It’s not often that an entire market gets disrupted. We’ve seen this happen in the past few years in the motor retail industry and I think the biggest changes are still to come.

Disruption doesn’t happen overnight. Even in the tech space, it takes a while. In traditional industries, it can take a decade or more.

WeBuyCars (WBC) has managed to do it in two decades. With eight warehouses, the company buys around 8,000 cars per month and employs 1,200 people. That’s not bad for a business that was started with humble capital by a teacher who had just returned home from working in London.

WBC is a hybrid wholesale model, with around 40% of sales going to dealerships and the rest going to individuals. I find this model fascinating, especially as I am a petrolhead who has spent many years trawling the classifieds.

How it used to be

You owned a French or Italian car, or perhaps a Volvo. You were in for a bad time.

Dealerships laughed at you as you walked through their showrooms of white Volkswagens, wondering what you might get for your baby blue Citroen. Even if you were buying another car, the trade-in offers were so low that you either couldn’t do the deal or you had to take a huge knock.

If you asked them to buy your car outright, the offers were even worse. As I came out of university, I was once offered R10,000 for an Alfa Romeo that I sold privately for R50,000 the following week.

There was a time when if you were emigrating, you were in even more trouble. There’s nothing more attractive to opportunistic buyers than a Gumtree advert proclaiming: “urgent sale” as “I’m emigrating next Friday – car must go!”

When last did you see one of those adverts in the classifieds? Yeah, me neither.

The market was screaming for a price floor

The WBC model allows us to learn something about financial derivatives and the concept of liquidity.

WBC is willing to buy basically anything (anything!) and the company has effectively granted a put option to every car owner in South Africa. A put option is the right (but not the obligation) to sell an asset to whoever gave you that option. It’s a liquidity mechanism that enables you to get out of an asset quickly and painlessly. They are frequently used in B-BBEE deals and private company investments.

Obviously, WBC hasn’t physically entered into a derivatives contract with the entire country, but the economic impact is similar. No longer does an emigrating South African need to suffer through offers R50k below trade-in value.

WBC will happily buy the car and allow the seller to do the deal just a few days before leaving the country. Bliss.

I can confirm that private sales have dried up on local classifieds. Gumtree is now full of dealers advertising cars. Occasionally, a private seller is trying to get a slightly better deal than WBC would offer, going through the pain of selling a car to try get R80k instead of the R70k that WBC offered.

With an enormous balance sheet behind it, especially under the recent ownership of Transaction Capital, WBC can buy and keep buying. They might lose money on a few cars, but they make money on most of them. More importantly, they can crush the independent dealers.

This brings me to my next point…

A fat and happy market gets disrupted

Some years ago, it wasn’t rocket science to make money by selling used cars. With a decent margin on each car and frequent stock turn, used car dealers with decent processes in place and a willingness to treat customers fairly were able to make proper money.

Things have changed. To quote Douglas Cherry from Snapt in Ep4 of The Startup Junto, the market participants were “fat and happy” and therefore ripe for disruption.

The impact of WBC’s market entry is that consumers no longer accept lowball offers from dealers. There’s a guaranteed selling price available from WBC and anything above that is simply a bonus. These days, an offer from a dealer is met with “WBC offered me more than that” rather than “ok, I’m desperate, I’ll take it!”

If we assume a retail margin of say 30%, WBC is now happy to capture 10% or 15% of that margin. Because they operate a warehouse model and use Dekra reports on every car so consumers know what problems they are buying up-front, they focus on selling lots of cars rather than maximising margin on each one.

Where does this leave traditional motor retailers?

Let’s use another industry as an analogy. Specifically, I want to discuss Makro and the sale of general merchandise.

Makro sells to individuals and businesses from warehouse locations, so that’s similar to WBC except they sell TVs rather than cars. The stores are focused on being highly price competitive and the levels of service (and length of queues) reflect that.

If you have a decent idea what you’re looking for, Makro is a great place to buy the stuff you need and a few things you didn’t need. You won’t get truly expert advice on anything, but they will always have stock and you’ll get a decent deal.

Warehouse models can’t be beaten on price and range, so they must be beaten on service and specialist knowledge (Hirsch’s) or convenience and distribution (Takealot). Motor retailers need to wake up and realise that WBC will drive them into the ground unless they find a way to compete in a way that makes sense.

Convenience and distribution will only help in smaller towns. WBC can’t open a warehouse in every region as there won’t be sufficient volumes. Traditional dealerships will survive in smaller towns although the cost of transporting a car isn’t so prohibitive that they won’t be impacted by WBC.

There are over twenty Makros in South Africa and currently there are only eight WBC warehouses. It’s not unreasonable to think that the WBC footprint could easily double from here. Dealers that aren’t currently being impacted by WBC will feel the heat soon.

In urban areas or where WBC already exists, dealerships will need to compete based on service. They will suffer lower margins because they need to pay more for cars, but they may achieve better selling prices by offering expert knowledge and creating an enjoyable experience for more discerning clients. This suggests that premium cars are a more sensible focus area than Hyundai i10s, which WBC can sell all day long.

Most of all, I expect independent dealerships to become smaller. There will be fewer salespeople and overheads. The owners will work harder and do more of the selling themselves, giving clients the personal touch.

There’s more pressure coming

Motus (JSE-listed automotive business spun out of Imperial Group) has bought GetWorth, another warehouse-style business that claims to use artificial intelligence to improve the buying and selling process. The battle is on.

Motus and Transaction Capital have enormous balance sheets and they will throw money at this problem. WBC and GetWorth will fight as elephants and the independent dealers will be trampled in the process.

If I owned a car dealership right now, I would be lying awake at night thinking how to amend the strategy. I would probably visit a Hirsch’s or a successful independent pharmacy to figure out how they have managed to survive in markets with similar characteristics. Barloworld has reduced its exposure to the motor retail industry and that sends a message about the challenges that are coming.

Luckily, I don’t own a car dealership, but I do own shares in Transaction Capital instead.

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