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THE move to an agency sales model from that of a franchised dealer leaves retailers with a business activity that is roughly only a third of what it once was under the current franchised dealer model, according to a discussion paper prepared by lead partner for motor industry services at Pitcher Partners, Steve Bragg.

In an exclusive interview with GoAutoNews Premium, Mr Bragg outlined 10 major impacts to the financial operations of a car retailer that moves to the agency model. The model developed by Pitcher Partners was based on agency agreements prepared by OEMs Honda Australia and Mercedes-Benz Australia to their new agents.

Mr Bragg developed a case study built around a retailer who was selling 100 new cars a month as a franchised dealer prior to the onset of COVID-19.

For a comparison table of franchise vs agency financials, click here.

Here are the top 10 financial impacts of the agency sales model:

Financial Impact number one – revenue:

“The number one, and most obvious impact of them all is that revenue from new car sales drops to basically only the commission the OEM is paying the agent per new car sold.

“Which means, from a top-line revenue point of view for a dealership, the total revenue of the business drops by somewhere between 60 per cent and 70 per cent. So, if you were previously a $100 million turnover dealership, you’re now a $30 million or $40 million business.

“Revenue from new car sales drops to just the agent’s commission. Therefore, revenue in the new car sales department drops by about 90 to 95 per cent like for like.

“So under an agency model the dealership’s revenue drops down to $30 million to $40 million for the business overall as their revenue from new car sales is just the agency commission, or the agency delivery fee, whatever you want to call it, and that is a 90-95 per cent drop on new car sales operations.”

Financial Impact number two – new car gross margin:

“The new car gross margin drops that is the gross margin percentage on a like for like basis on the new vehicle sales price. As you would expect, this has a really big impact.

“So, in FY21 in the dealerships that we have modelled, the new car margin was on average approximately 11 per cent. That’s all in gross. That’s all OEM money. Everything, including all the variable bonuses and hold backs and all the various types of dealership-OEM monies.

“In our modelling of agency agreements we modelled different scenarios for the dealerships (base, best and worst case scenarios). Where the dealer was achieving that 11 per cent gross margin in FY21, it drops down to somewhere between seven per cent and nine per cent gross margin and that is heavily dependent on hitting different variable bonuses in the OEM agency schemes.

“That is up to a 37 per cent drop in margin (which assumed OEM targets are met).”

Financial Impact number three – overall dealership gross profit:

“The agency model doesn’t only impact the new car gross margins, it impacts the entire dealership’s overall gross profit in the  modelling we’ve done. Our modelling, which is based on a hypothetical $100 million turnover dealership, which would be a large metro dealership, the gross profit from the dealership drops by $3.5 million on average.

“In the best-case scenario modelling, the gross profit drops by only $2.5 million. However, on the base-case scenario, which assumes average performance, gross profit drops by $3.5 million.”

Financial Impact number four – expenses and profit impacts:

“Obviously, in an agency, as a dealer you no longer own the stock. And so therefore, you save on some expenses.

“Without new vehicle stock, the dealer’s floorplan liability decreases for those new vehicles, which basically, saves the dealer somewhere between $500,000 to $600,000 in floorplan interest expenses. There are also some additional savings on insurances on those vehicles and other expense savings in parts of the business. Those additional expenses drop by approximately $200,000.

“Therefore, your gross profit drops in the base case scenario by $2.3 million, and you save somewhere between $700,000 and $800,000 in expenses. So net, you’re worse off by $2.7 million to $2.8 million in our base-case scenario.”

Financial Impact number five – new unit sales volumes:

“There is going to be a reduction in new car sales volumes especially for the OEMs that are first movers, the early adopters of agency. This is primarily because, if you think about it, all your competition is going to be pricing just below where you are because you have a one-price model across the nation.

“Therefore, with Mercedes-Benz and Honda going to agency sales you can expect that all their competitors will go pretty hard against them in pricing. We have conservatively built in a drop in volume of 10 per cent in the modelling, but the impact could be much greater in our view.”

Financial Impact number six – service and parts:

“The service and parts departments are also impacted. In the agency agreements that we’ve seen, the warranty labour rates and capped price servicing labour rates are reduced. So these agents will be impacted by the warranty and in the SP (service plan) rates.

“In addition to the direct impacts from the agency agreements, the reduced new unit sales volumes will have additional flow on impacts over time as the car parc reduces.

“And everyone knows it’s coming next; EVs are only going to accelerate these issues in the service and parts departments because EVs require less service and parts.”

Financial Impact number seven – staffing:

“There will be a massive impact on staffing at the dealership. In my view, agency will be the death of the salesperson as we know them because you end up going purely to customer experience and product-experience roles.

“They will be an entirely different kind of salesperson in that they will basically be host type salespeople on lower pay, rather than hard core salespeople who negotiate price with customers.

“Our case study is a hypothetical Metro dealership which is doing 100 new and 100 used cars, to get to the best practice staffing levels it goes from having roughly 56 staff to only 24 staff. So, your staff levels are headed to reduce by half in order to reduce your wage bills to offset the reduced margin.

“Therefore, if you assume on average the dealership pays $100,000 per staff person, it’s $5.6 million of wages reduced down to $2.4 million.

“Unfortunately, that’s what you have to do to make it work under agency, by the way. So, obviously, if you do nothing, you just end up losing money and having a lot of under-utilised staff sitting around doing nothing.

“Salespeople will become product experience people and product specialists like the BMW genius types because in an agency world, most of your sales are coming into the dealership pre-qualified and far down the road to a sale journey. The agent is just the delivery point for the most part, with the staff of the agency primarily giving test drives and product and experience demonstrations. They’re never talking price because the price is the price is the price.

“The agent doesn’t technically transact with the customer directly. All monies are going between the customer and the OEM direct. Even though in some agency agreements, agents are acting as an intermediary and handling some monies, but, for the most part, it’s all being done from a technical point of view between the customer and the OEM.”

Financial Impact number eight – ROI:

“The return on investment (ROI) for the dealership significantly declines. The primary reason is the ‘floorplan float’, which is basically the three to five days dealers get to pay out their floor plan after they sell a vehicle. This is now gone, because the dealer no longer owns the stock, and they are not transacting at all with the customer. The customer is transacting with the OEM directly.

“Therefore, using the metro example of a typical dealership that sells 100 new cars a month, that’s somewhere between 15 and 20 cars sold and the floor plan unpaid over those three to five days. And if it’s $35,000 on average per car, that is somewhere around, $500,000 to $700,000 of free ‘floorplan float’ cash in the business that the dealers now have to fund under the agency model.

“In terms of the typical ROI for a dealership that is best practice, it is best to work an example. At a very high level, for a franchise dealership with $100 million turnover in FY21,profit would be 3.6 per cent of its revenue. So, 3.6 per cent of sales is what dealers would typically strive for, which would be $2 million in net profit before tax.

“So you’ve got $3.6 million of net profit before tax from your investment in a dealership. Lets leave the dealership property aside, because typically the dealership property is in a different entity where you pay yourself a market rent, and that market rent is included in the net profit. The normal investment (cash outlay) as a dealer is typically $2 million of used car stock, roughly $600,000 in parts stock and roughly $1 million dollars of furniture, fittings and workshop equipment.

“So you have $3.5 million to $4 million invested in the business in a working capital scenario and you get $3.6 million profit as a best practice dealer. So you get somewhere between 80 per cent and 100 per cent return on investment on the cash investment in a dealership.

“As an agent, the dealership is a $38 million turnover business making net profit of around $800,000 which is better as a percentage of sales at 2.1 per cent.

“To calculate the ROI, the dealer still has to also kick in that $3.5 million to $4 million in working capital that you had available in the normal franchise scenario, plus somewhere between $500,000 and $700,000 more which means you’re getting $800,000 on a roughly $4 million to $4.5  million investment, which is about a 20 to 25 per cent ROI.

“So, your ROI goes from 80 – 100 per cent to 20-25 per cent as an owner, which is a significant shift and a significantly more capital-intensive business. And that’s for one dealership in this scenario. Think about a dealer group and how this multiplies out and becomes very significant under the agency model.”

Financial Impact number nine – cost base reductions required:

“Dealers under the agency sales model are going to have to reduce their cost base by approximately 40 per cent from their current levels to maintain the profitability that they are currently achieving. And that goes back to the staffing impacts noted in number seven.”

Financial Impact number 10 – dealership property:

“There are going to be significant impacts to dealership property and in the way agents set themselves up.

“Under a franchise, versus how they set themselves up as an agent, there is going to be a lot of over-capitalised dealership property because the returns that you’re going to get from the business won’t be able to maintain and support the market value of the property.

“This means that agents will be even less able than they are today to invest in the kind of premises their OEMs expect of them because there simply won’t be the money in the business to make that investment.

“So, it’s going to be very difficult for an agent to basically justify a market rent for their current facilities based on the financial results of an agency agreement.

“And the banks holding loans on premises will look at that and probably see increased risk profiles.”

Mr Bragg said the agency sales model “is just going to throw up a whole bunch of issues that no one’s really thinking about.”

More soon.

Steve Bragg

By John Mellor

Dealer Auction