Why Most Cadillac Dealers Turned Down General Motors' Buyout Offer -- For Now

By Markets Fool.com

Cadillac President Johan de Nysschen appears to have wrangled most of the brand's U.S. dealers into a new program intended to boost levels of service. But thedealers aren't happy about it. Image source:General Motors.

Continue Reading Below

Nearly all U.S. Cadillac dealers signed up for a controversial new incentive program intended to boost the brand's quality of service, a General Motors (NYSE: GM) official told Automotive News.

The news comes just a few weeks after GM offered to buy out 400 of its smallestCadillac dealers if they didn't want to join the program. But that doesn't mean the dealers are happy about it, and their lingering resentments could present a challenge for one of GM's most important profit-boosting initiatives down the road.

Project Pinnacle: The plan to transform Cadillac's U.S. sales network

Dan Creed, the sales chief for the Cadillac brand in North America, told Automotive News that most of the brand's 925 U.S. dealers opted to join the program, known as Project Pinnacle.

Project Pinnacle is Cadillac President Johan de Nysschen's attempt to turn a structural disadvantage into an advantage for his resurgent brand. Cadillac has many more U.S. dealers than key rivals such as BMW (NASDAQOTH: BAMXF)and Toyota's(NYSE: TM)Lexus brand. That means fewer sales per dealership, on average, which in turn means lower profits -- and that in turn means that the dealers have less incentive (and cash) to invest in upgrading their facilities and levels of service.

Continue Reading Below

Practically speaking, GM can't just dump a bunch of its dealers. That would require big payouts (or messy litigation, or both) and generate a lot of ill will. Instead, Project Pinnacle sorts the dealers into tiers based on sales volume, though dealers can opt to move to a higher tier. Higher-tier dealers are required to meet stricter standards in return for bigger payouts from GM for hitting sales targets.

There are five tiers. Creed said that "significantly more than half" of the dealers opted for a higher tier than the ones they were initially placed in by sales volume. But some did opt for the lowest tier, reserved for dealers that sell fewer than 100 new Cadillacs a year. That level turns the dealership into a "virtual showroom" with no new cars on site. De Nysschen has said that a virtual showroom is a low-cost way to give Cadillac a sales presence in areas where rivals have no nearby stores.

Creed didn't say exactly how many dealers opted not to join. But he did say that dealers representing 98.7% of Cadillac's U.S. retail sales volume signed up for Project Pinnacle before the deadline at the end of September, and that most of the holdouts were "very small stores."

Dealers chose the program over buyouts, but they aren't happy about it

Project Pinnacle has been controversial with dealers since it was first announced, and it appears that many dealers signed up for the program under protest.

Dealer groups have said that the plan gives big benefits to the largest stores in the best locations, leaving smaller dealers at risk of being put out of business. A National Automobile Dealers Association survey of Cadillac dealers earlier this year found that 87% of them thought that Project Pinnacle's real purpose was to eliminate hundreds of smaller Cadillac dealers.

De Nysschen responded to the controversy last month by offering the 400 smallest dealers a one-time cash payment of up to $180,000 to give up their franchises and walk away, if they preferred not to make the upgrades required by Project Pinnacle.But it appears that few if any dealers took him up on the offer.

Why this could be a problem for GM down the road

Turning Cadillac into a serious competitor to the German luxury brands is a big priority for GM CEO Mary Barra. GM's board approved a $12 billion overhaul of the brand, including a slew of new products, in hopes of making it a major profit center comparable to GM's hugely profitable sales of pickup trucks in the United States.

That overhaul included hiring longtime Audi and Nissan executive de Nysschen to run the brand. So far, de Nysschen has proven to be an inspired choice, unafraid to take bold steps to reshape both Cadillac's products and its brand image.

But de Nysschen has made it clear that his plan is a long-term one that will require near-term patience from stakeholders. Barra and GM's board seem willing to give him that patience, but dealers have been frustrated by a sales slump caused in part by (much-improved) new products that came with higher price tags.

Project Pinnacle added to their concerns. But simply put, GM needs Cadillac's dealers to play ball if this brand transformation is to succeed. I think the biggest and most important dealers will. But the smaller ones could continue to be a challenge -- and it's possible that GM won't be able to avoid the messy and expensive process of parting ways with them. Project Pinnacle may be a mostly done deal, but this drama isn't over.

A secret billion-dollar stock opportunity
The world's biggest tech company forgot to show you something, but a few Wall Street analysts and the Fool didn't miss a beat: There's a small company that's powering their brand-new gadgets and the coming revolution in technology. And we think its stock price has nearly unlimited room to run for early in-the-know investors! To be one of them, just click here.

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.