Why Toyota could be next to adopt the agency sales model

Toyota could join the ever growing list of car manufacturers that are switching to the ‘agency’ or direct sales model. “Every part of our business is going to get turned upside down,” the brand’s head of Europe, Matt Harrison, told the Automotive News Europe Congress recently. “The existing distribution margins and models are undoubtedly not sustainable.” The shift to the agency model has become the leading topic among dealers in recent months as they try to work out the impact on their profitability when car makers move away from the decades-old wholesale business model, under which dealers can choose to sell at full list or stimulate greater demand by discounting that price. The wholesale model benefits outright sales, but as companies scramble to improve profits on more expensive EVs, they are questioning whether they really need to give away all that margin to dealers and country-specific national sales companies – “legacy margins that are 20-25%”, said Harrison. “There is no way in the move to electrification this type of approach is sustainable.” Toyota, Renault, Hyundai, Kia and Mazda are among those wary of shifting because they value the relationship between dealers and customers. “I’m reluctant to say we are fans of the agency model,” said Harrison. “We want to protect our strong values and strong partnerships with the retailers. But I do think in terms of margin structures and the business model, it’s going to look very different in the future. I guess we’re stepping partly towards the agency model.” Mercedes-Benz was the first car maker in the UK to shift to the agency model, starting on 1 January this year, and its progress has been watched closely. In April, Penske – the US owner of the UK-based Sytner Group – reported that profits made from Mercedes cars at a fixed 5% commission per sale were actually up on pre-pandemic numbers, when it was discounting to shift cars. Mercedes has said it is happy with the shift in the UK and other countries. Its UK sales are down 12% in the first five months of 2023 against a market increase of 17%, but that is not necessarily bad given the company’s new ‘value over volume’ ethos. More worrying is that a much greater proportion of Mercedes registrations is, anecdotally, coming from demonstrators and showroom vehicles. The reason for that, however, is that Mercedes itself is now responsible for the demonstrators, hence the higher number registered, Gary Savage, head of Mercedes UK, told Car Dealer magazine. Claiming victory in the agency shift is premature, argues Steve Young, head of automotive retail consultancy group ICDP. “The lessons learned are limited when supply is restricted,” he said, because everyone has been able to essentially fix prices during recent parts shortages. The problem comes when supply returns: those working on the traditional model are able to stimulate demand by discounting, while those selling directly will either have to cut prices (a very high-profile action, as Tesla knows) or find more subtle ways to push. The main issue car makers face in the shift to agency is that they have no real experience of selling cars and are finding it hard to generate leads. Young reports that Mercedes in the UK has been paying dealers in the past couple of months on top of their fixed commission to market cars locally. “There’s nothing wrong with that. If anyone knows how to generate sales, it’s the dealer,” he said. A lack of readiness among car makers that are making the shift has been the problem. “They underestimated the critical role dealers play,” said Young. “They haven’t thought through how to stimulate demand. Somehow, they thought they could just fix the retail price and customers will come hopping.” Fixing prices is one of the chief aims of direct sales. Without discounting, this increases the car makers’ profit, but they also argue there is a customer benefit. Doing away with haggling reduces the anxiety in the customer that they should have shopped around more. It also reduces dealer anxiety, argues David Brown, head of Smart in the UK: “Dealers like it because it protects them from themselves. It protects them from a rival dealer distress-selling the same cars at lower prices.” Unsurprisingly, customers are finding old habits hard to break. “I guess the only thing negative you would say is that the customer still wants to negotiate,” said Roger Penske. How much does the dealer make under the agency model? In the agency model, the dealer becomes an ‘agent’ and is given a fixed percentage of the price of a car as a fee. If the car is sold completely online, then the nearest dealer to that customer is given the fee. Brand Percentage Mercedes-Benz (UK) 5% Audi (Germany) 6% plus 1.5-2.5% variable bonuses BMW (Germany) 5.5% plus variable bonuses JLR (South Africa) 3.4% VW EVs (Germany) 4% plus 2% variable bonuses Who is switching to the agency model, and when? BMW Will start the process with Mini in 2024, with BMW itself following in Germany by 2026. Ford Moved to direct sales in the Netherlands earlier this year ahead of an unspecified European roll-out. Honda Adopting the agency model in the UK later this year with its e:NY1 electric SUV. JLR Will make the shift in the UK by the end of 2024, following a trial in South Africa. Stellantis Moving first with Alfa Romeo and DS in the UK in January 2024, before an all-brand trial in some markets from July. VW Group Delayed due to a lack of IT readiness, said one source, but Audi will go 100% agency in Germany from early 2024.