How General Motors Will Boost Cadillac's Prices

The new 2016 Cadillac CTS-V outperforms BMW's M5. But its price is about $10,000 below than that of its German rival. Cadillac's president says closing that price gap could take years. Source: General Motors.

General Motors has a problem: Sales -- and prices -- at its old luxury brand, Cadillac, aren't what they should be.

GM is one of the world's three largest automakers. It sold over 9 million vehicles last year around the world. Its share of the worldwide market for new vehicles is about 9.2%.

But Cadillac's share of the world luxury market is just 3.4%, says brand president Johan de Nysschen.

Here's why that's a problem for GM: Luxury brands account for 10% of global auto sales, but they generate 50% of the auto industry's profits. Right now, Cadillac's sales are low, and its prices haven't been strong.

GM made a huge investment in new products for Cadillac, with the goal of matching or beating the German luxury-car giants. The new cars are excellent, and GM thought it could charge much higher prices. But sales slumped, and de Nysschen had to cut prices earlier this year to help dealers clear out inventory.

GM's sales approach forced Cadillac to cut prices At a conference organized by investment bank J. P. Morgan this past week, de Nysschen explained the problem facing Cadillac now.

As he explained, Cadillac's problem isn't the quality of its products. GM wanted its new Cadillac sedans, the ATS and CTS, to match or beat the best from Germany's luxury-car giants. Achieving that goal meant spending a lot more money than GM normally spends to develop a new car -- so GM spent it.

This slide from de Nysschen's presentation shows why GM is making a huge investment in Cadillac. Source: General Motors.

Most reviewers agree that GM hit its mark. On balance, the two sedans are extremely credible luxury-sport sedans, equal to the best from Germany.

But in order to get approval from the GM hierarchy to spend that much money developing the two cars, Cadillac's product planners had to make some ambitious assumptions about the prices they could get for the new sedans -- and about how many they could sell. So they priced the new Cadillacs likeBMWsand started sending lots of them to dealers.

The problem: The market didn't agree with those assumptions. Cadillac's products may be the equal of BMW's, but its brand strength isn't.

GM's brass felt that the new Cadillacs should be priced like comparable models from the German luxury giants. That was understandable, because -- like those German sedans -- they were expensive to develop and are expensive to build. But not enough buyers were willing to pay those prices. Meanwhile, Cadillac's dealers were getting stuck with growing inventories they couldn't sell.

De Nysschen "fixed" that problem (for now, anyway) by cutting back production and ordering a round of price cuts on the Cadillac sedans back in January. That helped dealers clear out excess inventories, but sales haven't jumped. Through July, sales of the CTS are down 38% this year. The smaller ATS is down 19%.

But it doesn't address Cadillac's real problem, which is that buyers aren't (yet) willing to pay BMW prices for Cadillac's BMW-quality cars. In fact, those price cuts will undermine the resale values of the two sedans, making the problem even worse.

De Nysschen acknowledges that. Right now, he says, Cadillac can't expect to charge BMW-level prices. And it won't until it changes its approach to strengthen the Cadillac brand -- something that might take several years.

"Pushing" versus "pulling" cars to dealersWhat undermined the ATS and CTS is what de Nysschen calls the "push model" of selling cars: GM decided how many cars it would sell and how much it would expect buyers to pay, and then pushed the cars on its dealers and told them to make that happen.

That approach works for Chevy pickups, but it doesn't work in luxury.

De Nysschen's plan, simply put, is to move Cadillac to what he calls a "pull model." For starters, de Nysschen will limit dealer inventories, ideally having just "one car too few," to make Cadillacs seem a bit more exclusive. He'll continue Cadillac's focus on quality -- the quality of its current vehicles is mostly terrific -- but he'll extend that quality focus to the customer's entire experience, where it has been lacking compared to rivals.

Often, GM (and other mass-market automakers) see dealers as their real customers. They work to get dealers to order and sell the right combinations of models. They're less focused on the actual people who buy their cars.

That won't work for Cadillac, and it's why de Nysschen is working to separate Cadillac from GM's corporate decision-making process.

GM's plan for Cadillac will take many years to unfold There's much more to de Nysschen's plan, but it all boils down to those same priorities: Limit supply (and thus the need to discount), emphasize quality throughout the customer's experience, invest in the brand to improve its prestige, and then -- and only then -- boost prices to improve GM's profits.

It won't happen quickly. De Nysschen thinks that the last phase -- what he calls "accelerating Cadillac's prestige" -- won't even get started until around 2021. Between now and then, Cadillac will release a slew of new products and do a great deal of work on its marketing and on its dealer organization. It's a bold plan.

GM is a company that has historically focused on near-term goals, but de Nysschen's long-range plan for Cadillac has the approval of GM's board of directors.

It's real and it's happening. Will it work? De Nysschen noted that Cadillac has already cut its incentive spending, boosted its average transaction prices, and is beginning to see far more younger (Generation X and Y) attendees at its events, thanks to a new marketing push focused on affluent younger buyers.

It'll be years before we know for sure. But it's starting to look like GM might finally have found the right path forward for its old luxury brand.

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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.

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