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A trimmer Cadillac network? Just a bit

The average U.S. Cadillac dealer sold 176 new vehicles last year, while BMW and Mercedes-Benz stores sold more than 900 apiece.

By the end of next year, almost 1 in 5 Cadillac dealers are planning to give up their franchise, with hefty buyout payments in hand. But Cadillac will still have about twice as many stores as its German rivals.

That may be why, two weeks after the deadline to accept a buyout, General Motors was still negotiating with some dealers who were on the fence about sticking with Cadillac as it aims for an all-electric lineup around the end of this decade.

"They are so over-dealered compared to their competitors that it's going to take far more than 20 percent of the stores to close for the remaining Cadillac dealers to become more competitive with their luxury peers," said Alan Haig, president of Haig Partners, a buy-sell advisory firm in Fort Lauderdale, Fla.

A nearly 20 percent reduction won't necessarily raise sales or profitability for remaining dealers by a similar amount, as most of those quitting likely have low-volume stores. "But it's probably the starting point to be competitive head-to-head" with other luxury brands, Haig said.

For any brand, the closure of about 150 dealers would be significant. However, given the size of the buyouts — generally $300,000 to $500,000, but in some cases much more — and the six-figure investments Cadillac is requiring for dealers to become EV-ready, it might seem surprising more aren't walking away.

The buyout terms prohibit dealers who even discussed one with GM from talking about it publicly. Ted Smith, president of the Florida Automobile Dealers Association, hasn't heard from anyone who is taking the money but said most dealers do want to sell and service EVs.

"I've never met a car dealer that didn't want to sell a car. I don't care if it's powered by a squirrel and a rubber band," Smith said. "My dealers are definitely pro-EV, and I'm so tired of hearing that they are not. They are motivated and prepared to sell vehicles that the customer wants."

Cadillac will give dealers who take a buyout a quarter of their cash upfront, with the balance paid after the franchise is terminated and other requirements are met, according to people familiar with the terms. Most dealers can continue selling new Cadillacs until the end of next year, a few months before the 2022 Lyriq electric crossover hits the market. They can sell used Cadillacs through 2024, unless their particular agreement states otherwise.

Some dealers, predominantly those with large stores, said they were unaware of the buyouts, which were first reported last month by Automotive News.

"There were many Cadillac dealers that had no idea this was even happening until I called them to ask, 'So, have you gotten your offer? What does it look like?' And their answer is, 'What offer?' They had no idea," said Stuart McCallum, who leads the automotive consulting and accounting practice for Withum accounting firm in Princeton, N.J.

Cadillac first contacted at least one dealer about the option Monday, Dec. 7, a week after the Nov. 30 acceptance deadline, according to a lawyer who asked not to be identified.

Some unresolved negotiations were escalated from dealer representatives to more senior GM officials, and Cadillac has made counteroffers, the lawyer said. Cadillac says it notified every dealer. Mahmoud Samara, vice president of Cadillac North America, told Automotive News in November that the brand updated dealers on its EV plans and informed them of the need to invest around $200,000 to sell and service EVs.

"The team is using a formula that is well thought out and calculated and agreed upon by our dealer council," spokesman Mike Albano said last week.

For dealers who are still undecided, "we want to answer those questions to the fullest. We understand how big this decision is, how emotional it is. In the end, it is their decision."

Shrinking network
By 2022, Cadillac will have cut its U.S. retail network roughly in half since 2008, when it had more than 1,400 stores. Nearly 500 disappeared shortly after GM's bankruptcy, many terminated involuntarily.

As of Jan. 1, Cadillac had 882 U.S. franchises, of which 153 were standalone operations, according to the Automotive News Data Center. That means more than 700 theoretically could remove the Cadillac emblem from their storefronts and move forward with other brands.

But such a setup also makes it less risky to continue with the brand, said George Karolis, president at The Presidio Group, a dealership advisory firm in Georgia and California.

"When you are able to dual with a couple other brands and have shared expenses, have lower overall cost ... you can sell your units and still do well," he said.

Average monthly new-vehicle volume at Cadillac dealers rose from fewer than 10 in 2008 to about 15 last year, but that's still well below the 78-a-month average for BMW and Mercedes stores in 2019.

"The cost is so significant for a luxury facility with luxury equipment and luxury finishes," said Erin Kerrigan, managing director at Kerrigan Advisors, a buy-sell firm in Irvine, Calif. "The business model doesn't work" at one new vehicle every other day.

Making the choice
Many large dealers have invested in state-of-the-art Cadillac facilities, so adding EV equipment might make more sense.

But many Cadillac stores are in small markets where EVs may be less attractive, reducing the return on costly upgrades.

"Dealers in smaller markets worry that if you take away a franchise, it's like having a stool that had four legs now has three," McCallum said. "How soon until they have a stool that only has two legs?"

Especially for dealers who have had Cadillac in their family businesses for generations, the decision to adapt to the EV era or walk away with a check is emotional.

"If you're a dealer that's being offered $1 million to take the buyout, what are you going to do when you're done?" said Stephanie Brinley, principal automotive analyst at IHS Markit. "They're making very personal decisions. They don't necessarily want to give the business up."

GMC approach
Cadillac's approach to electrification sharply contrasts that of GMC. That brand's first EV, the Hummer pickup, is due out in early 2022, and so far only about half of its approximately 1,700 U.S. dealers have agreed to make upgrades to sell and service the truck.

But GMC dealers who aren't interested in EVs will not be offered a buyout, the brand said last week.

There is a "very different strategy with GMC … and with Buick as well, so no need to do that," said Duncan Aldred, vice president of global Buick and GMC.

GMC's electrification rollout will take longer than Cadillac's, and GMC isn't aiming to eliminate gasoline-powered vehicles from its lineup in the foreseeable future — nor does it seem to want fewer dealers.

For Cadillac, Brinley said, the buyouts are about "being on board with electric vehicles as well as having the number [of dealers] that they want."

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