Analysing the effect of agglomeration economies on the financial performance of South African automotive dealerships

Abstract

The occurrence of urbanisation around the world is an ongoing phenomenon with ever-increasing importance for businesses who look to keep-up and exploit external economies of scale which emerge as a result of the gradual increase in the proportion of people living in urban areas. Urbanisation economies and, to a lesser extent localisation economies, emerge as a result of this increase in urban populations – making it imperative for businesses to strategically plan for the effects of urbanisation, in order to remain competitive. This study focuses on one of the factors associated with a gradual increase in people residing in a specific area: Agglomeration economies. It is historically evident that the automotive industry has frequently agglomerated in areas where the benefits of co-location might be enjoyed – from the automotive factories in Detroit (colloquially known as “Motor City”) to the ‘auto-rows’ which line most cities (co-located automotive dealerships). The automotive industry has historically benefitted from agglomeration economies. Through review of relevant literature, it is evident that these agglomeration economies, specifically urbanisation and localisation economies, effectively promote heightened performance in entities which seek to exploit them and a firm should certainly be cognisant of these benefits when deciding where to locate geographically. The main objective of this study was to analyse the extent to which supposed agglomeration economies affect the financial performance of South African automotive dealerships. The results proved that there is an impact on financial statement line items which are presumably most closely related to geographical location. Specific expense line items, generally linked to staff costs, as well as absolute sales figures all showed a positive trend in urban dealerships compared to rural dealerships. The net effect on the financials of the dealerships, however, did not seem material enough for this to single-handedly determine the location strategy of dealerships. It would be prudent for dealers to at least incorporate the aspect of agglomeration economies into their strategy setting process as a factor to consider, along with the other numerous relevant elements, in deciding where to locate geographically.