A revolution is taking place in car dealerships, with some brands moving to a direct sales approach. We take a look at the pros and cons for car buyers...
- Why things are changing
- Key differences between the sales models
- Which brands are switching?
- What it means for car buyers
- How much you can save under the old system
- What’s it like to buy a Mercedes now?
- What Car? says…
This relatively new sales method is called the ‘agency model’, in which you in effect buy your new car directly from the manufacturer, rather than from a franchised dealer as has traditionally been the case.
Although new cars have a recommended retail price, it is currently just that – recommended – so it’s not necessarily the price you’ll end up paying. At present, franchised dealers buy stock from the manufacturers at wholesale prices. They apply a margin or percentage to that price which is their profit on the sale, and they can decide to offer discounts to buyers by giving away some of the margin.
Conversely, with the agency sales model, the manufacturer owns the vehicles that you’ll see in dealer showrooms, sets the prices for them centrally, organises the finance and sells the cars to buyers. The dealers are still involved, acting as agents who facilitate the sale by helping the customer to choose the model and specification of their car, providing test drive opportunities and dealing with the handover process. Instead of making a profit on each sale, though, the dealer gets a service fee for looking after the customer.
The upshot of this is that the dealers can’t offer discounts beyond any offers issued by the manufacturers, so there won’t be any point in trying to haggle with them or pit one against another to negotiate a better deal.
On the flipside, it means the price you see online or at one dealership will be identical to that at another one, so you don’t have to worry that you’re not getting the best deal.
Why things are changing
The franchise model was first introduced to car sales in 1914 by Henry Ford in a bid to improve the distribution of the Model T, the world’s first mass-produced car, and it’s been the most common way to buy a new car ever since.
So, why change now? Well, the Covid-19 pandemic and the subsequent restrictions on new car supplies due to the semiconductor chip shortage have already put a stranglehold on discounts. Although supply issues are now less of a problem for most brands, some are seeing this as a good time to introduce a no-haggle system. After all, if buyers have become used to not getting discounts, they’ll no longer be surprised when they visit a showroom and are told they can’t have one.
In addition, car makers want to encourage the uptake of online sales, but they know people won’t buy this way if they end up paying more than they would in a showroom. That means the prices need to be fixed across all sales channels.
Key differences between the sales models
| Franchised | Agency |
|---|---|
| Dealer sets retail price | Retail price set by the car maker |
| Dealer can offer discounts based on sales margin | Car makers offer discounts that apply to all dealerships and online |
| Dealers can pre-register cars | Dealers can’t offer discounts or pre-register cars |
| Stock owned by the dealer | Stock owned by the car maker |
| Buyer’s contract is with the dealer | Buyer’s contract is with the car maker |
| Dealer pays for signage and branding | Car maker pays for signage and branding |
Which brands are switching?
There have been some small-scale forays into agency sales already, mostly from newer brands or sub-brands. Tesla sells cars directly to customers, and newcomers to the UK such as Genesis and Polestar do the same. Some established brands see electric vehicles (EVs) as a good way to test the water, with Audi and Volkswagen selling their offerings directly.
However, the only long-established car maker that has moved to direct selling across its entire range so far is Mercedes. In January, Mercedes took over control of setting the pricing on all new cars, including any offers, discounts, finance APRs and finance deposit contributions.
Asked why it made the move, the CEO of Mercedes-Benz UK, Gary Savage, said: “In an increasingly digitised world, customer buying habits have changed, and an agency model provides a consistent and transparent purchase journey, whether that’s online, in a physical showroom, or a combination of the two.” Savage said initial feedback shows customers are enjoying the simplified buying experience.
The Stellantis Group is also making the move to agency sales. Alfa Romeo and DS will be the first brands to switch next January, with Abarth, Citroen, Fiat, Peugeot and Vauxhall following suit at a later date.
Stellantis network development director Lee Titchner explained: “The agency model simplifies the customer journey and reduces complexity in the showroom, allowing more focus on giving a great personal brand experience each and every time.”
He believes customers will be able to get a much clearer understanding of the product and services available because they can configure and price up their new car, and get a part-exchange valuation online, from the comfort of their own home. And if they want to talk to a product expert or take a test drive, they can drop in to a retailer and pick up the process where they left off, without having to go through the whole process again.
Other brands that are switching to the agency model this year include Smart and Volvo, Jaguar, Land Rover and Mini are believed to be planning to do likewise next year, with BMW following in 2025. Cupra, Ford, Seat, Skoda and Volkswagen are all believed to be considering agency sales too, but with no timescale set.
Not all car brands are keen on this new form of selling, and certain car makes, including Honda, Hyundai, Kia, Mazda, MG, Nissan, Ora, Renault and Suzuki, are expected to stick with the franchise model.
Explaining why Mazda UK isn’t making the change, sales director Peter Allibon said: “Under the franchise selling method, the dealer owns the local relationship with the customer. We believe this is a huge strength and something customers appreciate. Our retailers are able to adapt the experience they provide to the customer’s specific preferences, rather than a process that has been prescribed without any local or customer demographic knowledge.”
Allibon also pointed out that there would be scope for Mazda and its dealers to be more competitive in all aspects of car sales if other brands adopt the agency model, pay dealers reduced handling fees and stick to the recommended retail prices.
What it means for car buyers
The fact that prices are transparent and the same wherever you buy is a good thing, but the big concern is that buyers who opt for a brand following the agency method will end up paying more than they would from a franchised dealer. This is highlighted by the National Franchised Dealers Association (NFDA), which represents car and commercial vehicle retailers in the UK.
“The introduction of uniform pricing will mark the end of intra-brand competition, putting downward pressure on retail prices,” said Sue Robinson, chief executive of the NFDA. “Ultimately if you take away the franchises, you are taking away another layer of competition and inevitably prices will go up for consumers.”
Another blow is the potential disappearance of pre-registered cars. These are cars that are registered to the franchised dealer and then sold on to customers at a discount. Because the dealers no longer own any of the cars they stock, consumers won’t have the opportunity to get money-saving deals on pre-registered ones.
As part of the move to agency sales, Mercedes has slimmed down the number of trim levels available on its models, concentrating on the most popular combinations of colours and specification packs. As long as you’re happy to choose a car from this relatively limited selection, it can be built and delivered fairly swiftly after you place your order.
You can still order a car with other options added, but it will take longer to be built: up to three months. And because dealers might not be able to extend time-limited offers or special finance rates to suit cars with distant delivery dates, and prices could rise between ordering and taking delivery of a car, buyers could be faced with price hikes compared with those buying from stock. But at least they’re sure to get the colour and exact specification they want.
How much you can save under the old system
Traditionally, buyers of most new cars expect to get some sort of discount off the list price. The What Car? Target Price has always helped in this regard; it’s what we consider to be a fair price, based on research by our mystery shoppers.
Below are the average Target Price discounts (for the brands we have data for) offered by dealers in the month up to 16 February 2023 under the existing franchise system. These discounts might not be possible if or when agency sales are adopted.
| Brand | Average discount |
|---|---|
| Alfa Romeo | 2.7% |
| Audi | 8.7% |
| BMW | 5.0% |
| Citroen | 7.0% |
| Cupra | 4.1% |
| Dacia | 1.1% |
| DS | 8.4% |
| Fiat | 1.2% |
| Ford | 5.3% |
| Honda | 5.5% |
| Hyundai | 6.0% |
| Jaguar | 5.8% |
| Jeep | 7.0% |
| Kia | 9.0% |
| Land Rover | 0.9% |
| Lexus | 5.1% |
| Mazda | 8.2% |
| MG | 4.6% |
| Mini | 3.5% |
| Nissan | 9.9% |
| Peugeot | 7.7% |
| Renault | 9.6% |
| Seat | 10.3% |
| Skoda | 7.6% |
| Smart | 9.6% |
| Ssangyong | 3.4% |
| Subaru | 3.5% |
| Suzuki | 6.6% |
| Toyota | 10.6% |
| Vauxhall | 6.6% |
| Volkswagen | 8.8% |
| Volvo | 9.7% |
What’s it like to buy a Mercedes now?
Our team of Target Price mystery shoppers contacted nine Mercedes dealers, from various groups around the country, two weeks after the introduction of agency sales, to assess how the new system is working, and how salespeople are dealing with it and explaining it to customers.
There appears to be a script in play that Mercedes clearly wants all salespeople to use, based around agency sales being so much better for customers because the transparent pricing means no haggling, the slimmed-down model ranges make it easier to choose a car, and that you can get a new car faster because many cars are available from stock.
Customer-facing explanations also include playing on the exclusivity of buying a Mercedes. One comment from a salesman was: “You wouldn’t haggle when buying a Rolex, would you?”
However, when questioned about the risk of consumers simply opting for a different brand that has a better discount or offer available, many salespeople admitted that there’s not a lot they can do about this, and that they hope Mercedes will be smart enough not to price itself out of the market.
Our mystery shoppers noted a lack of true dedication to the new system among many salespeople, as these comments reveal: “All the fun has gone now. Not being able to discuss price has been difficult sometimes,” from Mercedes-Benz Tamworth.
“I’ve already lost a few customers because of the fixed price, I will admit,” from Mercedes-Benz Guildford.
“Mercedes says what’s what, and there’s nothing we can do about it,” from Mercedes-Benz Wakefield.
“Yeah, we’ll lose some business, but everyone else will be doing [agency sales] very soon, so there will be fixed prices everywhere,” from Mercedes-Benz Southport.
All the salespeople felt they had to tell our mystery shoppers that they could complete the whole process online and pick any UK Mercedes dealer for fulfilment, but they were all keen for us to visit their showroom to complete the purchase. The reasons given for this all revolved around helping us to build the spec of the car and go through the online ordering process with Mercedes, but it was more likely so that they could earn the agency fee for the sale.
What Car? says…
Agency sales are rather a double-edged sword for car buyers. While some people will welcome the demise of haggling in favour of transparent pricing, losing out on discounts takes the shine off those haggle-free prices. The loss of pre-registered vehicles will also mean there’s less scope for buyers to make savings.
The move to agency sales could also limit buyer choice, with model ranges slimmed down to simplify ordering and production. It might mean buyers face the choice of going without certain features or paying more than they intended for a higher trim level.
There is also the concern that if you do order a bespoke car, the price could change before you are able to lock the deal in. So, at present, the negatives of a switch to the agency model far outweigh the positives for buyers.
Keyword: A new way to buy cars: agency sales investigated