Column: Smart dealers gain exposure to once-dreaded agency model

I've covered the auto industry for a long time, but mostly from the factory, automaker, supplier or Wall Street perspective. Before I got to Automotive News, I probably wrote more about the consumer experience than the dealer experience. That all made sense when I was writing for general interest newspapers or a financial wire service.

But I've always admired the entrepreneurial spirit of auto dealers, and I'm glad to have more exposure to them since I joined Automotive News almost four and a half years ago.

I remember David Hult, CEO of Asbury Automotive, before the pandemic talking about buying a used car from Carvana, just to learn what the experience was like and gauge how it stacked up against trying to do the same on his brand's site. Compared to hiring a consultant whom you may or may not fully trust, the return on investment of that experience had to be off the chart.

So it's through the lens of that example that I look at other public dealers willingly exposing themselves to the agency model of auto retail, which is just about the opposite of America's franchise system.

For nonretail readers, the agency model involves the automaker owning the inventory and setting the price for new vehicles, while assuring some level of payment — presumably profitable — to the dealer, whose duty is to ensure a good customer experience, particularly upon delivery.

After automaker abuse of retailers in the industry's early, Wild West years, dealers worked their state legislatures to ensure they didn't get overpowered by their manufacturer partners again. In the U.S., dealers buy vehicles from the factory — literally as soon as they roll off the assembly line — and sell them for the best price they can, much like a grocer or furniture store, except with perhaps more geographic protection and with the complex, three-party relationship between consumers and manufacturers via warranties, recalls and other activities.

So it's a little counterintuitive that Lithia would jump into the agency game. But like Hult's shopping on Carvana, it makes a lot of sense.

Of course, Lithia CEO Bryan DeBoer, in acquiring Jardine, the luxury retailer in the U.K., is spending something like 10,000 or 20,000 times what Hult paid for his first-person market research. Then again, Lithia did not invest in a depreciating asset.

While U.S. dealers are righteously wary of automaker overreach, manufacturers aren't going to try to squeeze their retailers out of business. They need them, whether they are the independent franchisees we have in the U.S. or the now-agency retailers often seen in places such as Europe and Australia.

As brands seek to compete in the Tesla-dominated U.S. EV market, they have done some experimenting that has gotten awfully close to an agency model already.

This isn't just a Lithia thing. Penske Automotive Group has long had a presence in Europe, and since January its U.K. Mercedes-Benz stores have been selling new vehicles under the agency model.

After he became CEO of Group 1, Daryl Kenningham told me he was interested in adding to the company's U.K. presence in part because of the agency model.

Like the Asbury experiment, I presume they are all comparing the operational metrics in one market against the other and looking for opportunities to transfer best practices back and forth across the Atlantic.

Let's be real.

Franchised auto dealers in the U.S. have no interest in giving up a business model that has been profoundly successful for the last 90 or so years. It would be irrational to think that retailers would abandon an approach that has been extraordinarily resilient, with adequate to outstanding profitability year after year, generation after generation.

And yet, the new-car retail part of the franchise model has often been the least profitable part of a dealer's business in the U.S.

Those who recall when new-vehicle sales were effectively loss leaders — unprofitable transactions that brought in the foot traffic to support the rest of the operation — might be intrigued by the idea of a guaranteed $500 or whatever of marginal contribution per vehicle.

I still believe what Roger Penske said in 2021: "We won't see an agency model here in the U.S."

But if there's a way to boost overall profits while letting automakers and customers think they have a little more power, maybe there's also a way to make a deal.