General Motors has announced its latest program to attempt to bring the Cadillac brand back to prominence. As usual, the factory has put substantial focus on dealership operation and performance instead of product! Regardless, the Cadillac Pinnacle Program, like so many per car incentive-based programs, is filled with potential violations of state franchise laws.
Indirect Termination of Small Volume Dealers
Just like during the GM bankruptcy proceedings, the Cadillac division has seemingly again come to the conclusion that the brand cannot be successful unless it shrinks its dealer body. Instead of attempting to pay low volume dealers to obtain a voluntary termination of their franchise, the Pinnacle Program sets these dealers up for failure. The Program places dealerships in 5 different tiers based upon planning volume. Dealers with a planning volume of less than 100 have a “choice” to remain in Tier 4 which includes certain facility requirements or move to Tier 5 which allows the dealership to maintain a service-only facility and conduct only “virtual” sales operations.
Why would a dealer with an existing sales and service facility want to move to a service-only facility? Cadillac has created an incentive program which attempts to force these low volume dealers to move to the Tier 5/service-only option by placing Tier 4 dealers at a competitive disadvantage. The Pinnacle Program will pay Tier 5/service-only dealers 1.0% of MSRP for meeting the very minimal facility standards required while Tier 4 dealers are paid only 0.2% for meeting more costly facility standards, including maintaining a sales facility, sales staff, reception, signage, etc. To make matters worse for the Tier 4 dealers, the Pinnacle Program pays higher volume dealers in Tiers 1 through 3, greater per vehicle incentives than both Tiers 4 and 5 – from 1.25% to 3.0% of MSRP.
Putting these incentive percentages into dollars, a dealership will receive the following on the sale of a $70,000 Cadillac vehicle:
- Tier 1 (PV = greater than 700) = 3.0% or $2,100
- Tier 2 (PV = 400-699) = 2.0% or $1,400
- Tier 3 (PV = 100-399) = 1.25% or $875
- Tier 4 (PV = less than 100) = .2% or $140
- Tier 5 (No PV) = 1.0% or $700
Based upon these incentive payment amounts, the service-only dealership will have a $560 per vehicle price advantage and the Tier 3 dealership will have a $635 per vehicle price advantage over the Tier 4 dealership that has a planning volume of less than 100 vehicles. The situation gets exponentially worse if the Tier 4 dealership is in a market where the next closest Cadillac dealership has a planning volume of more than 400 (Tier 2) or 700 (Tier 1) as those dealerships will have a $1,260 and $1,960 price advantage, respectively.
“[T]he Cadillac Pinnacle Program, like so many per car incentive-based programs, is filled with potential violations of state franchise laws.”
What does Johan DeNeyshen expect a small volume dealer to do with their sales facility, sales staff and signage if they were to opt to move from Tier 4 to Tier 5? It may sound good for a small volume dealer to sell vehicles using a virtual sales kit. However, the virtual sales approach does not compensate the dealer for the investment made in their sales facility and staff. What about facility lease commitments? The dealer is going to have an empty facility he or she can’t pay for. Even if the dealer had some other use for their sales facility, it is not at all clear that a dealer is permitted to use the sales facility for another function while performing Cadillac service at the facility. Likewise, it is highly unlikely that the dealership could maintain a viable virtual sales operation. After a dealer invests $10,000 for each virtual sales kit, how likely is it that a customer is going to purchase a car from a dealer with no vehicles in inventory when they can visit a neighboring dealership to choose the vehicle of their choice, test drive it and take it home? Not only will the customer not have to wait for their vehicle to be ordered from the factory but they will be able to purchase it for over $1,000 less when you factor in the CPO and Sales Objective bonuses for which the Tier 5 dealership is not eligible.
Classic Two-Tier Pricing
As described above, the facility brand element payments increase on a per car basis with each tier (based on the dealership’s planning volume). This is classic two-tier pricing when one considers the relative cost of compliance with the facility requirements at each tier. It does not appear that those requirements change dramatically from Tier 3 to Tier 1 and certainly do not justify the difference in total annual per car incentives of $210,000 to over $857,500 (difference in per car incentive of $525 to $1,225 multiplied by 400 to over 700 cars annually based on planning volume).
A dealership’s planning volume is a function of the size of the market it serves. Thus, there is no rationale for paying higher per car incentives to dealerships with higher planning volumes. The planning volume is something entirely out of the dealer’s control. Yet, dealership’s that happen to be fortunate enough to be located in a more densely populated market are being rewarded at significantly higher annual incentive payments than dealerships in relatively less populated markets. Those larger volume dealerships should be rewarded with the SAME per car incentive as all other dealers. In doing so, the larger volume dealership still receives a greater aggregate amount of incentives over the course of the year. This greater aggregate amount of annual incentives should serve to compensate those larger dealerships for any added facility and personnel costs. In contrast, a higher per car incentive creates an unlevel playing field when the larger dealership is competing against the smaller dealership for a customer’s business. By definition, the larger dealership has hundreds of dollars more to work with on each transaction.
Although the Pinnacle Program allows dealers to move to higher planning volume tiers to qualify for higher per car incentives, those dealers must incur higher brand standard requirements with which smaller dealers may not find practical. In many cases, dealerships would have to add display space which may not be available in the dealership’s current facility or personnel which are entirely unnecessary considering the size of the dealership’s market.
Sales Objective Incentive
Unlike the Brand Elements incentive, the Retail Performance incentive is paid at the same percentage of MSRP depending upon the level of achievement of the dealership’s assigned sales objective. Except for Tier 5 dealerships, each dealership receives a per car incentive of .50% of MSRP for reaching 90%-99.9% of the quarterly sales objective, 75% of MSRP for reaching 100% – 109.9% of the quarterly sales objective and 1.50% of MSRP for reaching 110% or more of the quarterly sales objective. Of course, the big question is how Cadillac intends to set dealers’ objectives. If objectives are not set in a fair manner, some dealerships will inevitably have a pricing advantage over others.
State Franchise Law Protections
The Pinnacle Program violates state franchise laws in most states. In particular, most states prohibit a manufacturer from paying per car incentives which are not practically and reasonably available to all dealers. For many Tier 4 dealers (planning volume of less than 100), it is not at all practical to move to a Tier 5/service-only designation in order to obtain the higher per car incentive at that level. As discussed above, most dealers have made a financial commitment on their sales facility which cannot simply be canceled. Dealers have a return on capital investments that must be obtained and, in most cases, lease payments which must be made under long-term binding lease agreements. With regard to obtaining the even greater per car incentives at Tiers 1 through 3, it is not practical for a Tier 4 dealership to obtain the higher per car incentives due to the greater facility requirements without the corresponding market demand. Not only is it not practical, it is impossible as Tier 4 dealerships are not permitted to move to those Tiers under the Pinnacle Program rules. For all these reasons, the Pinnacle Program flagrantly violates the rights of Tier 4 dealerships under the franchise laws prohibiting discriminatory per car incentive programs.
Similarly, for Cadillac dealerships in Tiers other than Tier 4, the Pinnacle Program runs afoul of the franchise laws prohibiting discriminatory per car incentive programs. In most cases, it will not be practical for a Tier 3 dealer to move up to Tier 1 or 2, or for a Tier 4 dealer to move to Tier 5, because the size of the dealership facility and dealership lot would not accommodate the facility brand requirements of those higher tiers. Likewise, the expenditure for those increasingly more enhanced requirements would not be practical because, by definition, the customer demand in the dealership’s market does not justify those expenses.
We have also heard from dealers assigned to the highest incentive Tier (Tier 1) who cannot qualify for those incentives because they cannot meet the facility brand element requirements. These dealerships are primarily in dense metropolitan markets with strict zoning limitations which prevent the dealership from complying with expansion or remodeling requirements of the Pinnacle Program.
Many state franchise laws allow a dealer to protest any adverse modification to the franchise. Without question, the Pinnacle Program is an adverse modification for Tier 4 dealerships as well as any other dealership which finds itself competing for sales against a dealership with a planning volume that allows it to receive higher per car incentives or a dealership which cannot otherwise meet the brand element requirements within their assigned Tier due to circumstances out of the dealership’s control. The adverse modification protection contains a time limit (i.e. 30 – 90 days) in which dealers must file a protest or the protest is waived.
Next Steps for Cadillac Dealers
If a Cadillac dealer finds itself at a competitive disadvantage under the Pinnacle Program, or in the case of Tier 4 dealerships, finds itself forced to give up its sales operations altogether, the first step should be contact experienced motor vehicle franchise legal counsel to obtain assistance in writing a letter to Cadillac objecting the Pinnacle Program and setting out the ways in which it is harmful to the dealership. The next step, again with the assistance of experienced counsel, is for Cadillac dealers to determine what state franchise laws are triggered by the Pinnacle Program and to take all necessary action to preserve the dealership’s rights under those laws – to include filing an adverse modification protest within the time frame required under the law.
Author: Richard Sox
Richard Sox is a lawyer with the firm of Bass Sox Mercer PA (formerly known as Myers & Fuller PA).