The automotive industry has traditionally followed a three-tiered sales model placing the dealers in between OEMs and customers. In the agency sales model, dealers act as agents on behalf of the OEMs to interact with the customers and perform sales, while the OEM keeps hold of the inventory. The customer simply places an order directly with the OEM, whether offline or online, and chooses a preferred delivery agent. The price of the order, the commission to the dealer, is already fixed across the country and set by the OEM.
The agent takes only responsibility for activities that involve physical interaction such as conducting test drives, processing the transactions, vehicle handover, and handling service appointments as usual, but they will also obtain large savings on staffing, storage costs, inventory costs and logistics compared to the earlier sales model.
Stakeholder perspectives
The agency sales model aims to provide the best customer experience possible while the OEMs continue to maintain their pre-existing relationships with the dealers. All three primary stakeholders, Customers, Dealers, and OEMs, need to synchronise to make the new model a success.
Customer view: To ensure a coherent customer journey, OEMs require lots of consumer data so that they can solve pain-points effectively. It was found during multiple consumer surveys, that most customers are willing to share their data with OEMs and dealers to be able to obtain a hassle-free pre and post-purchase experience. Unlike ecommerce, a dealer is essential in this equation to act as a central point of contact as he/she shall be the one driving the sale.
The need for negotiation is, however, eliminated as the customers are shown homogenous prices. The dealer will be incentivised to convert the lead based on fixed prices instead of playing with the margins each time. Thus the market will benefit from improved service quality as the agents will compete to differentiate themselves through the overall customer experience rather than price.
Dealer view: The dealers’ perspective could vary based on their business size as well as the kind of OEM and territory being served. While dealers can seek comfort from the fact that the inventory cost is eliminated, there can be chances of discontent amongst them on account of loss of some entrepreneurial independence. Majority of the dealers prefer a uniform price to be set by the OEM as long as it applies to the entire dealer network.
The dealers can plan better if there are predefined margins and reduce intra-brand competition. In terms of remuneration, dealers prefer a fair and sustainable model across the dealer network where all agents receive the same fee. The use of analytics for targeting, will lead to a 360° customer view that will improve the chance of closing a sale.
OEM view: The agent model provides OEMs with an opportunity to gain greater control over distribution channels, control prices, and increase sales efficiency. OEMs can now have access to customer data some of which was privy to only the dealers in the existing model, allowing them to get full control over online and offline channels to develop a seamless omni-channel experience for customers. The price variation across dealerships can be curbed by setting a single price across all sales channels, thus reducing intra-brand competition. The control over online channels will allow the OEMs to push digital services and new offerings into the market and there will be increased transparency about market performance at each dealer level, thus allowing OEMs to continuously optimise the sales network.
Challenges
Even though the agency sales model seems like the way forward for the industry, there are still some unresolved issues hindering the transition. In India, automotive dealerships have one of the lowest margins in the world. In such a situation, an opportunity to delve into the non-price aspects of competition might be well received.
- The agency sales model is designed in a way that it will reduce the financial burden for the dealers but will also diminish their bargaining power. It’s a pressing concern among dealers that by going the Tesla route, OEMs will subsume the business of dealers completely
- Although customers are encouraged to purchase through a dealer, the choice of direct online sales of vehicles might lead to reduced dealer sales and turnover due to inter-channel competition
- Dealers believe that OEMs might set prices too high thus making agent sales difficult. In such circumstances, commission-based compensation might not be well accepted by the dealers
- OEMs will need to manage high inventory holding costs which will have a major impact on the immediate cash flows as that will impact their working capital cycle.
In brief, the elements of change management, digitization, financial incentives and customer acceptance need to be navigated carefully to make this model succeed.
Implementation strategy
The big question to address for the OEMs in India is to traverse or not to traverse this route. The business case decisions for the established OEMs that have an extensive dealer network in India and use that as a competitive advantage, will be driven by the benefits that this model brings for enhancing the customer experience and hence protecting the market position. The benefits have to be weighed against the investments made on the IT platforms, training of personnel, change management.
However, the most critical element in the decision-making process for the established OEMs will be the risk of disrupting a strong and established dealer network which they have built through years of investment and moving to a different model which essentially offers a level playing field for all, to begin with.
On the other hand, market challengers or new entrants who see the investments in the dealer network as a big hurdle for expansion into the Indian market, would like to use this model to diminish the competitive advantage of the incumbents. The key benefit for them would be easy agent on-boarding.
The agency sales model can turn out to be a key differentiator for the players in the Indian car market. A lot depends on how the customers react to the model. The OEMs will have to undertake extensive business viability evaluation studies and conduct pilots to carve out a strategic roadmap on the subject before they can go ahead in educating the customers for or against it.
Conclusion
The industry is transforming to provide a “phygital” experience where the physical and digital realms blend seamlessly to create a better way of selling automobiles. The rise in demand for electric vehicles also presents an opportunity to experiment with new sales models. In India, Mercedes Benz piloted its ‘Retail of the Future’ sales model where it registered and sold 1,000 cars directly to customers while its dealerships handled test rides and delivery touchpoints. Customer response has also been positive about this reimagined retail experience.
A hybrid model combining the incumbent and the Agency Sales Model seems most plausible for the Indian Automotive industry in the immediate future. However, what is needed is careful decision on the territory to cover with the new model to make the old and the new complement each other for higher gains.
Disclaimer: Ashim Sharma is Partner and Group Head at NRI Consulting & Solutions India. NRI’s Aashutosh Sinha (Senior Manager), Kalyani More (Senior Consultant) and Nihal S. Amin (Deputy Senior Consultant) made significant contributions to this study. Views expressed are their own)
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