People who buy Ferraris typically fall into one of three categories, quipped Enzo Ferrari in his autobiography: “the sportsmen, the fifty-year olds and the exhibitionists”. Each of these customers is quite distinct, he observed, but in one respect they are no different to any other customer looking to purchase a car. Regardless of whether they drive away in a Ferrari or a Ford, nobody ever seems to enjoy the process of buying a car. Pushy salesmen, unexpected fees, missed delivery dates: all of these add up to an experience that most people describe as somewhere between miserable and unbearable. In a recent survey of car buyers in the UK, two out of five said they found purchasing a car more stressful than getting stuck in a lift.
Impressions are even worse when it comes to used-car salesmen, whose reputation precedes them in all the wrong ways. If there is one industry that millions of consumers would happily see disrupted, or at least reformed, it is car dealerships.
This potential has been on our minds recently as managers of SAINTS. We have been looking at several companies around the world whose business is advertising cars for sale. Auto Trader in the UK, CarGurus in the USA and Scout24 in Germany.
At face value each of these companies is little more than the online equivalent of the classified advertising section that once appeared in the back of the newspaper. These can make attractive businesses to invest in as they tend to be “winner-takes-most” marketplaces where buyers attract sellers and vice versa.
There are also good reasons to believe these businesses are still in their infancy, with years of potential growth ahead of them. When researching a vehicle, buyers today spend most of their time on the internet. Yet one estimate suggests that for every $100 spent on advertising cars, less than 15 per cent is online. That mis-match could lead to substantial growth in digital advertising revenue over time.
Where these businesses become most intriguing, however, is their potential to improve car dealers’ behaviours. The most advanced online car sites, including the names above, have started analysing the data generated by their websites and apps. They have discovered that dealers who respond quickly to customer enquiries enjoy dramatic increases in sales.
Dealers who respond to questions within two hours convert far more enquiries into purchases than dealers who don’t.
Much like Amazon’s infinitely long bookshelf, these companies also dramatically increase availability, which again makes customers happier. Rather than the used-car salesman pushing a buyer into whichever vehicle they happen to have on the forecourt, the same salesperson can search for an exact match online and turn a profit putting the customer into her or his perfect vehicle. Whether that’s a silver Volkswagen or a red Ferrari.
Car dealers appear to be taking notice. There is anecdotal evidence of dealers transferring their best sales people onto digital enquiries, and other dealers are undertaking training courses based on data sold by these companies revealing what makes customers happy. It turns out that no-one enjoys sitting in a dealership for hours on end, ticking boxes on pages of paperwork. Who’d have thought it?
As potential investments these companies are not without their question marks. Potential competitors are emerging such as CarWow in the UK, which has an interesting new business model. It operates a reverse marketplace, where customers specify the car they want to buy online, following which dealers quote for the sale. CarWow provides video content to help buyers decide the right car for their needs, then coordinates quotes from dealers while taking a commission.
Manufacturers like Volvo meanwhile are experimenting with selling direct to consumers, as Tesla has pioneered. Could these sales cut out the middlemen altogether? Sceptics say no, arguing that most buyers want to undertake a test drive before putting down their money. Tesla’s recent experience contradicts this though, with tens of thousands of customers putting down a deposit before its latest vehicle was launched.
All of which serves to highlight that, as with all the companies we invest in for SAINTS, the management team and board at each company, and the quality of the strategic decisions they take in an evolving industry, will be far more important determinants of their long-term success than, say, the near-term price-earnings multiple on their shares, or which grew fastest last year. A large part of our focus as stock pickers is evaluating the people running these companies. We want to invest in great people, not just great businesses.
One of the jobs of a long-term dividend investor is to think about the income generators of tomorrow. Although none of these companies pay substantial dividends currently, given the capital-light nature of their business models and the potential growth ahead of them, they hold the prospect of excellent dividend generation in the years ahead. That’s why all these companies are squarely on our research agenda for further investigation as to whether selling cars might potentially drive future dividend payments for the SAINTS’ portfolio.
The views expressed in this article are those of James Dow and should not be considered as advice or a recommendation to buy, sell or hold a particular investment. They reflect personal opinion and should not be taken as statements of fact nor should any reliance be placed on them when making investment decisions.
This communication was produced and approved on the stated date and has not been updated subsequently. It represents views held at the time of writing and may not reflect current thinking.
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Any stock examples and images used in this article are not intended to represent recommendations to buy or sell, neither is it implied that they will prove profitable in the future. It is not known whether they will feature in any future portfolio produced by us. Any individual examples will represent only a small part of the overall portfolio and are inserted purely to help illustrate our investment style.
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James was appointed Co-Manager of The Scottish American Investment Company PLC (SAINTS) in 2017. He joined Baillie Gifford in 2004 on the Graduate Scheme and became an Investment Manager in our US Equities team. Previously, James spent three years working at The Scotsman newspaper, where he was the Economics Editor. He is a CFA Charterholder, graduated MA (Hons) in Economics-Philosophy from the University of St Andrews in 2000 and MSc in Development Studies from the London School of Economics in 2001.