Why General Motors Is Offering Buyouts to 400 Cadillac Dealers

By Markets Fool.com

Cadillac president Johan de Nysschen with the critically acclaimed CT6luxurysedan. De Nysschen's effort to upgrade Cadillac's dealers has prompted protests -- and a buyout offer for some. Image source: General Motors.

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General Motors (NYSE: GM) is offering buyouts to 400 of its smallest U.S. Cadillac dealers. It's a move to quell dealer concerns about a new reorganization plan, and part of a much larger long-term effort to boost the old luxury brand's exclusivity and level of service.

Why Cadillac is offering these buyouts

Automotive News reported on Friday that Cadillac is offering the 400 dealers up to $180,000 each if they would prefer to give up their franchises rather than making the substantial investments and compromises required under an elaborate plan to upgrade the brand's level of service and polish.

The offer follows a series of protests by Cadillac dealers concerned about the brand's plans, which divides its U.S. dealers into five tiers and imposes new requirements on each. In a nutshell, Cadillac is providing incentives to some of its largest dealers to upgrade their facilities and service levels, while reducing others to small stores with little or no inventory.

The dealers are concerned that the net effect of Cadillac president Johan de Nysschen's plan, called Project Pinnacle, will be to give major benefits to Cadillac's largest and best-located dealerships while making it difficult for smaller dealerships to survive.

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An ambitious push to lure more luxury-minded buyers

The dealers receiving this offer are small ones. Together, they represent 43% of Cadillac's 925 U.S. dealerships, but they generated less than 10% of Cadillac's U.S. sales in 2015.

Cadillac has far more U.S. dealerships than its German luxury-brand rivals, something that analysts have long seen as a disadvantage for the old U.S. brand. A smaller dealer network would mean more sales and profit per store, on average, giving franchise owners more incentive (and more money) to upgrade their facilities and deliver higher levels of service to customers.

De Nysschen has repeatedly insisted that he doesn't want to put Cadillac's smaller dealers out of business. Instead, he has said, Project Pinnacle is about turning a perceived disadvantage, the large number of dealers, into an advantage by making it easier for the smaller stores to turn a profit.

De Nysschen told Automotive News that he hopes none of the dealers will take the buyout offers. But, noting that his plan to transform Cadillac's level of service is a long-term project that is "not one for the faint-hearted," he is making the offers available to any of the small dealers who may "choose to make life a little easier than what lies ahead."

Given that the offers aren't very generous, de Nyschen's hope may be fulfilled -- but that might not be enough to quell the dealers' concerns.

The goal: Transforming Cadillac into a profit powerhouse

Elevating Cadillac's brand image (and profitability) is a significant, long-term goal of GM CEO Mary Barra, part of her plan to boost GM's profits and margins substantially by early next decade. De Nysschen has been given a big budget ($12 billion) and wide leeway by GM's board of directors with the expectation that he will double Cadillac's global sales to 500,000 per year or more by about 2020, while elevating the brand's status among luxury-minded car-buyers.

It's a project that sounded far-fetched as recently as a few years ago. But GM has proven with Cadillac's latest products that it can compete head-on with the likes of BMWand Daimler'sMercedes-Benz brand, with no excuses necessary -- at least in terms of the cars themselves.

De Nysschen's challenge is that while it's one thing to upgrade Cadillac's products, it's another thing entirely to upgrade luxury shoppers' perception of the brand. Project Pinnacle is part of that effort. De Nysschen wants Cadillac's dealers to deliver an experience to their customers that rivals -- or exceeds -- that offered by the German competition and Toyota'sluxury Lexus brand.

It will take time. De Nyscchen and other GM executives acknowledge frankly that upgrading the brand is a long-term project that may not fully succeed for a decade, and they've made it clear to investors (and Cadillac dealers) that patience will be required.

If nothing else, this latest drama reinforces that point.

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John Rosevear owns shares of General Motors. The Motley Fool recommends BMW and General Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.