“Let me show you the picture, you’ve got to see the picture”. I walk through the office to a boardroom with a large window, and realise the picture is actually a view of the floor of the largest WeBuyCars showroom just outside Centurion. A thousand cars lined up, ranging from Porsches to Citigolfs; this is a car supermarket, filled with shoppers walking around inspecting cars, salesmen zooming around the floor on Segways, the walls lined with banks to provide finance and even a coffee shop for shoppers to relax in. “This is our Dream Come True, this is what 20 years of hard work looks like” Dirk van der Walt tells me, the co-founder of WeBuyCars. You can see the passion and energy still burning bright in Dirk’s eyes when he looks over the floor. This is the story of WeBuyCars and how they went from trading single Toyota Corollas at a time to trading over 5,000 cars every month around the country.
We pick up the story in 2001, with Faan returning from the UK at the age of 30 to join his brother, Dirk, in taking his (rather successful) hobby of trading bikes and turning it into a fully-fledged business. Problem was, they had very little money, and therefore had a very low risk tolerance per transaction. What to do? “Initially, we couldn’t afford to lose any money on a deal, so we only traded in cars we were most confident in the value of, being Toyota Corollas”. No surprises with the car choice, but this does provide an early illustration of the focus that they grew WeBuyCars with, and while it may seem trivial at this early stage, it is one of the keys to their success.
So if you’re driving around buying Corollas from potential sellers, how do you convince them that you are legitimate, while at the same time getting deals done quickly? You carry around bags of cash, literally. “In those early days, we used to go to many second hand car conventions and we got to know a few of the (trustworthy) dealers. We would arrive at someone’s house who we knew was thinking of selling, would hop on a quick call with a dealer and confirm what they would pay for it, and then we would literally pull our offer price out of a rucksack in the boot of our car. That was one way to make sure we closed the deal!” Great story, but also a great way to de-risk the transaction by guaranteeing a buyer before even making the purchase.
This strategy took them to an inventory of 80 cars and their first lot in Pretoria around 2010. As I’m sure you’ve noticed, they really weren’t re-inventing the wheel up to this point. They were taking a process, buying and selling cars, and adding an element of focus and convenience to the process — principles they still have today. By being willing to drive to potential sellers, making sure they only traded in cars they knew and getting an off-taker for the car lined up a lot of the time, let them buy with confidence and build a reputation of trust that would prove important in the way they grew their business – especially in contrast to the negative reputation that second hand dealers (rightly or wrongly) were saddled with. The trust led to their marketing being done by their early customers, which in turn led to buyers coming directly to them and the organic start of Wesellcars. The only structural difference between them and other dealerships was that they didn’t have a repair shop as part of their process and generally only sold cars with a cosmetic clean up – focus once again being the name of the game.
Digging the moat
The next key point seemed obvious to me but Dirk says was really important to their long term growth — keeping all their profits in the business (and generally using any spare cash to pump advertising). They paid themselves modest salaries and drove basic cars for a long time, Dirk proudly told me. This is one of the principles made famous by Warren Buffet and is espoused ad nauseum in modern business books. But back when Dirk and Faan were doing it, it wasn’t so common and resulted in them being able to invest in capital equipment which gave them the structural advantage to making large scale a possibility.
This capital investment came in the form of their own technology platform, systems and physical warehouses, and led to what would become a super powerful fly-wheel to drive the crazy growth they experienced. They could have successfully remained a 100 -200 vehicle lot, but Dirk and the team were ambitious and wanted to do more than that. This meant creating the right technology enablers to scale up their model of buying cars on-site scale – walking around with bags of cash will break down once you start hiring additional buyers. They were fortunate to be around at the boom of the internet and e-commerce era (something Dirk openly acknowledges), but there are plenty of stories of companies that were around and didn’t take advantage of it, so kudos to the team for investing in the technology early to enable the scale they were looking for. Many of the large dealerships could have scaled to WeBuyCars’s level at that stage, but none of them saw the opportunity that technology would bring and that ultimately proved the difference. Dirk credits Faan with building out a lot of these systems and creating the framework for growth. Their current call-centre that manages leads, the software that crunches the data and provides the price range they are willing to pay for cars instantly (remember the buyers are usually sitting at the customers house/office at this point – all WeBuyCars transactions take place at the clients residence/office – super convenient), the back-end to manage the payment and paperwork of each sale, all built to facilitate one goal – same day transaction and a happy customer.
This technology platform is what let them keep growing, and grow they did. From a lot of 80, to selling 5,000+ vehicles a month, their 10 employees in 2010 grew to almost 900 today. This shows the value in getting the base right to kick off the boom. For many years they grew steadily, constrained by capital and systems, but as soon as the base was right they grew exponentially.
So now that WeBuyCars is up to over 5,000 vehicles a month, does that just make them big or does it give them a strong competitive moat in South Africa? I would say undoubtedly the latter, with the strength of this moat mainly due to (i) their size and (ii) their data source, both of which feed each other in a powerful flywheel.
Driven by data
To explain this, I must take a quick diversion to mansplain the basics of statistical distribution (which I promise is relevant). When you sell a small number of a similar thing, there can still be a lot of variance in the price (due to random factors), but if you sell enough of them, it becomes predictable what you will sell them for on average. Once you get to this level, you have a predictable distribution of the selling price. You get various distributions and they get quite complicated, but for now there are only two other important points to think about, how tight or wide the distribution is and how often extreme deviations from the average take place. Imagine that you sell a thousand 2014 model Toyota Corollas, with basic specs and 75,000km on the clock – the prices you sell them for will all be pretty similar. This is called a tight distribution, as all the selling prices are tightly clustered around the average (the mean). Contrast this to selling a thousand Mercedes S-classes, where the price can vary wildy from car to car – a wide distribution with many of the values quite far from the mean. Back to the Corolla example, it is also highly unlikely any of them will sell for 80% less or 80% more than the average (which could well happen with the S-classes), which is called having a short tail. Long tails are dangerous when you’re basing your business model on distributions, and having short tails with a tight distribution makes your business nice and predictable.
So back to WeBuyCars. They’re now buying and selling over 5,000 vehicles a month – more than enough to get (i) an overall distribution of buying and selling prices across the fleet and (ii) to even break that down per model and in some cases per year and mileage. This is important for two reasons. First, they don’t have to make money on each deal “If we are making money on each trade we are leaving too many deals on the table” explains Dirk. This logic is similar to the property rental market, where it is known that if you are 100% let, you aren’t charging enough rent and there is a level where you maximise rent and minimize vacancies – much the same way there is an equilibrium between spread made on transactions for WeBuyCars and the number of transactions they enter into.
Secondly, because they are trading in so many vehicles per month, they have far more data than any of their competitors on the actual value of vehicles. The more data they get, the more accurately they can make their pricing models, and the more they can offer to buy certain vehicles (given they have a lot of data on the selling price). If they’re offering more for vehicles, they’ll do more deals, which feeds the pricing model, and on it goes in a beautiful fly-wheel. Once this fly-wheel has been running for a while, it makes their moat ever wider – their competitors just don’t have the same data that WeBuyCars has.
It is no surprise then that the team at Naspers (through OLX) got excited about the prospect of buying them. A profitable, sizeable business with very slick and advanced systems, stable and a forward thinking management team coupled with a data flywheel makes them very hard not to like. As long as they never run out of capital, their business has good prospects in SA. Naspers as buyers can pretty much guarantee that the capital will never run dry, reducing that risk.
Not done yet
So what will get in the way of them continuing to grow from here? Like any founder-led business, the transition into large corporate status runs the risk of killing the culture and removing the focus – especially when the founder had final say on all decisions in the company. In this regard, Faan and Dirk are fairly unique as well. I asked Dirk what his personal focus was for the business right now and he surprised me by pulling out various documents he’s been working on regarding the company’s vision, mission and operational philosophy. These have always been in his head, but as the company grows ever larger he wants to make sure they go beyond just him and becomes ingrained for many years to come. This is not a glamorous task and one a founder with a large ego would pass on to someone else – a big mistake in my view. Obviously he does plenty of other things, but the fact that he takes the company’s mission, vision and operational philosophy so seriously makes me think it will endure well beyond his and early management’s tenure.
Threats from new entrants like Weelee and Carzar, have grown in the last couple of years. These companies offer a compelling alternative – letting price discovery take place through a bid process rather than a single offer. In my view though, these companies have made a fundamental mistake of underestimating the incentives in play on the demand side of the equation on their platform – that of the dealers. Although they have plenty of dealers on their platform, these are all small dealerships relative to WeBuyCars – in the 50 – 250 vehicles per month range. As such, they do not have as clear cut a distribution as WeBuyCars and cannot afford to make losses on individual trades as often as WeBuyCars can. As such, the incentive for most dealers is to use Weelee/Carzar as a channel to drive volumes to their dealerships by bidding high and then pushing the price down once the customer is in their shop. Weelee/Carzar would argue that they guard against this by removing dealerships that behave in this manner consistently, but I think this force is too fundamental to be regulated like that. I could well be wrong, but I don’t see Weelee/Carzar gaining much market share in the years to come.
After the interview, as I was taken on a guided tour around the office, I couldn’t help but be struck by the symbiosis they have created between the old practice of buying and selling cars in person, with a very modern technology platform to facilitate this old practice being consistently achieved at scale. This transition, facilitated by the same management team, reminds me of the Netflix story, where their first bet was delivery of DVDs through the post, before making their own business redundant by facilitating the DVD purchase through the internet and later by streaming the content instead of physically delivering it. Being able to reinvent your company like this is while you’re performing well is rare, and something the WeBuyCars team have not only been able to achieve in the past, but is also something they constantly focus on. “Brands of the future will live in the internet, where customers have a real connection and share meaning with the brands they interact with. We want to be the company that our customers associate with trust, are proud to be associated with and we are constantly working at moving more and more in that direction”.
To me, this doesn’t sound like a company that is likely to go the way of Kodak or Blockbuster, but more likely one that will keep growing and shaping the industry in which they operate. WeBuyCars is rarely held up as shining light of South African business, but after spending an afternoon with Dirk and understanding the size and complexity of the operation they run, I couldn’t help but think that they should be.
A big thanks to Dirk for answering a cold Linkedin email and chatting to me for a full afternoon! All the opinions expressed in this post are mine alone and do not reflect the views of Dirk, Faan or WeBuyCars.