Used car valuations – this is the major trap for agents. Currently, most dealers throw four percent plus of their new car margin into over-allowance (OA) on trade-ins to win deals. They don’t have this luxury anymore as their margin has now halved or worse. If you are doing an inter-brand sale, where the other brand is a dealer, you can never match the trade-in valuations as you don’t have the trading margin. So, the logic is you will never win an inter-brand sale on price as you just can’t give an OA on a used car. This is a major trap that dealers need to be considering.
Used cars will also be the saviour of the dealer that wants to remain a dealer. Refer back to the franchise to agency comparison model prepared by the Pitcher Partners team. The agency dealer is predominantly a used car business when considering revenue and gross profits.
As the market shifts to EV, the OEMs will shift to online and direct sales. This has already been flagged as the preferred approach by Volvo globally and is the next logical step in the evolution of the business model.
Dealers will for the next decade have a mix of franchised, agency and OEM direct sales brands represented. The only way dealers can retain control of their businesses is through used or ‘new to market’ concepts. This opens the door for parallel importing to the Australian market similar to New Zealand. Our view is the dealers need to embrace it to survive.
Regarding add-on sales; given the dealer doesn’t have a commercial relationship to the customer nor a financial relationship to the sale, how they upsell aftermarket, insurance and non-captive finance – and not confuse the customer – is a complete unknown in our view.
F&I and point of sale exemption:
Is the Point of Sale Finance Exemption available to an Agency dealer vehicle sale?
Under the NCCP regulations, “It only applies where the introducer deals directly with the credit provider/lessor and facilitates finance of the vendor’s own products or services.”
But the vehicle being sold by the Agency is NOT the vendor’s own product.
Therefore, the dealer will need to align with a broker and work under their ACL or get an ACL themselves.
Another alternative is for the OEM’s captive finance company to employ the F&I staff at the dealer and work under their ACL.
Importantly, if the customer is financing the purchase online with the OEM captive finance or the F&I staff are employed by the captive, why would the dealer get a commission at all?
Unintended consequences will occur for the dealership footprint given showroom traffic will fall by 50 per cent as intra-brand shopping vanishes and the time in showrooms should drop by 50 per cent as there is no transacting/negotiation taking place. We also should be asking why dealerships need to open seven days a week.
Dealers could run these businesses by appointment like high-end jewelry stores. Dealers should also consider closing Sunday’s to save Sunday loading and possibly even mid-week. This would mean a five-day roster rather than seven-days, and reduced headcount by 30 per cent as a minimum in these scenarios.
Administration nightmare – from what we have seen from the agency models, the dealer is still doing 100 per cent of the sale admin for half the gross profit. This is preposterous as the agent is acting as the vendor with none of the benefits. I see this as a real cost shifting issue by the OEM which is unsustainable in the long run.
Do we think agencies should be in separate entities to avoid issues across the rest of the businesses the dealer group operates? Do they need a dealer license or is the OEM the dealer license holder?
Simply put, if you think about it, the agent no longer owns the stock at its dealership. So then the question needs to be asked, who has the liability for FBT? Our view is any vehicle owned by the OEM principle that is provided to the dealership staff that results in an FBT liability would be borne by the OEM.
“Agency will throw up some other interesting tax considerations:
1) If the agency fee is a sales rebate, is it a GST supply?
2) If the dealer has a finance company and the OEMs customer chooses dealer finance over OEM captive finance does the agency fee convert to a finance payment recognisable over the life of the loan rather than upfront income for tax purposes?
3) Currently dealer revenue includes new vehicle transaction gross value; under agency dealer gross income will fall by up to 70 per cent. This will have major impacts on GST collections in general for the tax office as it will shift back to the OEMs.
In summary, the agency model will have major impacts on GST collections, vehicle registrations and reported income levels for dealers.
This will set warning lights off everywhere in the tax collection process which will cause a lot of pain points the dealer will need to resolve with the OEM and ATO.
Audit requirement – given the drop in turnover, asset values and staffing at dealerships a lot of the businesses will no longer need auditing. Therefore, preparing motor specialist review-based accounts will be more relevant and useful to dealers and their financiers.