Automotive News Europe — 2023-01-03
Automotive Industry
The surge in electric vehicle sales has led a number of automakers to move to a direct sales and distribution model, known as agency, in an effort to cut costs and better control pricing.
Big names that are shifting to some form of agency, for EVs or all their models include Audi, BMW, Cupra, Mercedes-Benz, Stellantis Europe and VW brand.
But not everyone is on board with agency. Renault Group CEO Luca de Meo said the risk of holding hundreds of millions of euros in inventory outweighs potential gains.
“As a company in a sector that has a problem generating cash, to have that working capital around your neck, with all the risk, market volatility, downturns, it's a very risky game,” de Meo said in an interview with Automotive News Europe.
In the traditional model, dealers buy their inventory from manufacturers, and are free to negotiate prices (to a point) with customers. They also bear marketing costs. In return, dealers can earn a higher profit from each sale.
Under agency, the automaker retains the inventory and buyers purchase the car directly from them. The dealer earns a fixed, lower margin – but does not have to bear marketing costs and carrying costs for inventory.
Risk rises with volume
De Meo said that agency is particularly risky as volumes increase. A company that sells about 100,000 cars a year would typically hold 30,000 cars, or a three months’ supply. At an invoice price of €25,000, that translates to €750m of capital, he said.
But that figure would be in the billions for a company such as Renault that sells 2m cars a year, he noted.
De Meo said that a no-haggle policy could also be problematic.
“You do agency because you want to control the price and you want to cut distribution costs,” he said. “So you give a 5% margin to the dealer, there’s no discount – but you need to have a very unique product not to offer discounts.”
Renault has negotiated separate dealer contracts for EVs such as the Megane E-Tech. De Meo said the base margin would be higher than 5% (a typical level for agency contracts).
“We need the dealers to make money because if you cut their margins, you don't help them to reduce unnecessary costs by asking them to build showrooms that are like temples or cathedrals,” he said.
“You know what they will do? They're going to say, thank you very much, I'm going to go to a brand that gives me a higher margin,” de Meo said. “When you make this decision [to go to an agency model] you need to know how sales and marketing and distribution works in the automotive business.”
While Renault Group does not have plans to shift to an agency model, de Meo said the low-cost brand Dacia acts in many ways like agency. There are few options and relatively few trim levels, and nearly all Dacias are sold through retail rather than lower-margin channels such as rentals.
“Dacia is a normal contract that behaves like agency in terms of economics,” he said, “even in control of the price, because you have a very simple lineup and there’s no discount, and 85% of sales are in the retail channel. Dacia has distribution costs that are one-third to one half of other volume brands,” de Meo added. “So we proved we can do it without having to call it agency and having to bear the stock.”
In de Meo’s opinion, the best way to control price “is to make sure that your production capacity is below demand.” He said Renault has cut 1.2m cars from its annual capacity (using the Harbour Report measurement of two shifts, five days a week).
In 2023, he said, “with a very conservative assumption, I'll be above 100% Harbour capacity. So, I think we've cut more than 10% of distribution costs for Renault brand just because of this.”
“We had very high distribution costs, and now we’re in the game,” he said.