Fixed-Price Agency Model Causes Disruption
Fixed-Price Agency Model Causes Disruption
If you’re feeling the fixed-price agency model pinch you’re not alone. Automotive dealers around the world are bucking what manufacturers are dishing out.
Case in point, in August, thirty-eight Australian Mercedes-Benz dealers launched a $650 million lawsuit against the luxury German car maker over their perceived loss of revenue once the new fixed-price agency model goes into effect.
Previously, dealers were able to buy cars from the manufacturer and set their own sale price. That’s no longer an option. Manufacturers now retain ownership of the cars while dealers have become agents that sell cars at a fixed price for a set commission.
“This is an incredibly important case for the automotive industry,” Australian Automotive Dealer Association (AADA) chief executive James Voortman said.
This may be overseas news, but it impacts the U.S. and our dealer network in many ways because German car makers are the dominant luxury brands in the U.S.
Dealers have reason for concern, Tesla has this model in the U.S., and other EV startups are trying to follow their strategy. OEM’s have made overtures to bypassing the dealer with direct sales. Even if they keep the current dealer system, OEM’s want to have customers order directly from them at a set price. Ford is currently doing that with the Mach E and has plans for that process for future EV’s.
What the Fixed-Price Agency Model Means
Dealers won’t be able to make any more money than what’s established by the manufacturing company. It’s basically a flat commission for delivering the vehicle.
- OEM’s will be more reliant on selling their extended warranty and other after products at the time of ordering.
- Inventory on the lot will be limited, with just a few vehicles for test drives.
- Smaller showrooms and decreased service departments may become the norm.
- Income from floor-plan interest allowances will go away.
Once the ordered unit hits the lot, it’s sold. Dealers will receive some P&C insurance money and possibly sell some aftermarket items, but the main profit centers are being taken away from the dealer.
While internal combustion engine (ICE) vehicles are supported in the market, trade-ins may still provide strong grosses for dealers. Currently, the dealers have strong advocates in their state associations and with state franchise laws. But those may change as outside pressure mounts. The biggest concern for dealers, is that this new way of selling vehicles negates the need for the current number of dealers. Consolidation is coming!
On the flip side, the dealer is exempt from significant commercial risks and is no longer burdened with administrative tasks, such as billing and payment, according to Automotive News Europe. They also claim that the enterprise value at car retailers that switch to the genuine agency model is forecast to rise by as much as 12 percent.
How does that compare to your current value? Time will tell.
Understanding the keys to dealership valuation can help you proactively increase the value of your dealership before its sale, merger, or acquisition.
Reality Sets In
Some brands are talking about this fixed-price agency model shift by the end of the decade. When we look at the game plan for European manufacturers, you’re looking at 2025 – 2026 and phasing out gas-powered engines by 2027.
Automotive News Europe agrees. It states, “Daimler’s European direct sales ambitions, Volkswagen’s IDX direct sales model, and Volvo announced plans to sell all vehicles online and direct by 2030.”
The Ultimate Challenge
Now’s the time to consider your options and to begin succession planning. Also, have a discussion with your OEM, attorneys and CPAs, broker, and advisor to form your game plan for the next three to five years.
There’s still money to be had if you’re far enough from a metro area. Somewhere down the road, however, smaller dealerships will just go away, and an existing dealer will buy them. If you’re the only dealership in town, you should be worried because you won’t be able to sustain what the manufacturer wants.
We are talking about the end game versus driving toward the end game. Five years ago, we had zero electric cars in the market. Now look at where we are. It’s not going to happen overnight, but we are quickly heading in this direction.
Change is coming, no doubt. By embracing that change and taking a lead in the transition to direct sales, dealers can turn impending disruption to their advantage.
The question is, do you want to comply or get out?
Faris Syed
President of SAR Partners
407.430.3900