For Cadillac dealers, no push, but a way out

DETROIT -- Most of Cadillac's larger U.S. dealers are on board with the brand's controversial new incentive program, Project Pinnacle. But most smaller dealers haven't signed up yet, and at regional meetings to discuss the plan, some of them asked for a way to just get out instead.

So last week, Cadillac responded with buyout offers from $100,000 to $180,000. Rather than make what could amount to a sizable investment in the name of elevating Cadillac's brand image and customer experience, those dealers can simply take the check and walk away.

The offers might not seem like a lot of compensation for all that dealers have poured into their businesses over the years. That's in part because Cadillac says it isn't trying to push dealers out; it's just offering a simpler, cheaper path. At any rate, Cadillac said, the 400 dealers being offered a buyout are contributing little volume to the brand as it tries to catapult itself back into the top tier of the luxury market.

The eligible dealerships accounted for 43 percent of Cadillac's U.S. retailer network in 2015 but only 9 percent of the brand's sales. They averaged just 25 units -- roughly two a month -- vs. 192 for the other 525 dealers.

Cadillac President Johan de Nysschen says enrolling in Project Pinnacle would help those smaller dealers improve their business and become more profitable, but it won't be painless.

"This is going to be a long, arduous and challenging journey and certainly not one for the faint-hearted," said de Nysschen, whom General Motors hired in 2014 to revitalize Cadillac. "Some people may choose to make life a little easier than what lies ahead."

The offers have a median value of $120,000, de Nysschen said. All of the eligible dealers sold fewer than 50 new Cadillacs to retail customers in 2015, and all but six have other GM franchises. For 290, Cadillac represents less than 10 percent of their overall business, de Nysschen said.

They will have until Nov. 21 to decide whether to take the money. They would then have to wind down by the end of 2017.

Richard Sox, a lawyer in Tallahassee, Fla., who represents dealers, said his Cadillac clients aren't interested in the offers. "The vast majority of the 400 dealers are dualed with other GM brands, and they must have the Cadillac business to make the entire enterprise profitable," Sox wrote in an email. "What is being offered would not come close to covering the hole that would be left in covering dealership overhead."

De Nysschen, while acknowledging that Cadillac has too many dealers relative to its chief rivals, said he would be pleased if nobody took the deal, as long as everyone staying with the brand is fully committed to making it succeed.

But his plan to do so has come under fire from some dealers and state associations. With a week to go until the enrollment deadline on Friday, Sept. 30, he said 474 dealers -- representing 83 percent of Cadillac's sales volume -- had signed up. Up to 80 of those can now elect a buyout instead.

Those figures mean that only one in five buyout-eligible dealers have enrolled in Pinnacle, compared with three-fourths of larger dealers, showing the quandary that smaller stores find themselves in.

One larger dealer who hasn't signed up yet is Randy Farnsworth, owner of Randall Buick-GMC-Cadillac in Canandaigua, N.Y. Farns-worth, whose store sold 89 Cadillacs last year, said he expects to sign up this week but is reviewing the program again before doing so.

"I'm gambling that I can actually grow that business," Farnsworth said.

"I understand their vision," he said. "The question is, do I share it? I always try to find a positive way to move forward. They're the manufacturer. They hold the cards, and they hold the deal."

The program, which begins Jan. 1, overhauls how Cadillac distributes incentives to its dealers by separating stores into five tiers based primarily on sales volume. Larger stores can earn bigger margins by meeting the most stringent standards, while the smallest stores would have more relaxed requirements but be barred from stocking vehicles on-site, instead having customers order vehicles through a virtual-showroom approach.

Aside from delaying the enrollment deadline once to Sept. 30 to let dealers get a better understanding first, de Nysschen has firmly stood by the program, which he says is aimed at creating a customer experience more befitting a luxury brand. He said accusations that Cadillac would be breaking various franchise laws are "based on misinterpretation."

"Every single Cadillac dealer will have the potential to earn significantly higher profits than they do today," he said. "I continue to be confident that we have a very feasible, dealer-friendly and customer-friendly program which certainly will be to the benefit of the brand."

Cadillac plans to contact dealers eligible for the payout in October. The amount of money they are offered is based on a formula accounting for their size and performance.

De Nysschen declined to discuss Cadillac's internal estimates of how many dealers would agree to the payout or the cost to the company. Based on the median figure of $120,000 he provided, the maximum cost would be about $50 million.

The loss of a large number of dealerships would hurt Cadillac's sales initially, de Nysschen said, but he expressed confidence that those remaining would make up for the lost volume in the long term.

Cadillac was the nation's leader in luxury-brand sales for decades until 1997. Since 1999, the title has been owned by either Lexus, BMW or Mercedes-Benz.

Cadillac now ranks No. 6 among luxury brands, and its U.S. sales have fallen 6.2 percent through August this year. c