Announced last Friday, the buyout offers 400 U.S. Cadillac dealerships — or 43 percent of the brand’s installed dealer base — as much as $180,000 per dealership. Stores receiving the offer sell 50 or fewer new Cadillac vehicles per year, representing around 9 percent of total Cadillac sales.
The potential maximum buyout cost to Cadillac could be $72 million, but some are estimating that the actual cost will be closer to $50 million. So, why is GM and Cadillac willing to spend big bucks to close down a sizable chunk of the Cadillac dealer network? Here’s our take.
1. No Dealers Are Being “Closed”
Before we get into the core of this development, it’s vital to note that Cadillac isn’t closing the stores in question. Instead, it’s offering an optional buyout to those dealers that are not willing or not capable of making the necessary investments associated with Project Pinnacle — Cadillac’s new retail initiative.
2. Too Many Dealers But Too Few Resources
At the heart of the matter is the fact that Cadillac, as it currently stands, has way too many dealers.
Compared to its direct rivals in the prestige luxury space — BMW AG, Daimler AG’s Mercedes-Benz, Audi AG and Toyota Motor Corp’s Lexus — Cadillac has roughly three times as many dealerships in the United States, a circumstance that has profound impacts on the operations of the brand and its dealer network.
Reducing dealer count will definitely result in a smaller footprint and geographical reach, but the stores that remain end up with a higher sales through-put (read), which normally results in fatter margins. These higher margins typically lead to higher revenue and, when run well, profits, thereby leading to more willingness by dealer principals/owners to invest in upgrades, like the physical improvements initiated by Project Pinnacle, which addresses address staffing, service and other operational details on the retail level.
By contrast, a higher amount of dealers results in fewer sales per dealership and lower revenue with slimmer margins, resulting in dealers incapable of investing in their own stores or marketing operations.
Having fewer dealers is especially vital when considering Cadillac’s sales volume, which is consistently lower than that of its direct rivals. In fact, over the last decade, Cadillac sales have fallen far behind BMW, Mercedes and Lexus, all of which sell twice as many cars as Cadillac.
|Brand||Jan 2016 – Aug 2016 U.S. Deliveries|
Cadillac’s lack of SUV and CUV/crossover vehicles in a market hot for such models has widened the sales volume gap even further. Cadillac President, Johan de Nysschen, is addressing Cadillac’s paramout need for crossovers, with at least three new crossovers models due to join the lineup prior to 2020.
3. More Cadillac-Only Focus At Retail
Another important element to note is that a large percentage of dealers that have been offered the buyout have other GM franchises in the same or adjoining buildings, such as those from Chevrolet, Buick, or GMC. Those other franchises typically sell in higher volumes and therefore receive higher levels of attention than lower-volume Cadillac stores.
By contrast, stand-alone Cadillac dealers — like most that sell Mercedes-Benz, Audi, BMW and Lexus — have a clear-cut focus on marketing, selling, and servicing those vehicles, rather than treating those sales as an incremental addition to sales of other vehicles. The nature of having most dealers focused solely on Cadillac for their bread-and-butter operations, along with used vehicle sales ops common to nearly all U.S. automotive dealerships, should result in a welcome cultural change at the retail level. And (some of) the dealers who aren’t all about Cadillac might see the buyout offers as a burden off their shoulders.
4. Reducing Field Support Costs
In addition to healthier and more profitable dealers, having fewer outlets will also enable Cadillac to reduce field support costs. This means that it will need to hire and train fewer district sales managers, district service managers, zone managers, and the like (decreasing costs) while enabling the remaining staff to increase their focus on the outstanding stores (enabling higher levels of quality).
5. Inreasing Advertising Support
Having a smaller, more focused dealer network will also enable more effective use of Cadillac’s ad dollars, as its advertising budget will be more concentrated, thereby enabling higher ad spend per DMA (designated market areas).
Trimming the dealer count will also naturally move some sales volume to the remaining dealers, thereby making them more profitable. In turn, those dealers would theoretically have more funds to allocate to marketing and advertising than they did before. Though exceptions do exist, the smaller Cadillac dealers rarely did much advertising to drum up sales, since their focus is on higher-volume Chevy, Buick, or GMC vehicles.
6. Simplified Logistics And Inventory Management
Fewer dealers also brings the rather obvious reductions in cost associated with logistics and inventory management. Plus, there’s no need for virtual showrooms or local inventory stores, which were ideas Cadillac was toying with in the past in order to address inventory-related issues experienced smaller dealers.
All things considered, we see the buyout offers as a positive for all involved: Cadillac trims its dealer count that’s more in line with the market in which it competes, while dealers who aren’t particularly enthusiastic on investing in or otherwise focused on their franchises get a way out, and some cash to boot.
And, as future Cadillac models begin to arrive over the next several years, they will go hand-in-hand with the Project Pinnacle retail network restructuring and associated updates. Sounds like a good plan to us. What about you? Sound off in the comments.