Understanding the move from franchise holder to agency agreement

Posted by Meg Bernazzani on July 3, 2019

The franchise model is the time-honoured way of selling new cars, but moves are afoot within the motor industry to switch to an agency-style arrangement, which could upend the conventional way of selling vehicles. It’s still early days for the concept, but if it catches on, then dealers could be in for a whole new way of running their businesses.

Franchise vs agency: the difference

Any new car retailer will be more than familiar with the franchise model. At its most basic level, the dealer, though linked to the manufacturer, operates as a standalone business – effectively as a distributor. They buy vehicles from the OEM then sell them to the end-user.

The agency model involves a very different kind of relationship between the dealer – if you can even call them that – and the manufacturer. Crucially, an agent does not own the stock; it remains the property of the manufacturer until it’s sold to the consumer, so the agent or dealer doesn’t take on the risk.

Agents are typically paid a handling fee for selling each vehicle, which is completely different from the established franchise arrangement, where retailers buy the stock and set their own prices.

Have any manufacturers made the switch?

Tesla famously owns its outlets and sells directly to consumers, and there have been examples of mainstream manufacturers attempting similar initiatives in the past, albeit typically on a smaller scale. So far, there has been only one case of a major OEM converting an entire country’s network from franchise to agency, though: Toyota New Zealand.

Following years of preparation, the company switched from a franchise to an agency model, known as Drive Happy, in April 2018. Toyota keeps its stock at three sites across the country and sells them for a fixed fee via its 63-strong retail network. Prices are cheaper than they were before the switch, which is said to better reflect the true value of the vehicle – but haggling simply isn’t on the table.

Work began on the project four years before it came to fruition and, critically, dealers were involved from the outset. Over time, the move has proved successful for the manufacturer; despite a 4% fall in its local market share to 13% during the programme’s first month – credited to stocking issues – it quickly bounced back to between 16% and 18%, the latter figure an improvement on its share before the change.

What does it mean for dealers?

Shifting to a completely different business model is inevitably a huge endeavour for existing dealers and may or may not be a welcome prospect. However, Toyota’s example proves that it can be done, provided the initiative is well planned and retailers are involved from the very beginning.

Dealers admitted they were apprehensive about the scheme beforehand, particularly those for whom business was good. They also weren’t shy about teething trouble with the new way of selling: “It’s a new system and you have different tiers [for prices]. It’s impossible to get it right first go,” said one.

However, the same retailer also stated that the new scheme hadn’t totally changed the way it ran its business, as the likes of used cars, finance and part exchanges all remained the same, while it had turned its attention to the former to increase profits.

Love or loathe the prospect, there’s no denying that the agency model is a simpler and more risk-averse approach to selling new cars as far as the dealer is concerned.

What’s in it for manufacturers?

An agency model gives manufacturers more control over the sales process, which, by itself, sounds appealing. However, with that comes dramatically increased risk and administration; essentially, the OEM has to shoulder some big responsibilities that fall at the dealers’ feet under the conventional franchising model.

According to Toyota New Zealand’s CEO, Alistair Davis, boosting sales was never the motivation for switching to an agency model, rather improving customer service and the sustainability of selling cars in the digital age, both of which are said to have improved under the new regime.

Topics: industry insights