December 5th, 2020 by Jennifer Sensiba
The Wall Street Journal reports that about 150 out of Cadillac’s 880 dealers chose to stop selling the brand’s cars to avoid getting into EV sales. Costs for dealer upgrades may have been the deciding factor, but dealers continue to be an obstacle to electrification.
Cadillac Lyriq SUV. Image courtesy of Cadillac.
As we reported previously, Cadillac dealers were given a choice by General Motors: either pony up for dealership upgrades to sell only electric vehicles, or accept a buyout of $500,000 to $1,000,000 to give up their franchise. Dealers choosing to continue selling the brand need to upgrade repair equipment, install electric vehicle chargers, make other upgrades, and get training to sell what will become GM’s first electric-only brand. Now we know what happened — about 17% of Cadillac’s dealers went for the buyout option.
The deal doesn’t kick the dealers out immediately. For one thing, they’ll get access to new Cadillacs until the end of 2021, and will be able to get prime deals on used Cadillacs at auctions until 2024.
According to The Drive, lower volume dealers wouldn’t lose out much because the buyout offer equals around what they’d make in 5 years. According to the Wall Street Journal, many of the dealers that opted for the buyout were the smaller ones, and often had a dealership selling multiple GM brands. With volume of Cadillac sales only a small portion of their overalls sales, paying for major upgrades was definitely the most expensive option.
On the other hand, attorney Len Bellavia told Automotive News that a franchise alone is worth more than $300,000 to $500,000 and for dealers looking at the long haul, the money involved in the buyout offer is simply not enough. “If I’m 50 years old and planned on keeping [the dealership] for 20 more years and making half a million a year, how does $300,000 to $500,000 make me whole? Any franchise on its worst day could be worth over a million dollars, unrelated to how many cars the dealer is selling.”
There are other reasons that going for the buyout might have seemed like the better option, beyond the upgrade costs or the dealer not being very invested in the future of the brand.
For one, dealerships tend to make their profits on the service side of the operation. While there are dealers who turn a healthy profit on their sales, most use the sales floor as a loss leader. Raking in warranty repair money, selling customers service contracts when they buy a car, and various other service work is what keeps most dealers afloat while new car sales are just a way to get people in the door and develop a relationship. Even used cars tend to be a better money maker than new sales.
With electric vehicles, there’s far less money to be made on service. The amount certainly isn’t zero, as electric cars still have tires that can be replaced, suspension components that need service, and repairs to make under warranty. What hurts the dealers is the lack of maintenance on internal combustion engines. No oil changes will be needed, and the simple gear reducers or other drive unit parts generally don’t need service nearly as often as multi-speed automatic transmissions.
Thus, with lost profits in the most profitable part of the dealer, the buyout looks like a better deal.
Tesla’s continued push into states that currently don’t welcome them may also be a small factor. As we’ve covered before, Tesla cannot operate sales or service facilities in many states because direct sales from manufacturer to customer aren’t allowed under state law. This can make life difficult for Tesla owners.
“But why doesn’t Tesla just franchise dealers?,” one may ask. The answer is that Tesla knew dealers wouldn’t want to sell EVs due to the lost service business, so they decided to stick with direct sales, despite the challenges. If states continue to carve out exceptions for electric vehicle manufacturers to do direct sales to customers, then an EV-only Cadillac franchise isn’t worth what it once was, and that may be one smaller factor in the reason dealers chose to take the buyout.
As my colleague Steve Hanley pointed out, this may all prove to be a good outcome for the Cadillac brand. By thinning out the dealers (especially the “we also sell these” dealers), Cadillac reduces its expenses and helps focus potential customers on the brand itself. This increases profitability not only with reduced costs, but with fewer sales being diverted to the GM brands that are still selling internal combustion models.
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About the Author
Jennifer Sensiba Jennifer Sensiba is a long time efficient vehicle enthusiast, writer, and photographer. She grew up around a transmission shop, and has been experimenting with vehicle efficiency since she was 16 and drove a Pontiac Fiero. She likes to explore the Southwest US with her partner, kids, and animals. Follow her on Twitter for her latest articles and other random things: https://twitter.com/JenniferSensiba Do you think I've been helpful in your understanding of Tesla, clean energy, etc? Feel free to use my Tesla referral code to get yourself (and me) some small perks and discounts on their cars and solar products. https://ift.tt/3jyQ3GM
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