How reality blew apart the agency sales model dream, even for Tesla

Blame Tesla for opening car makers’ eyes to the possibility of direct sales. The EV specialist chucked out the old sales model, bypassed established dealers and owned the retail process by seamlessly integrating a slick online showroom with physical locations. The ‘legacy’ makers meanwhile were giving away around 10% of their revenue to the dealers. These independent middlemen bought new cars much cheaper wholesale and lured customers by sharing some of their good fortune in the form of cash off the recommended price. But what if there was a different way? Tesla seemed to point the direction. Most established brands were too big to go the whole hog and swallow the cost of owning their sales points, so the agency model was born. Instead of the new car being sold twice, car makers would sell direct to the customer, with dealers facilitating the sale as their ‘agents’ and being paid a flat fee for doing so. Car makers hoped that this way, they would have complete control of the whole sales ‘funnel’, from the moment the customer started idly browsing for a new car to them taking delivery and even beyond. Haggling would disappear, because customers just paid one price set by the car maker. Not everyone was convinced, but Volkswagen, Stellantis, JLR, Mercedes-Benz, BMW/Mini, Ford and many smaller brands all set in motion plans to make the switch to agency. Now, however, many – including Ford, Stellantis, JLR and Polestar – are cancelling or postponing their agency plans. Even Tesla, the brand that kicked off the whole process for many, is finding it hard to maintain the purity of its direct sales model as it grows bigger. “Tesla probably did have a much lower cost of distribution until around 2021,” Steve Young, head of automotive retail consultancy ICDP, wrote in a recent report. “That has now changed.” That change, and perhaps the death of true agency altogether, has been triggered by the return of cut-throat competition. When many agency plans were being drawn up three or four years ago, vehicle production was curtailed by first Covid then the post-Covid chip shortage. Ca rmakers could sell all their limited output at the price they wanted. It proved the worst conditions for testing agency. Tesla’s ultra-ambitious growth plan called for increasing sales to fill its factories and achieve the economies of scale it dreamed of. But as rivals caught up and EV sales grew at a slower pace, it need to stimulate demand. At first, Tesla turned to the method prescribed by the pure, transparent direct sales model: it cut prices. However, as the company found in China and to a limited extent in Europe, pricing cutting forces competitors to do the same, negating the benefit and sparking price wars. It also damages the all-important residual values. Dutch leasing giant Ayvens earlier this year described Tesla’s practice of cutting its list prices as “poison” after getting hit financially from falling used prices. Never one to learn a lesson from others, Tesla found out the hard way the secret to stimulating demand with giveaways: do it quietly. “The more opaque the new-car pricing support, the better it is to protect residuals down the line,” Young said. In the run-up to the end of the third quarter, Tesla hit upon a new plan: cheap, limited-time lease rates. It offered the Model Y for £299 a month for three years, lower than much smaller EVs, such as the Hyundai Kona Electric. It also sells pre-registered cars at a discount – another way of stimulating demand. Tesla is feeling its way to unlock the advantage of the wholesale model: highly reactive price elasticity. “Pricing is the key tool to balance supply and demand in any market,” Young said. Because they can set their own pricing, dealers are very good at finding the exact level needed to get customers to buy cars. Under the wholesale model, they are also given more financial motivation to actively sell, crucial in times like now when competition is fierce, prices have risen and customers are behind the curve on expected EV demand. Ford UK head Lisa Brankin cited the power of the dealer under the current system to make sales as one reason Ford decided not to roll out the agency model following a trial in the Netherlands. “The dealer's job is to go and find customers, and they do that really well,” she told Autocar. Like Tesla, Polestar is another realising that the agency model represents a straitjacket in times when flexibility is needed. The embattled Geely-owned company has now moved to a system whereby it still owns the car until bought by the customer, but it now incentivises the dealer to make the sale. This replaces its launch policy of having low-pressure ‘product experts’ instead of salespeople, in the style of Apple. Ineos Automotive is another to back away from direct sales. “It was an example of us thinking we can do something better than dealers who’ve been doing it for over 100 years,” CEO Lynn Calder told The Telegraph earlier this month. “Let’s just let the people with decades of sales experience do their job.” Mercedes too is morphing its agency model, which it introduced in 2023. Recognising the need to push EVs in the face of legislation, it gave dealers an additional 1% fee for selling them, then incentivised dealers to sell from a pool of cars it made available. The company has shown more flexibility in its business lease rates for all models. Dealer group Sytner reported healthy prices for Mercedes cars under the agency scheme, but others reported sales were well down. The Eastern Western Motor Group recorded a drop in revenue of £50 million at its four Mercedes sites in 2023. The jargon for this looser way of applying the direct sales model is ‘non-genuine agency’ – something that riles Young. “This is a fairly clear definition, and any arrangement which fails to meet this test is not agency, and the [manufacturer] cannot set prices,” he said. Having said that, car makers are still committed to changing the way they sell cars. Everything they didn’t like about the franchise model still stands: the haggling, the discounting, the competition for customers within their own network, the severing of ties with the customer once they move from online research to ordering at the dealer. “We learned a huge amount,” Brankin said of Ford's Netherlands agency test. “The franchise model that we've got in Europe will evolve over the next five years.” She referenced the data connection with the customer as one area that Ford wants to strengthen – an imperative for every car maker as they look to sell digital adds-on to the car over the air. Many original agency implementations were flawed however, suggested Young. “A few [manufacturers] carefully planned and considered their switch, but many rushed into it, seduced by a message from big consulting firms that this would allow them to slash the cost of distribution,” he said. Young cited incomplete IT systems – something that afflicted Stellantis in its pilot programmes in Austria, Belgium and the Netherlands. That forced a change in plans, Uwe Hochgeschurtz, chief operating officer of Stellantis’s Enlarged Europe region, told Automotive News Europe. Now Stellantis plans to move country by country, instead of brand by brand, with 10 markets switching by 2026. In 2022, the company pledged to slash its distribution costs in Europe by half by 2030. The overall problem is not agency per se but coping with the drop in demand. “The almost universal problem with agency implementations to date is that [manufacturers] continue to push excess supply into the market,” Young said. “They have not developed new pricing mechanisms that allow them, or the retailers on their behalf, to achieve a matching demand.”