Why would Cadillac dealers go virtual?

DETROIT -- Cadillac's plan to have nearly half of its dealerships essentially convert to service centers and sell new Caddys through "virtual showrooms" is radical, controversial and perhaps groundbreaking.

It's also completely voluntary.

So why would any of those 412 low-volume Cadillac stores agree to go virtual? After all, they've been happy for decades selling Cadillacs in small numbers, as a lucrative sideline to their busier franchises.

The answer lies in the new payment system that was concurrently presented to hundreds of dealers at recent meetings in California.

Put simply, whatever incremental profit those mom-and-pop operators are earning by selling a few dozen new Cadillacs a year could vanish under the new system.

"The margins will be untenable" for most small dealerships, said one high-volume Cadillac dealer who attended.

Cadillac's Project Pinnacle does away with much of the profit margin now built into new-vehicle sales. For example, it eliminates the holdback, those lump-sum payments made to dealers as a percentage of the sticker price. Floorplan credits are to be reduced. The new system ditches a popular program that pays qualifying dealers up to $700 for each vehicle they order.

Dealers can recover that money -- and potentially more -- on the back end by complying with new standards aimed at elevating the customer experience. They'll have to hit new sales and customer-satisfaction targets. They must offer roadside assistance and courtesy service loaners. They'll need to have a minimum staff of Cadillac salespeople and in some cases a dedicated receptionist.

Officially, even the smallest dealers can qualify for the highest payments. But many of those hoops likely will prove too costly or unworkable for smaller stores. Can a dealership selling 50 or 75 Cadillacs a year afford to keep three or five sales staffers? Can a small showroom packed with Chevys afford to keep multiple Cadillacs on display?

Low-volume dealers who talked to Automotive News seemed more bothered at the prospect of losing the Cadillac presence and identity at their stores than the loss of incremental business. As a whole, though, Project Pinnacle seems to hold promise for Cadillac President Johan de Nysschen's bid to raise the brand's stature on several fronts:

• Customer experience: Cadillac's remaining dealer network would consist largely of big, urban and suburban dealerships that are more reliant on Cadillac for their livelihoods and have more to gain by raising service levels.
• Service footprint: One big advantage of Cadillac's sprawling dealership network is that it provides service locations for customers in small communities where luxury rivals are mostly absent. That would remain intact.
• Inventory: Having smaller dealerships forgo new-car orders could help shrink the size and age of Cadillac's overall inventory -- those stores typically see their inventory get stale because they have trouble matching it with customer demand. And the end of those cash payments per vehicle order reduces the incentive to overstock.
• Certified pre-owned: Increasing CPO sales is a key component of Project Pinnacle. That likely will result in Cadillac dealers snapping up more off-lease and off-rental vehicles, which should over time help residuals.

Cadillac execs are working on the details of Project Pinnacle, which will roll out this fall. Dealers who spoke to Automotive News were apprehensive about such a wholesale revamp to how they get paid. But many also expressed confidence that they can earn their fair share.

One Cadillac dealer in the Southeast, who sells around 100 Cadillacs per year, said he plans to invest whatever it takes.

He said, "We're cocky enough to think we can hold up against the big boys."