Exclusive: The future of new car sales in Australia

A controversial blueprint for restructuring how new cars are sold in Australia has been obtained exclusively by carsales.

The EQ Agreement offered by Mercedes-Benz to its Australian franchised dealers to become agents for the EQC electric SUV is a clear precursor to the massive overhaul the luxury market leader plans for its entire local dealer network by 2022.

The swap from franchising to the agency sales model is also underway at Honda and is being considered by other manufacturers in Australia as well.

It is an overhaul that if executed properly should be almost transparent to the buying public, but will have huge ramifications for dealers revenues and the control they have over their operations.

“I don’t want to be told when to sit and when to stand and when I can go the dunny,” one disgruntled Mercedes-Benz dealer told carsales when asked about the agency sales model.

“I don’t like someone trying to take the soul out of what we do.”

In a global change already made in Sweden and South Africa, Mercedes-Benz intends to abandon the traditional retail model, instead selling its entire range of vehicle at a fixed price via the internet or through dealers.

Mercedes-Benz Australia has been instructed by global HQ to push on with the swap to agency sales despite the overwhelming opposition of local dealers.

The choice for those dealers now is either to sign up or exit the network and try and negotiate compensation. Legal action may be considered by some of them.

In the agency agreement seen by carsales, Mercedes-Benz Australia is offering its franchised dealers a fixed margin per example sold.

The offer is based on the local list price for a Mercedes-Benz EQC excluding taxes, which is currently $112,278. The margin equates to roughly $7800 per sale.

In theory, a fixed margin is a positive because it far outweighs the little – if any – return dealers are making on their new car showrooms industry-wide at the moment.

The profit potential is aided by no longer having to fund the inventory dealers sell through their new car showroom. Dealers also retain control of servicing, spares and used vehicle sales.

But the proposed fixed fee is broken up into components for delivering the car, sales documentation and other criteria.

“No-one disagrees that seven per cent is good,” a Mercedes-Benz dealer told carsales. “But you still have to jump through some hoops to get it. It’s more like a guaranteed three per cent.”

Key responsibilities and rights of dealers within the EQ agency agreement are robustly defined.

It does not deliver exclusive territory and it states the vehicle or service must for sale at the prices specified by Mercedes-Benz Australia.

The ownership of customer data is another significant change. The agreement makes clear all customer data is the sole property of Mercedes-Benz.

“They [Mercedes-Benz] are doing this because manufacturers want to own the transaction from beginning to end,” a vehicle retailing source familiar with the EQC agency agreement told carsales.

“It is their [Mercedes-Benz] data, because the transaction is between the manufacturer and the end-user with the dealer/agent acting as an enabler. That is a big fundamental shift.”

Dealers say agency removes their ability to negotiate a deal efficiently. They are convinced it will hand an advantage to their luxury rivals such as BMW and Audi, who will retain the right to set the price of vehicle and a trade-in on the spot.

The interface between fixed price, inventory ownership, demonstrator ownership and trade-ins has the potential to cause issues for end consumers, a retailing expert told carsales.

“Almost every retail trade a car dealer does has the associated trade-in issue… and there are some customers who just want to get what they want to get for their old car,” he said.

“Under the old dealer franchising arrangements, the dealer bundled it together. He discounted the new car price and found ways to earn extra income on the ancillary revenue streams and a deal was put together.

“But if you have the new car transaction passing through the books of the manufacturer, then what does the dealer do to get the deal on its feet? He can only take it out of his five per cent.

“That is a big, big issue.”

Any hope the government will strengthen franchising rules to the extent it will prevent the agency model – as per the USA – seems unrealistic.

“It doesn’t matter which party is on the government benches, both have a relatively free economy philosophy and the idea of intervention to prevent anyone from doing business the way they see fit – as long as it sits within bounds of moral certainty – doesn’t get much truck up on capitol hill,” an auto industry source familiar with the franchising code told carsales.

A key side effect of the shift to agency is the potential for reduced value of both publicly listed and private dealer groups because sales and inventories will no longer pass through their books.

The limited income provided by the agency model might also lead to an erosion of the quality of service provided by dealers, although the agreement does specify minimum performance expectations.

“Good dealers know how to make a buck and maximise the outcome,” carsales was told.

“If that means de-emphasising what they do for the agency dealership and focussing more on the traditional franchise operation then maybe that’s what would happen.”