Dealership franchise agreements are the bedrock of the retail auto industry. But what if the OEM suddenly changes everything?
Since the inception of the automobile industry, dealerships have been a way of life.
Originally started as a way to attract private capital, dealerships grew in number as the industrial revolution gained momentum. Assembly lines could produce large numbers of vehicles. These vehicles needed to be distributed, and the concept of a network of dealers was born.
Individuals were eager to sign on the dotted line to represent one brand or another. It was capitalism at its finest.
Over the decades, investing in auto dealerships was for those that could raise the capital to build a physical location and purchase all the vehicles the manufacturer could send them.
The finance community developed the concept of floor plan inventory financing. These dealer networks presented little risk to the finance community, however, this structure provided much needed timely and guaranteed cash flow to the manufacturer without any risk of doubtful accounts.
As Canada grew in population, so did vehicle demand. It was a tremendous match. Consumers needed vehicles to facilitate employment, dealers owned those vehicles and were only too willing to sell them, and the manufacturer built as many as they could, mostly just keeping up with consumer demand, but often exceeding that demand.
Dealers became the mechanism where manufacturers could push inventory and collect advance payment from the finance community.
Sure there were ups and downs, largely driven by economic circumstances that caused the industry to weather economic cycles.
Some manufacturers did this well and others did not. But over the longer-term, the system worked with little structural change, until the Internet gained in popularity and a new sub-economy driven by consumer electronics emerged with a force never seen before in history.
Technological capabilities enable consumers to do things they had never been able to do before. Consumers adopted these new technologies and capabilities at an alarming rate. Traditional auto manufacturers were caught off guard and immediately went into reaction mode.
They are reinventing the brand-dealer relationship. No longer will New Zealand Toyota dealers own and sell new vehicles. Instead, they will now only own a very small supply of demonstrator vehicles.
Today we are living in the tail end of that reactionary period. I believe we are about to enter into a new world yet again, where automotive retail shifts into another gear.
Traditional automotive manufacturers look more like technology companies and traditional technology companies are looking more like automotive manufacturers and brand owners. Auto retailers today operate in an omni-channel environment with high customer satisfaction scores.
It is no secret that there is a battleground surrounding vehicle electrification. This will continue until the mass markets adopt these new technologies rendering them economically viable.
There is also a battleground over vehicle distribution. Traditional dealerships are viewed as “the old school” way of doing business.
Much of the discussion is about vehicle subscription and the need for new vehicle ownership models with services such as ride-sharing, car-sharing and fractional ownership.
It’s all based on providing more choice to consumers who have embraced the sharing economy for things like hotel rooms, vacation rentals and, yes, vehicle sharing.
The sharing economy lives side-by-side with the traditional economy, but is steadily gaining a larger piece of the overall market.
Experiments abound in auto retail. Brands themselves are breaking the traditional mold with initiatives in ride-sharing, car-sharing, subscription and direct to consumer initiatives.
Although there are many examples, the most recent development is both fascinating and scary at the same time.
Toyota, the most valuable automotive company in the world, has chosen to test a new relationship with its dealers and customers.
They chose New Zealand as the testing ground after 10 years of developing the concept.
They are reinventing the brand-dealer relationship. No longer will New Zealand Toyota dealers own and sell new vehicles. Instead, they will now only own a very small supply of demonstrator vehicles.
Toyota New Zealand will sell the vehicles to consumers from its own pool of manufactured or imported Toyota vehicles. Dealers will no longer have to finance new vehicle inventory, and as such risk losing complete control of the new vehicle selling process.
To do this, Toyota New Zealand and its dealers have revised the contract governing how they will do business with each other.
For used vehicles, service and parts, their traditional agreement will remain in effect.
However, for new vehicles, the business relationship will be defined in an agency agreement.
Toyota New Zealand will be contracting directly with the consumer, not the dealer. As an agent, the dealer will be paid a fee for services required by Toyota New Zealand.
That means no more inventory to manage, no more CSI scores to achieve, no more floor plan financing to arrange or interest to pay, no more customers to negotiate with, no more gross profit on new vehicle sales, fewer people to sell vehicles, etc. You get the picture.
As an agent they will still have staff, however rather than commissioned based sales staff, they will be product presenters on a fixed salary, trained 100 per cent by Toyota New Zealand.
They will arrange and facilitate test drives and answer any questions the customer might have about the vehicle. However, they won’t be involved in discussion or negotiating prices. A national price that applies at every dealership across the country is set by Toyota New Zealand.
New Zealand was likely chosen by Toyota because it’s a small market with only 35 dealership locations with only 25 owners of those locations.
A few things come to mind.
Even if Toyota makes payment to agents in the neighbourhood of the net margins they once earned as dealers, the fundamentals of dealership valuation are significantly affected.
A significant aspect of what created value for dealer principals is now fundamentally altered.
Estate freezes will be impacted since in all likelihood those freezes would have taken place at much higher values, resulting in the ultimate overpayment of income taxes.
As a used vehicle, service and parts outlet, future free cash flows will not be certain and as such the price a buyer might be willing to pay for the business would be significantly lower that in the past.
Few barriers to entry exist, which was the stronghold for value in the dealership model. Most dealers emerged from the new vehicle side of the business. Where will the agents come from in the future? What is to happen to the facility investment? Who pays the severance associated with redeploying employees? It raises many more questions than answers.
We live in times where much experimentation is being undertaken from players both within and outside our industry right across the globe.
A significant aspect of what created value for dealer principals is now fundamentally altered.
It’s important that we understand what is happening to our industry globally. Being aware allows us to be prepared and compete better. One thing for sure, it is critically important that you keep strong relationships with your brand and engage in continual dialogue about opportunities in your marketplace and how best you can work together.
