are a few manufacturers that adopted agency models in Australia in 2021 and 2022, as the concept gained ground following Daimler launching a similar setup in Sweden in 2019, according to Cox. Stellantis is also moving toward an agency model for its brands in Europe this year, according to the company. Mercedes had implemented direct sales in 10 markets as of December: Africa, Australia, Austria, Germany, India, Malaysia, New Zealand, South Africa, Sweden, Turkey and the U.K., a company spokesperson told AFN . The agency model shifts many administrative tasks to the automaker, the spokesperson said. “We know from many customer conversations and customer surveys that the different price settings of the various dealers cause residual uncertainty among our customers,” the spokesperson said. “This will no longer be the case in the future and time-consuming price comparisons are no longer necessary.” Mercedes’ agency model applies to new vehicles and does not impact the sale and financing of used cars or aftermarket products, according to the automaker. “Only the process of pricing changes,” the spokesperson said. “It is more efficient and transparent for our customers and ensures that they receive the same price from each local authorized Mercedes-Benz dealer depending on the customer segment.” Dealership role More manufacturers continue to shift to an agency model where feasible. Volkswagen ’s retail partners signed an agreement in May 2020 allowing the manufacturer to adopt an agency sales approach for its fully electric models sold in Germany, according to a company release. Consumers can keep working with their preferred dealer, which handles all agent tasks in the transaction. While Volkswagen sets the vehicle price, dealers receive “the same commission and bonus as in the showroom business, even if the vehicle is purchased online directly from Volkswagen,” according to the release. Mercedes dealers who deliver vehicles purchased online from the OEM also receive the full commission, according to the company. “Fixed commissions will make business more predictable for our agents in the future,” the spokesperson said. However, Mercedes’ switch prompted a lawsuit in October 2021 from 38 of the then 49 Mercedes-Benz dealerships in Australia, claiming the shift to an agency model hurt their margins, according to a judgment filed with the Federal Court of Australia. Justice Jonathan Beach dismissed the case on Aug. 30, ruling that Mercedes-Benz acted within its rights to cancel existing contracts with franchisees and enact new agency model agreements. “Dealers were pretty up in arms about [the agency model] in Australia, but they don’t have franchise laws so they can’t fight it,” DriveItAway’s Possumato said. Move toward set pricing The European agency model isn’t likely to make its way to the U.S., but manufacturers are moving toward set pricing in the U.S. as much as possible within the legal limitations, Possumato said. EV companies such as Tesla that lean on direct-to-consumer online sales can better control their prices , while traditional manufacturers have made efforts to streamline pricing on EVs, he said. “If you make the MSRP close enough to wholesale, you pretty much set the price,” Possumato said. “That’s their way of implementing this.” Set pricing also allows OEMs to help dealers avoid discounting off the manufacturer’s suggested retail price , EV subscription company Autonomy founder and CEO Scott Painter told AFN . “The hard part about set pricing is when you're a franchisee, you do not have to play by those same set of rules,” he said. “MSRP is a guideline, not a mandate . When a manufacturer tries to set a price ... if a dealer decides to break ranks and discount their vehicle, then consumers end up shopping the price. Set pricing is good where you have a high demand, low supply product.” EVs provide an opportunity for OEMs to control more of the pricing and sales process, Porsche’s McCleary said, noting that monthly payments are still determined by financing rates and credit scores. EVs are “newer than anything else and give OEMs a point where they can push a different approach,” he said, adding that EV companies including Tesla and Rivian Automotive are saving on distribution costs – thus making a bigger profit – by going direct to consumers. Customers are also more informed about a vehicle’s trending price before entering a dealership in the age of manufacturer websites and digital information, McCleary said. “The research up front and transparency is significantly higher,” he said. “Set pricing is trying to fix the [finance and insurance office] customer experience that other brands can execute on that traditional OEMs are not able to. ... It’s transitioning the industry to meet the customers’ expectations on purchasing.” Dealer response Abroad, how dealers respond to an agency model is largely tied to the type of relationship brands have with their dealer partners, Porsche’s McCleary said. Dealers “that have strong relationships [with OEMs] can test and try new things,” he said. “The intent behind the agency model is for the agency, or the dealer, to focus more on service than transaction and enables a closer connection between the OEM and the customer.” Challenges may arise if dealers acting as agents aren’t providing the support and experience that is expected of them, McCleary said. While some manufacturers have faced issues with the agency model, many are still charging forward, DriveItAway ’s Possumato said. “Manufacturers aren't saving that much,” he said. “They're still pursuing it as it takes a long while to [change course.]” In fact, Volvo in May 2023 announced a transition to 100% direct sales in the United Kingdom and the closure of its U.K. wholesale channel, with planned shifts to follow in Sweden and other markets, according to a company release. The move toward an agency model followed Volvo’s launch of an online direct sales platform for used vehicles in early 2022, when online and direct sales made up 11% of Volvo’s total sales across the manufacturer’s top five European markets, according to the automaker. Volvo plans to be fully electric by 2030. There is not yet significant evidence on how further adoption of the agency model will impact the auto finance industry, Matthias Heck , vice president for credit rating business Moody ’s Investors Service , told AFN . “The switch to the agency model has so far not been material for credit. The U.K. is just a fraction of the global market, and even the most exposed issuer — BMW — only has a share of less than 10% of its unit sales there,” he said. “Hence, [there are] no visible implications and evidence on how well the switch works." Legal roadblocks in U.S. Dealership franchise laws pose a barrier to agency model adoption as they regulate much of the sales process involving manufacturers. The laws vary by state and were enacted to protect franchisees, Marci Kawski , a partner at law firm Husch Blackwell specializing in consumer finance issues, told AFN . “For a long time, what's been entrenched is this three-part [setup with] the manufacturer, dealer and consumer,” Kawski said. “The laws have developed around that and haven't contemplated direct-to-consumer. Whether manufacturers can sell directly to a consumer depends on what the franchise law says in the state.” Mercedes works with retail partners through franchise agreements in the U.S. given that the legal framework is different compared with other countries, according to the manufacturer. “We are in good conversations with the retail partners on how we can shape the sales transformation together in order to offer the best customer experience as a brand,” the spokesperson said. In the U.S., companies without franchised dealerships have fewer challenges to pricing control, Autonomy’s Painter said. This “new breed of manufacturers ... can decide to sell their car for whatever price they want,” he said.

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