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[NEWS] Switch to agency model raises Mercedes’ average sale price

Switch to agency model raises Mercedes’ average sale price

Mercedes Benz showroom
Mercedes' gross profit in the first quarter increased by £1.2 billion compared with the same period last year

Mercedes-Benz adopted direct-to-customer 'agency' sales model in the UK in January

Mercedes-Benz’s switch to the direct sales ‘agency’ model in the UK from 1 January has helped increase the average sale price of its cars, said the company.

In the direct sales model, Mercedes assumes responsibility for setting pricing and selling cars, taking over from the dealer. The dealer accepts a fixed fee per sale for acting as Mercedes’ ‘agent’.

“The [switch to] direct sales in the UK went very smoothly,” said Mercedes chief financial officer Harald Wilhelm on the company’s recent earnings call. “Every move in [every] market so far to the direct sales model has had a supportive element in terms of the net pricing.”

Direct selling allows Mercedes to fix the price of new cars across the whole country, ending discounting by dealers. The move has helped the company achieve its aim of boosting average pricing and helping profits.

The company said that higher pricing as well as boosted volume in the quarter helped lift gross profit by €1.34 billion (£1.2 billion). However, extra costs associated with direct sales cut that profit by €127 million (£110.5 million) over the quarter, added Mercedes.

Under the direct sales model, Mercedes assumes responsibility for all inventory instead of wholesaling stock cars to the dealer. It also owns the dealer demonstrator fleet. However, the boost in pricing by removing discounting “offset these effects by a large portion”, said Wilhelm.

The UK was Mercedes’ first big switchover to the agency model after it was piloted it in smaller markets like Sweden, Austria and Australia. The company plans to adopt the model in Germany in the second half of this year with the goal of migrating 85% of new car sales to the model in Europe by 2025, said Wilhelm.

Last week, Penske, one of the biggest Mercedes dealers in the UK via its Sytner chain, said its profits on new car sales had increased compared with pre-Covid figures after the German car maker moved it to the agency model.

“Overall, we’ve been quite satisfied with it at the moment,” said CEO Roger Penske on an earnings call.

Penske said Mercedes pays the dealer group a 5% commission for each sale, with the fee going to the dealer closest to the customer if they buy online.

Mercedes had a slow start to the year in the UK in terms of sales, but picked up the pace in March to record 28,801 sales in the first four months of the year, down 8.4% on the year before, according to figures from the SMMT. The biggest seller was the A-Class hatchback followed by the CLA compact saloon and GLA compact SUV.

Mercedes said that the removal of discounting was beneficial to the customer. “Obviously, you have much more visibility, and more transparency at both ends. I think that is favourable,” said Wilhelm.

Penske, however, reported that UK Mercedes customers have found that part difficult to adjust to. “I guess the only thing negative you’d say [is] that the customer still wants to negotiate,” said Roger Penske on his company’s call.

Mercedes’ desire to hold fast on pricing was reflected in its first-quarter profits, showing a 14.8% margin. The return on sales was slightly lower than the same period last year at 16.4%, but Mercedes said it had been hit by 548 million of ‘industrial’ costs, including increased raw material pricing. Profit was higher at 5.4 billion on increased revenue to 37.5 billion, up from 34.9 billion in the same period the year before.

Mercedes’ move to direct sales in Australia from the start of 2022 was met with resistance from dealers, 38 of whom sued the company, arguing they were pressured into accepting the changes. A ruling in the case is expected later this year.

Wilhelm said that, in his view, the switchover had been “beneficial from all stakeholder perspectives” and that even “sceptical” dealers were being won over. “At the end, we're pretty happy,” he said.

Dealers who have switched over continue to operate servicing as normal. “They keep the aftersales business, which is the margin business,” said Wilhelm. Dealers also remain in control of fiinance and insurance add-ons. Penske said it made an average gross profit of $3900 (£3100) including F&I on Mercedes new car agency sales in the UK in March.

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