Checking under the hood: Carsales.com

Cameron McIntyre is the CEO of Carsales.com — one of the early tech businesses which launched in Australia and is now taking on the world.

I spoke with Cameron regarding their domestic operations as well as the company's future growth options overseas.

Cameron, most of our listeners would be familiar with Carsales. If they haven't transacted or visited the website, we've covered the stock for a number of years. We've held it in our portfolios on and off for many, many years as well, so there's lots of familiarity, but there may be a few stragglers who aren't quite familiar with the business. Can you give us a rundown of the Carsales business and the service you offer?

Yeah, sure. Carsales has been around for 22 years, so for a tech company, we've been around for quite some time. Our purpose in life is largely to help our customers buy and sell cars. Whether those cars be new cars or used cars, every car that one of our customers buys is going to be new to them. Our major purpose in life is to help facilitate that, and to provide our customers with a seamless experience in doing it. They're always getting a result and they're getting a good result in a reasonable period of time, and a lot of what we do here in Australia, we've now taken overseas into many other different markets. At our core, we help people buy and sell cars.

And over that 22 year period, you've actually come to dominate the Australian market, in particular. What would you say is the most prominent source of competitive advantage that has driven that dominance of the local market?

I think there's not one thing, there's probably many, many different things that have contributed to that over a long period of time. One of them being the company that we grew out of was an automotive technology business, so in the very early days, we had the advantage of customer relationship through that business. But as we moved forward, we stepped into things like private to private advertising, we were very focused on getting results for consumers in terms of selling of their vehicles, which helped build our audience, which then helped our dealer customers sell their vehicles.

It was about probably being first to market, having those customer relationships. I think the thing that's helped us at our core for many, many years has been the fact that we've been a company that's been very focused on innovating in the area of the market that we occupy. Always trying to do things differently, always trying to enhance our customers' experience. I think many of those things have helped us over time and they're all one percenters, they're not 100 per cent of anything.

In the office we always talk about the trio, Carsales, REA and Seek, as prime examples of network effects in place. Are you worried at all, I mean, a similar sort of claim could have been made to classified businesses 20 or 30 years ago that came in the old print format. They looked really strong until they weren't.  How cautious or worried are you about sharing their fate in the future at some point?

I would describe an innate sense of paranoia in our culture, as a business. We're always looking out for potential threats, potential disruptors of our business, because ultimately, we don't want to ever have happen to us what the likes of ourselves and REA and Seek did to those traditional print classifieds many, many years ago. I think just having that sense of paranoia is helpful. I think the other sense that we have in our business is the preparedness to disrupt ourselves if we get to that stage. Being prepared to do that is critical, otherwise, you do risk that. I'd say the other point would be about being constantly focused on innovating inside our core is obviously helpful. But the most important thing is being paranoid, looking out for potential sources of new competition, and being prepared to disrupt yourself are the critical factors in making sure that we aren't disrupted down the track.

Yeah. There's nothing that encourages competition more than big fat profit margins, and high returns on capital, and you've certainly got both of those. I've noticed that both Facebook and Gumtree now provide facilities for dealers themselves to list inventory directly on those sites, which is a fairly new function and something that you've done quite early on. How do you view those two specifically as threats to the Carsales business? I guess they come with quite large audiences and quite big brand names already, so it's not quite like a business starting from scratch, trying to compete with an established business.  It's more a case of an existing audience using an existing product in a different way. How do you view those threats? Are they long term threats to you?

Yeah look, the market that we're in has been a very competitive market for a long, long period of time, and we see the market as having two sorts of competitors. You have vertical competitors, and Carsales is a vertical, which means that we're specifically focused on automotive. All the things that we do are very focused on automotive, and so we try to provide a very deep experience for our customers.

Customers that want to know about cars, new cars coming into market, we have a lot of editorial content around that. People that want to sell or buy cars, we have a lot of vehicle specification and pricing and data around that, and we have the tools to help facilitate that. In terms of transacting, we have a lot of capability in that space to ensure that that happens seamlessly, in terms of customers wanting vehicles inspected and so on, and being able to publish those inspection reports, et cetera. We facilitate all that.

The experience that we offer as a vertical player is very deep. There are other vertical competitors in our market, and there are also what we call horizontal competitors. These competitors aren't specifically focused on just automotive, and they tend to offer a different value proposition than what we do. Some of those competitors that you've mentioned before, they've been in the market for a long, long time, as well. They're not new to the market, so I guess from our perspective, competition is always good, and there are always lots of different competitors.

Our thinking is if we stay focused on the one thing, which is delivering results for our customers and facilitating the buy and sell of vehicles and doing it in a way that is as seamless as it can possibly be, with the best possible results for those customers, then that holds us in pretty good stead. We need to be continuing to innovate in order to stay ahead of all of our competitors, whether they be new or existing.

It's fair to say that over the last 20 years or so, you've really benefited from a structural shift from print advertising to online classifieds, and that's delivered huge growth for you. Do you think that shift is now largely complete, and if that's the case, is Carsales now a more cyclical business than it has been in the past?

I think there's no doubt that many, many years ago, private sellers left print classifieds and moved into online, many, many years ago. They were followed by dealers some years later, and then consumers in terms of eyeballs, left those print classifieds and moved across into the digital space. I mean, that's been evolving for some time now. I'd say to you that the market has changed over time, and consumer preference around using online as a source for finding, researching, and less so about buying at the moment online, has been evolving for many, many years.

In terms of maturity, I suppose maturity suggests that there's an end and from my point of view, technology's continuing to evolve. As technology evolves, new opportunities are created, new markets are created. The way consumers consume content, the way consumers transact are all evolving. I would say as the marketplace evolves, we will continue to evolve as well. I guess if you were to look at it and transfer what was print into online, there's an argument to say well a lot of that's already happened and it happened some time ago, but I guess the way we think about it is the digital marketplace is evolving constantly, and as that continues to evolve, we will evolve with it and hopefully, we'll continue to benefit from that change.

Does it change the way you need to manage the business, though? Because I suppose you're more exposed to things like credit conditions, you had a bit of a period where you had weak display advertising. Those sort of things would not have affected your returns in the past, and they probably affect them more now. Does it change the way you need to manage the business or these are just short term issues and you're not concerned about them at all?

No, I think again back to my earlier point around the business needs to keep evolving and changing, and in display content, one of the things that's happened over the past several years is consumers like to consume video content through advertising. So, you look at a product like Instagram and the video content on that is super rich and consumers like to look at ads that are in the format of a video.

That wasn't the case some years ago, and as a business, we need to see these changes in consumer behaviour coming and we need to adapt our own solutions in ways in which will facilitate and support that consumer behaviour and if we're not staying ahead and seeing those trends coming, then that potentially has a short term negative impact on the business. It's up to us to manage to that. There are some things that are out of our control, like structural changes in the way finance might be sold, or in terms of the impact of things like Royal Commissions.

They're externalities that have an impact on us to a degree, but as a business, we need to be focused on how we perform through those more cyclical changes that all businesses face from time to time. But also, as a business, how we continuously improve our performance in instances where those changes occur. I think there's ways in which we need to continue to evolve as an organisation through some of those externalities.

Can we think about dealers for a moment? They're a really important source of revenue for you. I mean, we've talked about it internally, I think it's quite a strong competitive advantage you have in that they're embedded, or you're embedded with them, and it turns you to be quite a nice little revenue stream. Does that come at the expense of their own margin? If that's the case, is there a bit of an uneasy relationship there? Is there a limit to how much pricing can push in that dealer channel before they start pushing back and perhaps getting together and talking?

We see ourselves as being an important part of the ecosystem for our core customers and our core customers are our car dealers. We see ourselves as playing an important role in delivering opportunities to those dealers to sell cars, and we certainly take nothing for granted with our dealers. In terms of how we see the value that we create, in delivering those opportunities for those customers, I mean in many cases we would deliver a considerable proportion of the sales opportunities that the dealer would have month to month, to sell vehicles. We're an important part of their business, but the way we think about things, within the gross margin that a dealer makes, there's always a component that's set aside for marketing.

That's largely where we see ourselves fitting in over time, and it's about behaving in a responsible manner, so as market conditions change and they get better and they get worse, we're responding appropriately so that we're supporting that customer network that we have.

What other growth opportunities do you see? I notice you've got a couple of international businesses as well, and some of them firing really well, particularly in South Korea and Brazil. Are you focused there for growth, or do you still see plenty of opportunity in the domestic market?

I mean, there's plenty of opportunity in the domestic market, for sure.  International has been a focus of ours for some time, and we've been focused on building our technology platforms so that it's globalised, which will enable us to expand into other markets over time, as we see fit. But there has been a focus on looking at high growth market opportunities that are in different geographies to Australia, and Latin America has been on area and North Asia has been another, with Korea, and our businesses in Brazil, Mexico, and Argentina, and Chile have all been areas of focus.

What our strategy is, is to deploy the technology and the IP we've built here over many years into those newer markets that are high growth and they're evolving markets, and trying to create equivalents of Carsales offshore. We've had some great success to date with what we've been doing in Korea and in Brazil, and look to replicate that, and all these markets are, bar a few, considerably larger than the Australian market.

Our value proposition is if we can replicate what we have here, then potentially the ability to create something of high value is there for us longer term.

Right. Is the opportunity there to capture that structural shift? Which is presumably slower than it has been in Australia, going from print to digital, or are you looking to displace an existing competitor, or does it not really matter?

Those markets are all going through the same transitions that we went through many years ago. Some of those markets, they are literally 10 years behind where we are. We're having the discussions with our customers in those markets that we would have been having with our customers here a long time ago, and we're delivering the technology into those markets. Those customers are now starting to need, that we've had many years’ experience in terms of evolving and building and developing, and finessing.

It's interesting because market structures are all fairly similar, market players are all fairly similar. The migration from traditional media into digital media is slower in many cases and the tools and technology that are available in market have benefited from what we've been doing over time. There's some great opportunity in those markets for us.

Which one are you most excited about? If there's one international market that fires you up most, which one would that be?

I love the Brazilian market. Even though we don't own a controlling stake in that business, I love that market. It's a huge market. It's one of the largest markets in the world for automotive, and I love Korea, because we have a very strong position in that market, there's a lot of opportunity around product and IP development to play out there, and the team that we have there are excellent.

We have a strong long-term partnership with a very significant corporation in South Korea, which is helpful as well. I really like what we're doing there, but there are some great markets that we're also in. Our business in Chile, which is Chile Autos, is the number one player there by a long way. It's been the number one player in that market for many, many, many years but in terms of the sophistication of that market and where the core customers are at around digitisation, I mean there's a lot of runway to play out there.

Chile is one of the wealthiest countries in Latin America on a per capita basis, so I like that market, too. There's plenty to be excited about, and there's plenty more opportunity for us to evolve over time, too.

A lot of investors might be surprised that you haven't chosen the most obvious expansion routes, which perhaps would have been Europe and the US, the more traditional Aussie expansion territories. Is there a particular reason for that or are they areas you're exploring at the moment?

No, look I'd say the reasons why, in online, to acquire a number one player in a market like the US or Europe, you're really betting the farm. Very expensive. In terms of the value that we'd bring to the table, we'd obviously bring cash to the table, but they're quite sophisticated in more mature markets, so the value of our intellectual property is not as great. Whereas I can go to the markets that we're in and acquire a number one position in those markets, not bet the farm, be able to deploy the things that we think we're great at, in terms of IP and tech. The scale opportunity in those markets are readily there, relative to the Australian market. The sophistication of those markets is not quite there and they're still on their journey around monetisation, which puts us in a very strong position.

I'd much rather place lots of small bets in high growth markets than place one big bet in a lower growth market, and that's how we've thought about our international expansion over many years.

Finally, Cameron, the auto industry globally is going through a period of quite intense disruption. Everything from manufacturers, suppliers, all the way down to the retail level. In fact, most consumers call buying a car one of the worst retail experience they have. Does the future of car dealerships concern you at all? Is that an opportunity or a threat, the digitisation of car dealerships?

There are several car brands that are now talking about going much more digital in selling their cars, and only doing it on online and not having as many showrooms. For you, is that something to be concerned about or is that an opportunity?

No, we see it as an opportunity. I mean, the market will continue to evolve slowly over time. We see that as a potential opportunity to work with our core customers, being our car dealers. In order to help facilitate them as the consumer moves, help facilitate them in moving themselves with that over time. 

Things like a used car purchase is a good example. Every used car is unique and different. New cars tend to be fairly similar. With the used car, people will always want to touch and test drive potentially, and look at, physically look at a used vehicle. So, there's always going to be in my mind, the need for a dealer down the track. I think as technology changes, the opportunities for both our core customers and ourselves will change, obviously, but I think the future is still good.

That's a good note to end it on, Cameron. Thanks very much for your time. That was Cameron McIntyre from Carsales.

Disclaimer: Please note that Carsales.com is held in the InvestSMART Australian Equity Income Fund (INIF), Intelligent Investor Equity Growth Fund, Intelligent Investor Equity Income Fund, Intelligent Investor Model Growth Portfolio and Intelligent Investor Model Income Portfolio.