What’s the deal with car dealers?

As digitalization and electrification gradually creep into the car industry, a disruptive change is reshaping the dealer landscape all over Europe. The new kid on the block is the agency sales model. In these transactions, the customer buys directly from the car manufacturer. The sales contract is no longer with the dealership, which morphs into a transit station, or a touch point with the customer, for car delivery and servicing.

There are pro’s and cons to this model. While the dealer is released from investing in a capital-intensive stock, he will also no longer be able to negotiate the transaction price. Instead, he receives a fixed handling fee per car passing through his showroom. Done deal? Not so fast.

The inspiration comes from Amazon

The sales agency model is closely intertwined with an online shopping experience. To a great extent, the customer configures and decides on his new car behind a computer screen without the need to haggle. It reminds us strongly of how we purchase goods and gifts through online stores such as Amazon, which are delivered to our doorstep by courier companies. Not without a coincidence. As an originator of introducing these tactics to the automotive floor, Tesla precisely drew its inspiration from Amazon. Tesla is also one of the few manufacturers that makes it possible to have a car delivered to your doorstep right after you click ‘buy’ on your computer.

As the dealer percentage in the retail price of cars represents 16% in Europe - almost twice as high as in the United States - manufacturers didn’t just recognize Tesla’s pioneering spirit, they also saw tangible profits in the sales agency model. Virtually every new EV startup, from Nio over Rivian to Lucid, grabs onto this buyer channel from day one. And the legacy brands follow their lead. Stellantis, Mercedes, and Volkswagen are just a few examples of well-established car builders announcing or having ended distribution contracts all over Europe to modernize them. This reshuffle can be traced back directly to the switch towards the sales agency model.

These direct sales are primarily for electric cars. It’s not difficult to see why. With their limited color schemes, straightforward mechanics, and simplified equipment policies, EVs align much better with the fast and uncomplicated convenience of online shopping. A highly personalized vehicle or service requires more intense and personal contact with the buyer.

The hybrid sales agency model

The brands haven’t forgotten about this. It is precisely why even the newest of startups open brand stores in key strategic cities or hubs, to have their customers touch, see and experience the cars. It shows that selling cars, often a coveted luxury product, still benefits from physical interaction with potential buyers. Also, brand success depends on it.

That’s why most agency sales models are hybrids. Take a reasonably new brand like Polestar. While the sales occur digitally, deliveries are organized through dealerships, not in the least because it presents a unique opportunity to meet with the customer. It’s too challenging to let that one go. Noteworthy is that dealers who have already adopted the agency sales model often show positive feedback because it is more transparent and less pushy.

But it remains clear that traditional brands, with a historically rooted and exhaustive dealer network in their trail, are streamlining their old partnerships, turning them into service and experience centers while reducing the franchising business. Most of them want to cut back by one-tenth.

The big independent dealers across Europe are seizing this opportunity. They navigate Europe as a marketplace for consolidation. They grow their share by acquiring these in-brand showrooms or smaller dealer networks to leverage their negotiation position with car manufacturers. It helps them survive in a commercial environment where margins and volumes are under increasing pressure.

As such, the share of big dealer groups in sales volume is rising year after year. In a country like The Netherlands, for example, already more than 70% of the car sales volume is in hands of the top-50 car dealers. In Belgium, it surpassed the mark of 50% last year. In all countries across Europe, the same trend is noticeable. This is called the Matthew effect, often surging in times of profound change. It translates into big dealer groups becoming even bigger, while smaller ones must focus on an even tinier piece of the pie.

More screens, fewer showrooms?

As to why smaller dealers are selling their businesses, it is not only due to the arrival of a disruptive distribution model or a change in customer behavior. The majority of them came about in the past forty years. With founding management nearing retirement, these entrepreneurs assimilate the near future evolutions in automotive sales with undeniable care for their families. Often, they find it more reassuring to provide their beloved ones with a secure financial backup. The number one motivation for dealers selling out is seniority, before an attractive take-over proposal and lack of succession.

More screens and fewer showrooms don’t necessarily mean that the old franchising concept will fade completely. As for the near future, the multi-channel sales evolution will rebalance the market shares for the different players but settle on a co-existence for a decent time to come. Traditional dealers can’t neglect digitalization, but they can find their uniqueness in putting the customer central, adding trust to the buyer journey, benefiting from their proximity, and relying on their experience in shifting big supplies.

Buying a car online remains a substantial threshold. Even for the most digital generations of them all: Generation Z. Studies have shown that even they prefer the live experience of a genuine showroom over a digital one when decision time is there.