September 5, 2022 – General Motors’ strategy to buy out Buick dealers not wanting to transition to an all-electric future is good news for the brand and its dealers.

The automaker introduced its plans to Buick dealers on Friday (kudos to Mike Colias of the Wall Street Journal for breaking the news). The move follows Buick’s announcement in June that it will be a fully-electric vehicle brand by 2030.

Initial reaction from a few industry people is decidedly more negative. They see it as another sign GM is planning to eliminate its dealers and move to a direct-to-consumer or agency-like model. 

And for good reason. The OEM-dealer relationship can be adversarial. Often, the business goals of dealerships and manufacturers are not aligned. Historically, dealers have had sound reasons to mistrust their manufacturer-led initiatives. 

But GM’s play here is not to eliminate its Buick retail network or move toward selling directly to consumers. Instead, the strategy is to improve the overall profitability and value of its dealers long-term while providing an exit for dealers not wanting to invest several hundred thousand dollars in an EV future. 

GM’s playbook for Buick is similar to its Cadillac strategy from two years ago. In 2019, GM had 882 Cadillac stores (153 are exclusive). The automaker spent $274 million buying out approximately 300 of its dealers who opted for the exit plan. Today, there are 562 Cadillac stores — 158 are exclusive. Cadillac is also transitioning to an all-electric brand by the decade’s end. 

Let’s look at the numbers. 

Buick has approximately 1,960 dealers (only 13 standalone stores), most of whom are dualed with a GMC franchise. In 2021, Buick stores averaged 7.6 sales per month. In the first half of 2022, that number had dropped to just over four monthly sales. GMC franchises are averaging just over 25 sales per month in 2022. 

Overall, the 41 automotive franchises from all U.S. automakers averaged 35 sales per month in 2021, with Toyota in the lead with more than 136 and Fiat at less than one. Buick ranks 30th. 

Yes, the chip shortage has reduced sales for each automaker. But Buick’s numbers in 2019 — before Covid and the chip shortage — were not much better than they are today, with its stores averaging 8.6 sales per month. (NOTE: Dealership data is from Automotive News).

Buick must reduce its dealership count to improve its sales per franchise numbers. Doing so will improve profitability in the future. (I’m talking about long-term profitability for when new-vehicle prices begin to normalize. Dealership profitability is at an all-time high due to the lack of inventory, which has led to record transaction prices. And no one knows when that dynamic will change).

Higher sales per franchise also mean higher valuations for a brand’s dealerships. In both the Kerrigan Advisors Blue Sky Report and Haig Partners Haig Report (two must-reads if you’re considering buying or selling a dealership), Toyota dealerships command the highest blue sky multiples of all the non-luxury brands. They are double the valuation of Buick-GMC franchises. 

It is true, numerous factors impact a store’s blue sky value, and each buy-sell transaction is its own book. But the overall correlation with sales per franchise numbers is clear.  

Within the next few years, both Buick and Cadillac should see the value of their franchises improve. Of course, we’re making some big assumptions: that GM’s EV strategy is successful, that consumers will buy EVs, and that Buick and Cadillac will produce vehicles customers want.

The strategy is likely favorable for dealers who want to continue selling Buick and Cadillac and are willing to invest in the future EV. 

What about the dealers who decide the investment is too much? 

Preparing a dealership to sell and service EVs requires much more than just adding a few battery chargers. That investment can be costly. 

In December, a Capital Automotive Real Estate Services team presented a report at the AUTOVATE conference showing dealerships may have to spend up to $650,000 or more to create EV-ready facilities. Dealers will have to invest in new vehicle lifts and forklifts to accommodate EV architecture, battery containment facilities, level three chargers, and a new electric infrastructure.

When you’re selling only four vehicles a month, even investing $100,000 is tough to swallow. 

The good news is, GM is not forcing its Buick dealers into a “take it or leave it” scenario. Over the next three months, each Buick dealer will receive a buyout package specific to their store. Yes, there will be dealers negotiating for a better deal. But, dealers opting to exit, will generally be satisfied with their packages. 

And over the next few years, the remaining dealers should see their valuations increase. 

The other dynamic here is that Buick dealers choosing to continue selling Buicks are showing they are buying into GM’s EV strategy. And as the industry moves forward into an EV and connected era, the OEM and dealer relationship will have to be more partner-focused and less adversarial. 

GM’s play is not to eliminate its dealer networks. If that were its strategy, GM would shut down Cadillac and Buick and then re-enter the market as EV-only brands without dealerships. Or it would rip up its current franchise agreements and force dealers into becoming delivery agencies. And the dealers not wanting to play that game would be left without an exit package. 

That strategy is fraught with risk with nasty court battles, class action lawsuits, and bad press. It is a far better play to reshape its retail networks with fewer dealerships, albeit ones that buy into the EV strategy and are willing to partner in the new future.