• Accelerated shifts in the retail supply chain across the automotive industry have increased the need for traditional automakers to re-engineer their individual approach to market.
• The emergence of new players focusing on direct retail, together with the omnichannel experience across other industries have significantly changed the consumers approach to purchase decisions
• Across the consumers, the traditional retail business will stay relevant to supply information and real experiences, however their role within the supply chain will dramatically change and support a re-focus on the most important requirement – customer service over a unsustainable margin and price driven competition.
• Whilst a direct retail channel allows for significant improvements for customers and manufacturers alike, there are significant challenges which need to be managed carefully in order to implement an agent model sustainably.

Evolution and disruptions form a constant circle within the automotive industry and are inevitably reaching even the smallest markets. Particularly throughout the past decade, the industry has seen an acceleration of technological evolutions, which deeply transformed the basic nature of the vehicles being produced. Whilst these technological changes have been mostly digested and manufacturers are adapting to the new requirements, the last 2 years have been amongst the toughest for the retail sector. This proofs particularly relevant for the automotive industry, which builds almost solely on a consumer-facing processes through a 3^rd party retail partner and contrary to its products, has hardly evolved their processes over the past several decades. Studies conducted show the cost of retail for the arguably inefficient and dated dealership led distribution model can be as high as 10%-30%.

Whilst a completely new digital only landscape has not been established just yet, the recent pandemic has nonetheless tremendously accelerated changes that have been building in the industry for years. Most notable is this change in customer preferences, driven by new sales models from e.g. Tesla or NIO as well as new ownership models such as subscription based ownership or car sharing. Ten years ago, customers visited dealers averagely 7 times prior a purchase, today, it is les than 2 times, and with these changes, came a progressive rethinking of the ideal process of distribution.

The shrinking customer interest in dealership lead sales experiences has overlapped with a growing push towards a full- or hybrid omnichannel experience with an increase of online marketing, digital experiences, visualization technology and a strong drive to online launches and exhibitions – the later, an important step towards full omnipresence. Traditional retail channels and dealers are facing a choice to evolve or risking becoming less relevant or even obsolete.

Customer perspective

Consumers gradually expect to be able to complete their shopping experience online and even across several channels, ideally at a place they can activate when needed. The global pandemic appears to have accelerated that already building trend. However, whilst online channels are being increasingly expected by potential customers, the traditional sales process involving a team of skilled and dedicated sales and aftersales personnel still dominates the expected experiences demanded by customers, where information, customization as well as added value services need be offered.

Dealer perspective

Despite a consumer progression towards digital purchasing, physical contact remains a decisive role within the sales process and even more so for finalizing a purchase decision. Surveys clearly show that consumers want the dealer and his team to remain the fundamental point of contact and reference to guide the offline sales journey.

The agency sales model allows dealers the possibility to continue being an essential part in the decision-making process. The updated scope as a core pillar in the retail process and touch point throughout the life cycle and ownership of the vehicle remains a key role and is increasingly lean and away from the traditional – often margin-driven – interaction. The new role thereby allowing the retailer to focus on the very core of customer interactions – Customer care, brand building and loyalty.

Manufacturer perspective

Traditional sales models encourage price competition among dealerships, thus over time risking a deterioration of pricing and marginality for manufacturer and retailer alike. This market inefficiency in the price setting makes it difficult for the customer to find an attractive offer and remain confident in the price paid for the product.

Consumers are increasingly used to a convenient online purchasing experience through other industries (e.g. Amazon) as well as competitors (e.g. Tesla or Nio). Driven by these new standards within the retail industry, customers progressively do not want to negotiate prices for products and services and require full transparency across the value chain. Online surveys conducted by Accenture show, that over three-quarters of surveyed participants prefer prices found advertised online to be as attractive as prices at the dealerships.

With direct sales through the agency model, the car manufacturer can actively steer, fix and control prices, across the market. A uniform pricing reduces intra-brand competition as well as a direct management of grey- and parallel importation. The customer receives improved consultation and service quality, as retailers need to differentiate amongst each other through the overall experiences offered instead of a heavy reliance on the pricing.

Studies show that consumers increasingly avoid investing time and effort in comparing multiple offers, however, driven by the inhomogeneous market, they still compare prices offered by dealers and manufacturers with those offered by third parties prior to finalizing the purchase decision. OEMs could potentially improve their position by creating a lean, fast, and emotional journey of their own – omnipresence.

Traditionally, the dominant form of distribution has been through a network of authorized independent dealers. However, there has been a strong push to transition to online sales and an agency model for the sale of vehicles in physical showrooms.

According to Accenture, 85% of dealers agree that the sales model needs to adapt quickly to survive. Where dealers used to be the end point of a traditional purchasing journey, we see a future where they will be part of a set of inter-connected touchpoints, which the customer can decide to utilize at any time.

In this new sales model, dealers become ‘agents’ who act on behalf of the OEM, with sales conducted directly between the OEM and the customer and being facilitated by the agent. The dealership’s role becomes the one of an “experience center” that adds value through in-person interactions and technologies, sales consultation, test drives, and vehicle handover, with dealers taking commission as intermediaries.

There are clear benefits to OEMs in adopting an agency model, but it is imperative that OEMs also assess the risks inherent in the move to an agency model – both in dealing with existing dealers in the transition and in the operational risks for the OEM thereafter.

Difficulty creating a superior customer journey, because many different entities with their own legacy systems are involved, there are inconsistencies and cuts in the customer journey which leads to a cumbersome purchase and moreover ownership experience. Particularly the lack of online-offline integration is perceived by customers as a significant shortcoming of the traditional sales model. Additionally, a weakly connected infrastructure makes it difficult for retailers to consistently engage with customers and for OEM’s to holistically manage a customer journey throughout the ownership cycle.

Insufficient price coherence, Inconsistent pricing confuses customers who want simple and transparent prices. Missing pricing guidance encourages competition between dealers of the same brand and ultimately reduces dealers’ profit margin by 1-3 percent. Surveys showed that up to 40 percent of dealers consider intra-brand competition a major threat to their current business model.

Limited direct interaction between OEMs and customers. OEMs have few to no direct touchpoints with private customers and only limited abilities to collect customer information. In a world where business models will be based on data-driven analytics, the lack of data about customers is a “no go.” Additionally, in the event of importer changes, all customer data might get lost, and manufacturers are under increased risk for a shortfall in the execution of any important service or recall campaigns, which will not only damage the brand reputation but also expose the manufacturer to inherent legal risks.

Limited data integrity Due to the inhomogeneous distribution setup driven by manufacturers currently, retailers and investors have developed their own end-solutions. This setup has become increasingly difficult to navigate particularly considering transparency and consumer engagements on a manufacturers level as well as campaign redemption, which forms a risk for brand reputation and might carry legal implications.

Difficulty to manage brand and customer loyalty with the fractured supply chain, efforts driven by the wholesale level to obtain and improve consumer loyalty may be ineffective due to differences in focus operations between retail and wholesale. This seems particularly true in the after sales area.

Outdated sales formats, the evolvement of an increasingly service oriented landscape, also manifested in the way vehicles being purchased and used. Vehicle ownership is gradually driven as a service or through a sharing economy. Supporting this change is increasingly difficult due to the traditional supply setup through the retailer and it requires a growing amount of manufacturer involvement to fully establish this type of operation.

While the benefits of the agency model are immense, there are substantial execution challenges and roadblock along the way. For one, the increased CapEx required for a full implementation, and the shifting of the business risk away from the retailers to the manufacturers would require an entrepreneurial mindset from the OEMs. Moreover, regulations to direct OEM sales are still not clear and are fragmented across countries. Thirdly, most OEMs and dealerships today work with a dated IT- and mostly in-coherent structure, particularly within the retail sector, these resources are not suited for an agency business models and to reap all its benefits. The agency model will require a coherent and agile technology backbone. The overall success will depend on the manufacturers ability to evolve from channel management to customer-centric organization across all business units, and this will require a massive cultural shift in how OEMs think and operate away from pushing volumes in to retail towards establishing a market pull to sustainably generate value within the retail chain.

The transition of an existing independent dealer network to a new agency model is risky commercially and legally – if not managed well. Where dealers feel commercially disadvantaged by the transition, there is a heightened risk of dealers taking legal action, either on an individual basis or via a class action (e.g., seeking investment compensation). Regulatory enforcement action also cannot be ruled out if there is a perception that the transition was forced through.

Balance sheet extensions, transfer of assets and investments from the retail to the wholesale balance sheet with a direct cash flow impact. However, this remains a onetime effect and includes the used car business too.

Organizational complexity, to completely utilize the agent model, there will need to be a build-up of expertise on wholesale level and an interconnection of centralized support functions and affiliated processes as well as skill sets to holistically cover the retail business on manufacturer level.

Shift of customer interaction, Value creation shift to the OEM, inherently moves customer relations from dealer to OEM, which renders it to be increasingly difficult to build customer loyalty though the new channels. This is especially important as new customers seem to be increasingly willing to change brands and are less loyal than the previous generations of owners.

Business performance during transition, Sales activities and customer interaction can be challenging while the new model is not perfectly in place. It therefore remains crucial to sustain a high level of customer engagement and to mitigate potential volume shortfalls by closely safeguard the buy-in and cooperation across all parties as well as to holistically manage the implementation process internally and externally.

Increased dependence on OEM activities, the value creation shift implies an increase in economic dependence on OEM activities in sales and customer interaction. This allows for an improved consistency of brand and process representation; however, this shift implies an additional layer of work on manufacturer and wholesale level. Through the increased closeness to the end-consumer, an increased demand to understand market and consumer behaviours is required.

Direct liability as "supplier" in view of consumer guarantee regulations, The legal obligations imposed will change due to the change in the role of retailers and importers. Manufacturers may have a direct obligation to provide refunds, repairs, or replacements to consumers under the relevant consumer provisions, as opposed to having an obligation to indemnify retailers and otherwise being liable for damages claims as manufacturer.

Competition law, potential competition law risks might need to be navigated where an agent also sells competing vehicles. The competition law risks may also be complicated if different models (agency, independent franchise) are deployed for different vehicle ranges.

Liability as principal for agent's acts, the actions of agents and its teams may be regarded to be the actions of the OEM, as it might be interpreted that they are acting for or on behalf of the manufacturer. This could render the principle liable for claims related to losses and damages arising from misrepresentations or other act in connection with the promotion and sale of vehicles within the retailer.