Franchisee v Agent - the sea-change within the automotive retail sector

Arguably, the main change currently taking place within the automotive retail sector, is OEMs compelling their dealers to move away from the traditional franchise model, to either “pure” agency or hybrid models (franchise and agency combined).

Many dealers remain unaware of how the transition to agency might affect them and are unsure of their rights when faced with the threat of termination by the OEMs. The transition to the agency model is likely to have a significant impact on the future direction of dealers’ businesses and one upon which it would be prudent to seek legal advice.

Franchisee or Agent – the differences

The franchise is the traditional business model within the retail motor sector. Under that model, the dealer acts for itself in negotiations with the end customer and has the right to market products or services using the trademark or trade name of the OEM (who is the franchisor).

Under an agency model, the dealer is legally empowered to represent the OEM in negotiations but does not have the right to negotiate on, nor enter into, contracts directly with customers. The table below sets out some of the key differences between a franchisee and an agent.

Action	Franchise model	Agency model
Price-setting	The retail price of the vehicle can be set by the dealer.	The retail price of the vehicle is fixed by the OEM.
Contract	The contract is between dealer and customer.	The contract is between the OEM and customer.
Stock	Stock is owned by the dealer.	Stock is owned by the manufacturer.
Branding	Specific costs associated with the brand, such as signage, are borne by the dealer.	Specific costs associated with the brand, such as signage, are borne by the OEM.
Customer negotiations	Dealers can discount cars by ‘giving away’ some of their margin.	Dealers cannot discount cars by ‘giving away’ the manufacturer’s margin.

 

Hybrid agreements 

Certain OEMs are seeking to implement agency agreements that are designed to straddle both business models, by portraying dealers as both franchisees and agents. These are being referred to as hybrid agreements.

There is a risk to affected dealers that this could result in them potentially getting the ‘worst of both worlds’, where, for example, they carry the risk of having stock in their possession without the benefits of owning it.

Further, there is doubt as to whether such hybrid agreements are legally enforceable. Where an OEM seeks to combine the two business models for its own benefit, this is likely to render the hybrid agreement outside the block exemption from EU competition legislation. Accordingly, such agreements could be open to scrutiny for non-compliance with competition law.

What next?

It is expected that all OEMs will seek to transition to some form of agency model in coming years. Whilst the impact of this transition on the automotive retail sector is not yet certain, it is imperative that dealers understand what the transition means and how it might affect them.

Please get in touch with Partner and Head of Automotive, Richard Coates if you'd like to discuss this further.

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This article was first published in UHY Hacker Youngs 2023 Automotive Outlook.