Please ensure Javascript is enabled for purposes of website accessibility

Will Cadillac Dealers Complicate General Motors' Plan to Boost Profits?

By John Rosevear – Sep 7, 2016 at 6:21PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Cadillac's U.S. dealers aren't happy with a GM plan to upgrade the level of service they provide. That could throw a wrench into an important part of CEO Mary Barra's effort to boost GM's profits.

 

Cadillac president Johan de Nysschen with a CT6 sedan in New York last year. Cadillac's U.S. dealers are unhappy with de Nysschen's plan to reorganize them, and some have taken the issue to his boss, CEO Mary Barra. Image source: General Motors. 

The U.S.'s largest state association of new-car dealers is pushing General Motors (GM -2.67%) to delay or change an aggressive plan to restructure its Cadillac dealer network, according to a new report in trade publication Automotive News.

To GM investors, that may seem like auto-industry inside baseball. But what GM is trying to do with Cadillac is an important part of a plan to increase its profitability, and this is a potential wrench in the works. 

What's happening?

The California New Car Dealers Association has written a letter to GM CEO Mary Barra, saying that it has heard from 52 Cadillac dealers who have "serious reservations" about a plan to divide Cadillac's 925 U.S. dealers into five tiers. 

The letter to Barra follows efforts by dealer groups in other states to push Cadillac president Johan de Nysschen to delay or change the program. For many current Cadillac dealers, the plan would mean radical changes that they fear will hurt their sales and profitability. 

What's the plan? 

Cadillac president Johan de Nysschen says that the plan, called Project Pinnacle, is his way of making the most of Cadillac's large dealer network. 

GM's luxury brand has far more U.S. dealerships than its German-brand rivals, something that has long been seen as a disadvantage. More dealerships mean fewer sales per store, meaning that each store is less profitable. That in turn means that the dealers are less motivated to reinvest in their businesses.

The result is that many feel that Cadillac dealers don't deliver the same level of service or polish that other, more profitable luxury-car dealers can. 

Because it would be politically very difficult (and very expensive) for GM to close half or more of its U.S. Cadillac dealers, de Nysschen came up with a plan to turn the large number of dealerships to Cadillac's advantage. 

Project Pinnacle divides the dealers into 5 tiers based on their projected annual sales. Each tier gets a scaled level of service standards and incentives for hitting various targets. Stores in the very lowest tier would have no inventory of new Cadillacs at all. Instead, they would provide service while hosting a "virtual showroom" to make sales. 

The goal of the plan is to significantly upgrade the level of attention and service provided to Cadillac customers, while making sure that even small dealers can provide that attention and service profitably. That's an important component of the larger plan to upgrade Cadillac's brand image, which in turn is a key part of Barra's plan to boost GM's global profitability over the next few years. 

Why are the dealers upset with it?

Dealer groups say that Project Pinnacle would give a lot of benefits to large stores that happen to be in locations deemed desirable, leaving smaller Cadillac dealers at a disadvantage -- and at risk of being put out of business entirely. The plan would require significant (read: expensive) changes to many dealers' facilities and delay payments of important incentives, they say.

De Nysschen disagrees. He has said repeatedly that the program makes it easier for smaller dealerships to meet Cadillac's standards and generate more profit. He has emphasized that the program was developed jointly with Cadillac's national dealer council, in close consultation with key dealerships. 

De Nysschen insists that Project Pinnacle is about using Cadillac's big dealer network to best advantage. But a National Automobile Dealers Association survey of Cadillac dealerships found that 87% of them think that Project Pinnacle's real purpose is to eliminate many of Cadillac's smaller dealerships. 

What's likely to happen here?

Project Pinnacle had been scheduled to begin on Oct. 1, but the company has delayed it until Jan. 1, 2017, because of dealer feedback. 

But the dispute could get ugly before then. The California dealers' letter to Barra made a point of saying that Project Pinnacle violates at least eight California state laws. De Nysschen disagrees, describing Project Pinnacle as "legally bulletproof." It's possible that assertion could be tested in court before long. 

John Rosevear owns shares of General Motors. The Motley Fool recommends General Motors. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

General Motors Stock Quote
General Motors
GM
$39.38 (-2.67%) $-1.08

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
351%
 
S&P 500 Returns
115%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 11/29/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.