General Motors (NYSE: GM ) has set an ambitious goal of reaching a 10% pre-tax margin in North America in the next few years, up from less than 8% today. Revitalizing Cadillac -- its top luxury brand -- is a key part of GM's plan to boost its North American margins. To that end, GM is introducing a variety of new Cadillac models.
Until recently, this was catalyzing impressive sales growth at Cadillac. However, Cadillac's momentum fizzled at the end of 2013. In the first quarter of 2014, Cadillac sales declined more than 7% in the U.S. While Cadillac has introduced several highly regarded new models, luxury car buyers don't seem particularly interested in what the brand is offering today.
The promise of new vehicles
During 2012, Cadillac launched two brand-new vehicles for the 2013 model year: the XTS full-size sedan, and the ATS compact sedan. The XTS was designed to appeal to loyal Cadillac customers who wanted a roomy luxury car. By contrast, the ATS was designed to compete directly with the popular BMW 3 Series and other German compact luxury cars.
The addition of the ATS and XTS sedans vastly broadened the Cadillac portfolio, which was down to just three models in early 2012 (the CTS mid-size car, the SRX crossover, and the Escalade SUV). This paid big dividends last year, as Cadillac became the fastest-growing, full-line, luxury brand in the U.S.
In 2013, U.S. Cadillac sales grew 22% to 182,543 vehicles. Combined, dealers sold more than 70,000 ATS and XTS sedans last year. This helped make up for a sharp drop in CTS sales and roughly flat sales for the SRX and Escalade.
Malaise sinks in
Cadillac's sales momentum began slowing in Q4 last year, and in the last few months deliveries have started to fall. While the ATS and XTS both put in solid first-year performances, they appear to have peaked early.
Year to date, ATS sales are down 25% and XTS sales are down 17%. A small decline could be explained by bad weather or the timing of deliveries, but these double-digit declines indicate a broader problem.
Falling sales of the XTS suggest that upgrade demand from Cadillac loyalists has been fulfilled, and that the market for a classic Cadillac "boat" is very limited. Meanwhile, weak ATS sales point to the difficulty of poaching customers from the German luxury brands.
For example, BMW 3 Series and 4 Series deliveries (which BMW reports together) are up 18% this year. BMW has sold nearly 25,000 of them, whereas Cadillac dealers have sold just 7,318 ATS sedans in 2014. To be fair, the Mercedes C-Class has not fared as well -- sales are down 26% year to date -- but Mercedes has still sold over 17,000. That's more than double the Cadillac ATS sales total.
The new wave of new vehicles
Cadillac has introduced another two new vehicles in the past six months or so. A redesigned CTS mid-size car went on sale last fall. In 2012 and 2013, the launch of the new ATS and XTS sedans cannibalized CTS sales. Last year, CTS sales were more than 40% below the 2011 level.
While the new CTS has gotten very good reviews, sales have been sluggish thus far. Through March, sales were down slightly year over year, and well below the peak sales level from a few years ago.
I was previously worried that the CTS could cannibalize ATS and XTS sales, but the reality has been even worse; sales are down for all three models in 2014. Last month, the CTS returned to growth, but sales figures are still far short of anything that could be called successful.
Lastly, Cadillac's brand new ELR plug-in hybrid coupe went on sale at the beginning of the year. The ELR was never expected to be a big seller. GM aimed to sell about 3,000 this year, according to Automotive News. However, dealers delivered just 180 in the first quarter!
The slow start can be attributed in part to low availability, which is now improving. However, the ELR also has a pricing problem. With a base price of more than $75,000, the ELR costs just as much as Tesla Motors' higher-performance Model S. Consumer Reports reviewers liked the ELR's design, but concluded that the price was way too high.
Interestingly enough, the only Cadillac model to post a sales increase last quarter was the SRX crossover: one of the oldest vehicles in Cadillac's portfolio. The SRX is benefiting from the surging popularity of small utility vehicles. However, in a case of bad timing, small utilities will be the last part of Cadillac's vehicle portfolio to be refreshed.
Cadillac is expected to offer a redesigned SRX for the 2016 model year. GM is also reportedly planning to introduce two more Cadillac crossovers around 2017 (one that is smaller than the SRX and one that is larger).
Assuming that crossovers are still in vogue three years from now, Cadillac could be in good position to challenge the luxury segment leaders then. However, that's a long time to wait, and a lot could change between now and 2017.
It's impossible to say for sure why Cadillac's sales have hit a brick wall. Whatever the cause, it's becoming increasingly clear that even with a completely refreshed car lineup, Cadillac is not a serious challenger to BMW, Mercedes, and Lexus.
The ATS, CTS, and XTS mainly seem to be competing with each other right now. Meanwhile, the luxury crossover market is booming, but GM chose to focus on updating its cars before its SUVs and crossovers. As a result, it may take several years -- and new crossover model introductions -- for Cadillac to mount a credible challenge to the luxury segment leaders.
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