Once considered ahead of its time, Toyota has continuously embraced innovation and customer-driven approaches. As a firm believer in letting customers determine the ideal powertrain and timing for their needs, Toyota’s focus on delivering exceptional experiences has been a hallmark of its success. However, in the ever-evolving automotive landscape, one company has stood out for revolutionizing the car-buying experience: Tesla. By simplifying the process to an online order and direct delivery, Tesla has eliminated the reliance on middlemen, passing on savings and ensuring fixed pricing without markups or sales pressure.
Inspired by Tesla’s customer-centric approach, Toyota is now gearing up to bring a similar experience to its showrooms. Today, let’s explore why Toyota could be the next major automaker to adopt the agency sales model.
By analyzing Toyota’s rich history of innovation, commitment to customer satisfaction, and determination to embrace new paradigms, we will delve into the potential impact of this strategic shift on the automotive industry and its customers.
The agency model is a sales strategy where car manufacturers sell their vehicles directly to customers through their own retail stores, eliminating the need for intermediaries or dealerships. This approach can reduce costs and increase profits for manufacturers. Instead of dealers purchasing cars at wholesale prices and selling them at higher prices, they act as agents and earn commissions on each sale. Direct sales to consumers are gaining popularity across various industries, including the automotive sector. Tesla is already implementing this model, and other automakers like Daimler, Volkswagen, and Volvo have plans to adopt it. Now, Toyota, one of the largest car manufacturers globally, is contemplating a shift to this sales model.
According to Matt Harrison, Toyota’s head of Europe, the company is prepared to revolutionize its business since the existing distribution margins and models are no longer sustainable. Harrison believes that the traditional profit margins of 20 to 25% are unnecessary, and Toyota could potentially earn more by embracing the agency model. This is a daring move that has the potential for significant rewards for Toyota.
So, why the change? It primarily stems from meeting customer expectations. A majority of people, over 80%, prefer transparent pricing and a buying process as convenient as online shopping. They desire the simplicity of e-commerce when it comes to purchasing cars and exploring new ownership methods. Direct sales offer automotive manufacturers a distinct advantage. They establish a direct connection with end customers, gaining valuable insights into their preferences. This direct relationship is unprecedented for manufacturers and holds great significance. As data-driven revenues are projected to grow substantially by 2025, reaching their current size of 5.5 folds, direct sales present manufacturers with an opportunity to access valuable customer data that they currently have limited access to.
According to an Accenture analyst, implementing direct sales to consumers can potentially increase an automaker’s margin by up to 3%. This boost in profitability has the potential to generate billions of dollars in additional revenue for manufacturers. Direct sales also enable manufacturers to navigate the rise of third-party platforms by allowing them to negotiate stronger terms and develop competitive offerings. Given the changing landscape, many manufacturers find adopting a different sales model to be an appealing and effective solution.
The transition to the agency model has sparked controversy, particularly among dealerships and national sales companies that are concerned about its potential impact on their profits. Dealerships traditionally rely on selling cars with significant markups, and they fear that the agency model could significantly affect their profitability. In this new model, dealers would act as agents for the manufacturer and earn commissions on each sale. While this could potentially reduce their profits, it could also relieve them of the burden of maintaining large inventories, which can be costly. Additionally, under the agency model, dealerships would no longer bear the responsibility of marketing and advertising vehicles, as these tasks would be handled directly by the manufacturer. This shift could lead to reduced marketing costs for dealerships, allowing them to allocate resources to other aspects of their business, such as providing excellent service and repairs.
Dealerships have been experiencing declining profit margins on new car sales for a considerable period of time. An analysis conducted by Accenture predicts that discounts could increase by up to 30% by 2025, resulting in an average annual revenue loss of $600,000 per dealer. Nevertheless, dealerships have an opportunity to protect their margins by transitioning to a commission-based system. Under the agency model, dealers would still invest in physical retail spaces and deliver a valued brand experience to customers. Finding the right compensation system that covers investment costs is a challenge for both manufacturers and dealers, but it is worth exploring.
While the agency model offers numerous advantages, original equipment manufacturers (OEMs) will face significant challenges in transforming their retail operations to meet the requirements of this sales model within the given timeframe. The objective will be to create a new customer experience that maintains familiarity and improves upon the customer service found in traditional dealership experiences. This shift represents a significant change in responsibility for manufacturers. Undertaking these additional tasks is far from easy. Today’s customers expect instant access to information, seamless shopping experiences available around the clock, prompt or even immediate delivery, and personalized products and services. Convenience, adaptability, connected technologies, and a seamless omnichannel purchasing experience are prioritized by the new retail model. Because of this, OEMs adopting these new retail models face logistical difficulties while attempting to limit interruptions for their customers.
At present, a typical customer journey involves approximately 5,000 interactions among various stakeholders, including sales teams, finance departments, test drive teams, administrators, and valets. In the traditional retail network setup, these responsibilities were managed by dealerships. However, with the emergence of new retail models, there will be a substantial increase in interactions between customers, their mobile devices, and the original equipment manufacturers themselves. Only a few manufacturers currently possess the required infrastructure to support customers throughout the entire purchasing and service process without relying on dealerships or developing alternative compensation models.
For example, in the current system, when a customer requests a test drive, the dealership typically handles all the interactions among stakeholders. But in the new agency models, the responsibility falls on the OEMs to establish a centralized base for conducting test drives, accessible to multiple agents, and ensuring the availability of the right vehicle at the right time. Transitioning to the agency model can prove to be both costly and complex for manufacturers. They must navigate the demands of consumers making significant purchases and take on a greater share of customer engagement activities and touchpoints. To succeed, they need to streamline interactions throughout the customer journey, simplify processes, and identify ways to reduce costs in other areas.
To address these challenges, manufacturers can utilize automated processes and integrated retail systems. By automating certain tasks and integrating systems, they can enhance efficiency and offer faster, more effective customer journeys. Additionally, reducing unnecessary interactions can further streamline the process, leading to improved overall customer satisfaction and cost reduction.
As the automotive industry changes, dealerships must adapt and embrace their new position as service providers. They have the chance to use their physical presence to their advantage and provide a variety of services within a larger mobility ecosystem. Among the automakers, Toyota appears well-positioned to successfully undertake this transformation.
Toyota, being one of the largest car manufacturers globally, possesses a strong infrastructure, well-established supply chains, and an extensive network of dealerships. This advantageous position enables them to effectively implement the agency model, utilizing their existing capabilities to offer direct sales and exceptional customer experiences. Additionally, Toyota has a history of innovation and adaptability to changing market dynamics. Their successful track record of introducing new technologies and approaches in the automotive industry gives them a competitive edge in overcoming the challenges associated with adopting the agency model.
The landscape of automotive sales is changing dramatically, and dealerships must not only accept these changes but also play a proactive role in the shift to direct sales. By doing this, dealerships can safeguard their position in the continuing mobility revolution and turn possible disruptions into opportunities. It will be interesting to watch how this movement plays out and how it affects all the stakeholders as the business continues to change. Dealerships will, however, undoubtedly play a significant role in the process of purchasing an automobile for many years to come. Even if their position changes, they will still be crucial in the near future for promoting positive client experiences and offering worthwhile services.
Toyota’s journey towards potentially adopting the agency sales model signifies the company’s dedication to staying at the forefront of customer-centric innovation in the automotive industry. Inspired by the simplicity and efficiency that Tesla has brought to the car-buying experience, Toyota aims to offer its customers a similar level of convenience and transparency. As we eagerly anticipate Toyota’s next move, it is clear that the automotive landscape is undergoing a transformation, with more manufacturers exploring new sales models to meet the changing expectations of consumers.