Despite being largely responsible for the automotive industry's worst year for recalls in the U.S. ever, General Motors (NYSE:GM) managed to convince consumers to keep buying its products in 2014. Sales of all GM brands moved higher in the U.S. last year -- except for Cadillac, which stumbled by more than 6% compared to 2013. That's a huge problem for GM's luxury brand, as U.S. sales represent nearly two-thirds of global Cadillac sales.
As most automotive investors know, it's critical for an automaker to have a global luxury brand -- which is heavily influenced by success in the U.S. and China -- in order to achieve more lucrative top- and bottom-line financial performance. As you can see below, Cadillac significantly trails the three big dogs in the U.S. market in terms of sales, and also posted the worst percentage change in year-over-year results.
Fortunately for investors hoping to ride GM's resurgence from the dark days of its recent bankruptcy, the automaker has a $12 billion plan to help boost sales of its Cadillac brand, and thus its overall profitability.
Where's the weakness?
Before investing $12 billion into improving its Cadillac lineup, General Motors needed to identify the brand's weakness. The result was surprising. Detroit automakers had long been known for producing excellent full-size trucks and SUVs, and it was their heavy dependence on these segments that aided in their ultimate downfall during the recession. With GM's successful history with SUVs, it's surprising that it isn't a strength for Cadillac as well, but it isn't.
Cadillac president Johan de Nysschen told reporters at the North American International Auto Show that Cadillac will put a serious focus on the crossover SUV segment, where only one Cadillac vehicle is currently represented: the SRX. That's a far cry from successful luxury brands: German rival BMW, for example, has five vehicles in the segment; Audi boasts three in its lineup.
What's the plan?
To try to catch more successful luxury brands in a booming luxury crossover segment, GM plans to pour $12 billion into eight new Cadillac models by 2020, and an additional two more after 2020. Three of those first eight vehicles will be SUVs, which should enable GM to turn one of Cadillac's current glaring weaknesses into a strength.
To understand why this is such a big deal, consider this: Luxury vehicles represent roughly 10%-11% of new car sales, yet those same vehicles account for almost 20% of revenues, and an estimated one-third of industry profits. On top of that, SUVs tend to rope in higher pricing and margins than passenger cars. To put it bluntly, luxury sales give a serious boost to automakers' top and bottom lines, and luxury SUVs do that to an even larger degree.
With that in mind, you can see why investors are worried about Cadillac's recent struggles. In fact, looking at the graph to the left, you can see that many U.S. consumers are leaving the luxury Cadillac brand for a non-luxury mainstream vehicle more often than not -- which is just bad business for General Motors, plain and simple.
"We have a defined plan [for Cadillac], and we are going to stick to it," GM CEO Mary Barra said in her new-year statement about GM, according to Forbes. "We realize we have work ahead with the brand, but we will stay disciplined. There was a time when Cadillac stood for luxury."
There's little doubt that Cadillac products have improved in recent years in terms of appearance, performance, and quality, but the automaker still has to tweak its strategy in terms of pricing and placement to complement the better product. With Cadillac's plan to reinvigorate its lineup, and to go back to General Motors' historic strength by rolling out more SUVs, it's a strategy that should certainly help the struggling Cadillac brand by the end of this decade.
Daniel Miller owns shares of General Motors. The Motley Fool recommends General Motors. Try any of our Foolish newsletter services free for 30 days. 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.