With inventory improved, Cadillac dealers await product

Cadillac dealers still are digesting the details of Project Pinnacle, a top-to-bottom overhaul of the system by which Cadillac pays them for new-car sales. Outlined at a February meeting in California, Project Pinnacle is scheduled to take effect this fall, tying dealer compensation to various sales, customer-service and other measures.

The Cadillac National Dealer Council worked to ensure two aspects of the program, said Will Churchill, council chairman: That it's voluntary and that it does not include a stair-step component, the system of awarding dealers tiered bonuses for hitting escalating sales thresholds.

"Stair-step programs result in dealers beating their brains out to sell those extra few cars," said Churchill, 39, dealer principal at Frank Kent Cadillac in Fort Worth, Texas. "This is not that at all."

Many dealers attending the convention likely will be eager to hear more about a new, voluntary facility image program, which is being floated just as the paint has barely dried from renovations done under a previous image program.

In the meantime, Cadillac dealers will be launching two key models this spring: The CT6 sedan that began arriving in showrooms in March, and the XT5 midsize crossover, which arrives in April as a replacement for the SRX.

Churchill spoke with Staff Reporter Mike Colias about Project Pinnacle, the vehicle launches and Cadillac's goals for 2016.

Q: How did 2015 shake out for Cadillac dealers?

A: We had a glut of 2014s at the start of the year. Cadillac spent a lot of money to clear the decks. The good part is that by the end of the year, we finally managed to work our way down to a very small inventory number. Unlike the typical GM, when they often make the same mistake year after year, Cadillac understood the problem and rectified it.

Cadillac President Johan de Nysschen has talked a lot about the quality of business getting better: incentives down, average transaction prices up, profits up. That's good for Cadillac, but has it been good for dealers?

What's been really good for dealers is not having the carryover inventory. There are costs associated with keeping those cars longer. A lot of the operational costs have come down as a result of getting the inventories in line. That then has a positive impact on the bottom line.

Inventories have been cut in half from what they had been averaging. How are dealers adjusting? Are they able to have what the customer wants?

It put us more into what we call "selling into the pipeline." So we're selling cars that are coming in that have just been made. That's a change. Before, we had so many cars on the ground, it was like just going to get a gumball.

Now that you've got shrinking inventories, if you want a particular package that could be obscure, dealers aren't ordering that stuff as much. It forces you to order the most popular packages. It puts us into more of an order basis, and that drives margin up.

The Escalade has carried dealers' profits for a year and a half. How are dealers coping now that transaction prices have leveled off?

The gross profits on Escalades have come down. For a long time, Escalade carried the water. Now that it's slowing down from a profit potential, we have two new units, which always garner higher margins. The XT5 and CT6 should be here to save the day.

I would think XT5 is one of the biggest launches for Cadillac in recent years because the SRX has been the volume leader for a long time.

The SRX continues to sell really well. It's been around seven years, and it still garners plenty of sales volume. That said, we've got a lot of people on their third and fourth SRX. They're ready for a new one. There is a lot of excitement around XT5. We're extending leases so that they can get into their new XT5 and not have to get into another SRX.

What does the CT6 mean for the brand and for dealers?

I really think that's going to be the surprise car. That's not just being drunk on the Cadillac Kool-Aid. It's based on the responses I've been getting from clients and people on the street. They're engaged in the car and talking about it, even more so than the XT5. So yes, it's not intended to be this huge volume piece because of its segment. But I think, eventually, it will surprise the industry and garner more volume than anticipated.

Who do you see buying the CT6? 

Who I originally figured would buy it and who's talking about it are two different things. I thought it would play into the clientele who feels that Cadillac kind of left them behind -- the DTS client who bought the big-bodied car and never really liked the XTS. But from what I'm seeing, it's garnering a younger crowd. That's why I think it'll be a surprise. 

How do dealers feel about the pricing Cadillac set for those two vehicles? 

I think they're super impressed with the strategy. The CT6 came in way under what everyone thought it would. With the XT5, Cadillac didn't try to take the price point up too drastically, even though there's a ton of improvements on this next generation. Cadillac has learned from its errors with the ATS and CTS. I think these two new products are priced in the sweet spot. 

It seems to show that Cadillac's strategy is to walk up the pricing over time. 

They've stated that. The old regime would say, "We're not making any excuses; our cars are just as good as BMW, so we're going to price them that way." But that failed to recognize that BMW has a little more credibility right now. 

What do dealers think of Cadillac's recent marketing efforts? 

I think some of them struggled to understand it. But I will say that the new creative that has come out recently helps you to see the thread that connects it all. I think dealers all want Led Zeppelin back. But that's not the direction that [Chief Marketing Officer] Uwe [Ellinghaus] and Johan are going. 

With Johan and Uwe's plan, you've got to have faith that these guys know what they're doing. In the past, we've had engineers or designers who were tapped on the shoulder to be the marketing guy. Of course, you didn't have faith in that situation. But Uwe is a professional marketer. You've got to have a little faith that he knows what he's doing. He has taken some direction from the council on certain things. 

Under Project Pinnacle, a lot of the margin that had been built into the new-car sale -- holdback, floorplan credits, etc. -- is either gone or being reduced, correct? 

I'd say yes, it's been repositioned. The Cadillac dealer council's opinion is we should be paid to sell cars, not paid to take cars. That aligns with Johan's view, and we totally support it. 

I've got to think that new facility plan is rubbing dealers the wrong way because so many recently have completed new showrooms. Should dealers be worried they'll have a new facility plan every time a new top executive comes in? 

For one, it's voluntary. And two, we realized that, which is why it's not part of the margin-delivery plan, the Pinnacle program. Johan has put in a seven-year moratorium, or amortization period, to recognize the investments that already have been made. 

Under the [Essential Brand Elements] program, the money came in the back. Dealers almost had to do it, or they wouldn't be competitive in the marketplace from a cost standpoint. This is all above and beyond the increased earning opportunity. So it is optional. 

For dealers who choose to do it, how much heavy lifting should they expect? 

The analogy I like to use is, on the old EBE program, your best friend was a bulldozer. On this plan, your best friend is a paintbrush or a hammer. The heavy lifting and tearing down of buildings mostly has been done. This is significantly less invasive for the dealer.

Is there anything in the new brand standards under Project Pinnacle that represents a big change in terms of customer service or sales process? 

There's nothing earth-shattering or mega-expensive. But we as the council are still tweaking these details. We've got to figure out, "What's the right formula for your objective?" The program is pretty well set at the 25,000-foot range. Now we've got to get into the 100-foot range and start peeling this thing back. 

Dealers I've talked to seem especially concerned about how that sales objective gets set. De Nysschen has said it will be a collaborative process. 

I think that's his desire. But from a legal standpoint and working with GM, I don't know if they'll be able to have such an open architecture in terms of determining objectives. 

Is there anything different about the way vehicles will be allocated? Dealers often complain that they can't get enough product to hit their objectives. 

I think the key with this program is that it's not a stair-step. It's designed so that every dealer has the opportunity to get the same amount of money. It just depends on their level of commitment to Cadillac, through customer-facing touch points and that sort of thing. Your planning potential puts you on a landing pad, but you can move up the scale to any level that you want. 

I think that's a big difference between the conventional stair-step. That was a big deal for the council to set it that way. And I think that was a big win for the dealers. 

Certified pre-owned sales are a big focus under Project Pinnacle. Why is that? 

CPO a few years ago was a big focus, but then Cadillac sort of took their eye off the ball and lost momentum. Then it was changed, and dealers didn't love it. 

Now, we have a lot of returning leases that start toward the end of this year, going through into 2018. If we don't have a robust CPO program, we don't have a way to dispose of these off-lease vehicles without sending them to auction. And that tends to deteriorate residuals. We as dealers need to be more responsible for our lease turn-ins and keep them out of the auctions so we're not competing with CarMax and others. 

Cadillac has talked a lot about this coming influx of product. But de Nysschen has said that won't arrive until 2018. Is it frustrating for dealers to have to wait in this historically strong market? Cadillac is at a significant disadvantage selling only one crossover. 

As a Cadillac dealer, when we're up against the other guys, and we don't have a full quiver of arrows, it is tough. We get two vehicles this year, but one is a replacement that isn't getting us into a new segment. And the other, the CT6, will play in a small segment. So I think it does put us at a competitive disadvantage. We do have our sights set on '18, when we will have a more robust portfolio. 

If you could have one of these new models that Cadillac has discussed in its plans, what would it be? 

I think it would be a three-row SUV below the Escalade. The SRX is great, but it's only two rows. And the Escalade isn't for everyone.