24 May 2021

Leaving Covid aside, there may well be several retailers wondering about the future. Network culls by Ford and Mitsubishi’s planned exit from the UK later in 2021 are both reasons for retailers to consider the longevity of their brands. Add in the poor sales virtually across the board and there might be a few looking for opportunities.

MG’s sales, which rose by 40.84%, were the exception to 2020’s slump. In January, it announced plans to add at least 10 more dealerships before the end of the year and told Auto Retail Network some retailers were “knocking on the door”. It is the earliest example of a low-volume Chinese brand (it belongs to SAIC Motor Corporation) flourishing in the UK, albeit trading on a dwindling amount of nostalgic British heritage.

Despite a fall in the NFDA survey, it has potential for retail groups – particularly smaller ones facing the aforementioned issues – as well as those representing similarly sized manufacturers on shaky ground, such as Subaru, sales of which fell by 68.27% in 2020, and Ssangyong, as majority shareholder Mahindra threatened to pull its backing last year.

A number of low-volume Chinese brands, many with electric SUVs, are circling European markets and could represent similar retail opportunities to MG if they make it to the UK. DFSK, owned by Dongfeng Motor Corporation, announced plans to begin selling a budget seven-seat SUV known as the Glory 580 in the UK in January 2020, imported by Dorset-based Sokon Automotive. The vehicle is aimed at business and municipality sectors and, at the time, the company said it was looking to set up a small dealer network.

Potential UK arrivals

Brands establishing themselves in Europe, some of which have expressed interest in the UK, include BYD – which specialises in electric buses but also builds the Tang SUV – Airways, Byton, Nio and JAC EVs – all of which produce electric SUVs.

In February, Volvo announced what it described as a “deeper collaboration” with Chinese owner Geely, which would involve expanding its Lynk & Co brand via “existing distribution and service network”, so Volvo dealers could be selling and servicing such models before long.

At the higher-profile end of the spectrum, Korean brand Genesis is due to launch in the UK this year with the G70 saloon. It is to Hyundai what Lexus is to Toyota – a premium spinoff of a mainstream manufacturer – but with Infiniti’s UK demise only a year past, Genesis will need to be managed well if it is to succeed in Britain.

Franchise vs agency

The potential for manufacturers to switch from a franchise to an agency model is a possibility for retailers, albeit one that is unlikely to happen at scale in the immediate future. Fundamentally, the change involves adopting non-negotiable pricing with retailers paid a handling fee for sales. Demonstrators are the only stock assigned to the dealer and the OEM typically holds the majority of its vehicles at a separate site.

Toyota New Zealand implemented the model in 2018, the results of which have so far been successful (see box). Volkswagen also initiated an agency scheme in Germany for sales of its electric ID range and initially told Auto Retail Network it would do the same in the UK. It later reneged on that announcement but did not rule out adopting the model in future, while Volvo appears to be doing the same for EV sales.

Fruitful examples abroad and an increasing level of control clearly render the model attractive to manufacturers. The pandemic’s by-product of fostering online retail plus the strength of Tesla’s 2020 UK sales – which were online anyway – could further increase OEMs’ desires to ditch franchise for agency.

However, manufacturers have tried and failed to subvert the conventional franchise model in the past. Hyundai’s Rockar stores are among the most recent examples; they operated commission-free physical and online sales in the Bluewater and Westfield shopping centres between 2012 and 2018, when they were sold to Motorline at the behest of the manufacturer, after heavy losses. Endeavour bought the Westfield site and Ancaster the Bluewater one the following year.

In 2019, former Group 1 boss Darren Guiver told Auto Retail Network that the level of manufacturer push in the car market was the main reason that franchises had not switched to agency agreements. He did not rule out a change in future but suggested a loss of volume in the wake of the shift could deter manufacturers.

Agency in practice, by Urban Science

What would actually change day-to-day in a typical dealer’s business under an agency construct, asks Paul Dillamore, managing director of Urban Science, and which of those changes would bring welcome relief or potentially make the game tougher?

Strong local new car sales have a positive impact on used car business and, ultimately, on the serviceable local vehicle parc – a critical part in the dealer’s current business model, but agency certainly reduces the number of levers at the dealer/agent’s disposal, moving them into the hands of the manufacturer.

We do at least have some data that could put dealers’ minds at rest. Toyota switched to the agency model in New Zealand on 1 April 2018. Its market share of private registrations dropped from 14.6% to 13% in the first 12 months, then hit 15.4% the next year and 16.8% by the end of 2020.

It remains to be seen what would happen in a market where more than one brand simultaneously makes the shift, but as with any competitive marketplace, there will be winners and losers. It seems unlikely, though, that shifting from franchise to agency will be the sole deciding factor in a brand’s performance. This will likely offset any adverse impact of a marginal increase in price but require at least a different focus and, at most, an entirely different set of skills.

Currently, the new vehicle sales department in a typical dealership might account for 40-50% of the total cost yet generate only 20-30% of the profit, but agency could correct this. Toyota NZ’s data shows that dealer count has remained largely unchanged pre- and post-switch to agency, which could give manufacturers the ability to represent their brand in locations that have been difficult to viably franchise in the past. This will be interesting to watch, as moving the cost of stock away from dealers will allow for it.