Agency model set to disrupt used car retailing

Philip Nothard, insight and strategy director, Cox Automotive (pictured), stated: “The war in Ukraine will bring further disruption in the supply chain and shortages of new vehicles. In addition, the much-debated shortage of semiconductors will continue longer than expected. As a result, the industry should prepare for further impact as the used car market supply becomes even more constrained.”

Half (50%) of the world’s output of neon and 40% of the world’s krypton, which are needed to manufacture semiconductor chips, comes from Ukraine.

In addition, Russia and Ukraine play a substantial role in the European and global automotive ecosystems, as Owen Edwards, head of downstream automotive at Grant Thornton, explained: “Both Russia and Ukraine operate 34 and seven automotive assembly and production plants respectively. Much of the vehicle production is for their own domestic markets, but for OEMs that export to these countries, a direct impact will be felt from halted production in Russia. Some of the largest effects of the conflict on the industry in the West will be felt the most by the supply chain, which ranges from raw materials to sales and operations.”

The raw materials shortages include gases and microchip production, palladium and platinum, wire harnesses, aluminium, and cobalt.

Edwards added: “The conflict in Ukraine will influence raw material prices, which will continue to rise, and some of these costs will be pushed on to the consumer. This comes at a time when the West is grappling with a cost-of-living crisis, as general increases in the price of oil, gas, electricity, food, and inflation are also expected to continue.”

Current response

There is evidence dealers are already responding to consumers’ tightening the purse strings. Currently, dealers are managing their cashflow more efficiently by buying higher value premium used cars to order, rather than having multiple cars in stock, according to Aston Barclay’s May desirability index.

Analysis shows the demand for well-specced luxury SUVs in popular colours between £20,000 and £50,000 has risen strongly. The top five most desirable vehicles in May are all premium SUVs, with the Mercedes GLC taking the top spot, closely followed by the Land Rover Discovery, BMW X6 and X5, alongside the Audi Q7.

Martin Potter, Aston Barclay’s chief customer officer, said: “Despite initial concern that the cost-of-living rise might see buyers turning away from premium offerings, the top-end of the market continues to demand luxury SUVs and dealers are making their purchases accordingly. Dealers are also investing their cash into lower value cars to accommodate the current change in retail confidence in the economy since Christmas.

“The ongoing popularity of premium vehicles is in no doubt a response to the ongoing semi-conductor shortage; the scarcity of new vehicle stock is placing added demand on the luxury used market as there is simply not a high enough volume of new cars to meet the demand.”

New agency model

In new vehicle distribution manufacturers, the latest being BMW, are starting to embrace an agency model approach, where they deal direct with the customer and the role for the dealership shifts from sales to product support. MotoNovo Finance’s commercial director Debbie McKay argues this is a development that has implications for all parts of vehicle retailing, including the used vehicle and financing sectors.

“We have seen the impact of new vehicle shortages over the last two years, with franchised dealers pivoting to increase their focus upon used vehicle sales. I expect the advent of agency models will sustain this focus. The impact could be more significant than the well-publicised launch of online used car retailing,” she said.

In McKay’s analysis, the over-arching principle of the agency models currently being discussed would see an online/offline model with the manufacturer (OEM) interacting with customers digitally and taking responsibility for order taking, pricing and payments. Dealers would take care of the offline test drive, part-exchange and vehicle handover elements. The aim is to take time, cost and variation, notably vehicle pricing, out of the equation.

While legal issues remain, agency models are also likely to further shrink the established franchised dealer networks for brands pursuing the model. In short, many existing dealers and dealer groups seeking to control their own destiny will continue to shift their focus towards used vehicles.

The outcome of this, according to McKay, is an opportunity for the used vehicle retailing sector to re-imagine itself.

“We already see the emergence of used vehicle sub-brands from established dealer groups aiming to combine franchised credibility to their used operations. While free of franchise standards, these sub-brands are designed to leverage the credibility and inherent value of a franchise type proposition.

“There are implications for traditional independent dealers for whom it will mean further evolution. I’m sure many will lift their game as they did through successive lockdown challenges. The opportunity to package their service and agility attributes to add a new level of trust and relevance is there. As we see in other markets, great service can command a premium,” McKay explained.