South Africa’s automotive industry is a major source of job creation and a large contributor to the local GDP. However, the onset of the COVID-19 pandemic in 2020 and the resulting economic downturn caused many dealerships to close their doors. Today, those that remain have struggled to keep up with increased operational costs in the wake of interest rate hikes and decreased purchasing power from consumers. 

“We have experienced ten interest rate hikes in the past two years alone. These have been felt by automotive dealerships who’ve had to contend with elevating monthly rental costs on their premises and lowered consumer demand for vehicles,” explains Wayde Carroll, Head of Automotive for Galetti Corporate Services (GCS) - a division of Galetti Corporate Real Estate.

The National Association of Automobile Manufacturers of South Africa’s (NAAMSA) CEO Confidence Index for Q1 2023 reflected the struggles. 20% of respondents reported a decline in domestic new vehicle sales and 43% expressed a negative sentiment on new vehicle business conditions.

Carroll is deeply attuned to these challenges, having worked closely with dealerships to evaluate the commercial real estate side of their operational expenses. He shares that while dealerships have pursued various avenues to stay financially afloat, the potential cost-savings unlocked by regearing their lease agreements or reducing occupied space are often overlooked. “Innovative solutions are required to help get the industry back on its feet.”

Automotive industry primed for growth

“The good news is that there are clear indicators of recovery in the sector. Reports of increased sales volumes and reinstated confidence by investors could soon lead to an industry resurgence,” says Carroll.

He points to the NAAMSA statistics for July 2023, that show a 4.46% year-on-year increase in domestic vehicle sales. “Vehicle exports have also increased by 9% year-on-year and total domestic vehicle production numbers have increased by 13.95% from July 2022.”

To add to this, various economic forecasters are predicting imminent rate cuts now that inflation has dropped to 4.7%. “Lowered interest rates are the most significant contributor to consumer demand for new vehicles and we expect to see this translate to increased dealership sales and demand for larger premises to accommodate the new stock.”

This positive industry outlook is reinforced by the recent announcement that Sanlam Private Equity has purchased a majority stake in Danny’s Auto Body Parts - a premium aftermarket automotive parts supplier. “Sanlam has stated their confidence in the industry’s high potential for economic returns over the next five years, creating a value chain of opportunities for investors, dealerships and landlords to unlock when it comes to repurposing their premises. GCS is well-placed to help realise these opportunities and propose innovative usage of space to maximise cost-savings,” Carroll adds.

Dealership space is being reimagined

To save on occupation costs, dealerships such as Mercedes South Africa are reducing the square footage of their premises and instead focusing on the customer experience. “This trend is termed a ‘destination concept dealership’ and comprises of a much smaller space, about 250m2, that can fit two to three cars.”

“This type of dealership can be described as a premium outlet with luxury finishings and is often located within a trendy neighbourhood rather than in a commercial or industrial area,” says Carroll. 

Although a smaller premises can result in significant cost-savings, these dealerships still require a safe location to house their high-value vehicle stock. The innovators among these dealerships are storing their additional stock (i.e. stock that’s not on display) at their affiliated Accident Repair Centres.

“While this approach can be financially beneficial in that it reduces monthly rental costs, dealerships must take into account the security and insurance-related considerations associated with housing expensive vehicles off-site,” cautions Carroll. 

Technology integration offers a way forward

Other dealerships are tackling the space-saving conundrum by integrating technology into the showroom. 

“Companies like Snapcell offer automotive software and video tools that allow dealers to build trust and engage with their customers without ever having to meet them,” says Carroll. He shares the emerging technology trends revolutionising dealerships around the globe:

Virtual Reality (VR): Customers can use immersive VR headsets to explore a vehicle’s interior and exterior, configure their desired features and enjoy virtual test drives.

Augmented Reality (AR): AR applications overlay digital information onto physical vehicles in the showroom. Here, customers can access more information about vehicle specifications by simply scanning a code.

Interactive Digital Configurators: These allow customers to customise their preferred car models in terms of colour, trim, accessories, and features, providing a visual representation of how the chosen options will appear on the vehicle.

“With the prospect of recovery on the horizon, the clear path forward involves rethinking premises and embracing technology. The automotive sector's ability to adapt and capitalise on these opportunities could well determine its future success,” Carroll concludes.