BMW Still Wants An Agency Model, But Not For The US

Business

After years of tearing its hair out over its dealers discounting its cars against each other, BMW insists it is still trying to move to an online- and agency-selling model.

But, BMW Chairman Oliver Zipse admitted, there would always be a strong place for dealers within BMW, even if they end up operating in very different way to today.

In the modern BMW world, the manufacturer supplies, or “wholesales”, vehicles to its dealers, who then follow BMW franchise-agreement protocols to retail and deliver the vehicles to customers.

But, Zipse insisted, the current dealer model didn’t always work for BMW.

“I think the car industry was the only one that did not have absolute price control,” the BMW Board Chairman said last week.

“I don’t know of any other business that does not have absolute price control, at least not for high value goods.

“We would do it to regain the price control – whether that means a higher price or a lower price, I’m not here to say – but to regain price control and to inhibit intra-brand competition.

“Our industry was the only one where dealers in the same brand were fighting dealers about pricing. There is some correction necessary,” he insisted.

While he was specifically speaking about the European and UK auto markets, the second part of Zipse’s concerns with the existing BMW dealer model was more universal, covering what the company could learn about its customers.

“When you do great marketing today, you know much more about your customers, to learn about them, to make better products for your customers, and you cannot do that with the traditional wholesale scheme,” Zipse explained.

“You know, we don’t worry about retail. Retail will take care of itself. You want the data of the customers.

“There is a case for the dealer to be an agent, where the dealer gets a profitable margin for him, and that is of course incentivized if he does more of it.

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“If the dealer thinks that is a profitable model, and it works in many many other industries, I think we have a very good chance to regain the data from the customers, the power for pricing and, of course, a company like ours lives through free cashflow, and that means your stocks.

“Once the car is at a dealer, in the old world, you lost it. It’s gone for you. You don’t know where it is.

“To regain control of your stock is the third part, and if you do that with your dealers then you have a chance.”

The proposed agency model is that the car maker, rather than the dealer, retains control of the stock, with the car company also directly invoicing customers. There are also models that work via online purchasing systems. The dealerships receive fees from the car companies for their roles in test drives, purchasing paperwork and vehicle deliveries.

This is the model BMW Group sales and marketing director Pieter Nota admitted in May that BMW was pursuing in Europe, with a hope to rolling it out worldwide, except for China and the US, where a direct sales model was illegal in many states.

Outside Europe the switch to the agency model lead to heated court battles for both Mercedes-Benz and Honda in Australia.

The Australian Competition and Consumer Commission took Honda to court over its model, while Mercedes was sued by its own dealer body, even by those who signed up for the new arrangement.

“This is not the OEMs doing retail. That’s not what it is,” Zipse insisted.

“The pre-contract information gathering will be on-line. The final contractual parts and delivery; the vast majority will be at the dealer.

“There will be a proportion, three percent, five percent, 15%, of people will do it on-line and get the delivery at home. But there are contractual issues, a lot of legal issues. There are a lot of thresholds you have to make and that’s not possible in every country in the world.

“Technologically, that’s possible but it’s a legal problem.”

Some consumer bodies have complained that the agency model would lead to higher prices for customers, with dealers unable to negotiate down prices when they have swollen stocks of in-demand models and specifications.

While there are clear downsides for dealers, there are upsides, too, despite the clear loss of independence and flexibility.

While dealers operated on a theoretical percentage margin per car sold, they also bought the cars from the OEMs first (generally using short-term loans) and stored them before delivery, and could find themselves selling cars at a loss to stem interest payments on cars that had held on to for too long.

The agency model, as used by Mercedes-Benz in Australia, offers a guaranteed three-percent margin, no matter what, which also encourages dealers to sell the highest-priced models with the most options. Dealers also retain control of servicing, spare parts and used-car sales, from trade-ins or wholesaled stock.

“For us there are no direct sales without dealers,” BMW’s Zipse insisted.

“I don’t know of any concept where you can forfeit dealers.

“All the connection today with the customer is to the dealer, who is very localised, with an area of 100km.

“For a company as large as BMW, you need dealers. There are thousands of them worldwide. It would be suicide to do that by yourself.”

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