The Prague Post Online: Business: 10 Questions

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November 22nd, 2008

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10 Questions

with Anthony Denny
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By Paul Voosen
Staff Writer, The Prague Post
October 3rd, 2007 issue

VLADIMÍR WEISS/THE PRAGUE POST

Denny says AAA Auto plans to enter the pre-owned, certified dealer market next year with AAA Premium.

THE DENNY FILE
Job title: Chairman and CEO, AAA Auto
Nationality: Australian
Previous job: Partner, Eurocar California
Education: Ryde College of Horticulture, Sydney

Anthony Denny is the used-car king of Central Europe, with his company, AAA Auto, holding a large share of the domestic market and pushing into neighboring countries. In late September, AAA became the first company this year to launch an initial public offering on the Prague Stock Exchange, offering a minority share of its stock. Denny talks to The Prague Post about AAA’s formula, its expansion east and the “itch” cycle.

➊ What prompted AAA’s rapid expansion over the past few years?

We realized we had a formula that was working well and that we were in an ideal situation to capitalize on it. Everywhere we’ve opened sites in the Czech Republic, we’re selling lots of cars with low cannibalization from other sites. So we decided to put it into top gear.

This year we opened 22 sites, which stretched our internal resources to the absolute limit. We’ll never do that again. Next year we’ll open 12 to 14 sites. We had a great resource of middle-to-upper managers in the group for several years, so we were able to open those sites, but now we have to train new managers.

➋ And you needed the IPO to fund this?

The IPO gives the company transparency in a controversial industry, which will enhance our credibility with financial partners, customers and the press. And, more importantly, it does give us capital for our expansion.

We’re looking at Moscow and St. Petersburg, which are the only two cities in Russia that you only need to be in for the next five years. We’re looking at land in northern Moscow right now and also talking with dealership groups about a potential joint venture. We have similar situations in Ukraine, Kazakhstan and the Balkans.

Also, looking at the current markets we’re in, we still have room to expand. We have a 23 percent market share in the Czech Republic and that can grow to possibly 30 percent in the next three years. We have 16 percent of the Slovak market and we’re opening a lot of sites there. We’ll finish our first level of expansion in Hungary within three months, opening 10 sites. The second level of expansion should come in 2009, when we target cities of 50,000 to 100,000 in population.

➌ You mentioned AAA’s formula. What is it?

We deal in quality cars that are up to 5 or 6 years old with an average price of 5,000 euros [$7050/138,050 Kč]. We buy the cars with cash and make sure we buy liquid cars — cars people want to buy. We’re focused on liquidity as opposed to profit, which is our secondary focus. We currently have around 9,000 cars in stock, and we sell those 9,000 cars in 35 days. That’s exceptional by industry standards.

Besides that, what separates us from the rest is that we own all the cars. Other companies take commissions for selling cars, meaning the customer predetermines the price. The dealer has no say over the condition of the car or whether it’s correctly priced. We have a whole centralized department analyzing every car that we buy and another 30 people analyzing the car stock daily: what’s right, what’s wrong, what we need to drop in price, whether we need to shift cars to other locations. It’s similar to the CarMax model [in the United States].

➍ What role do imports play in your sales?

We import about 8 percent of our sales in the countries we operate. It ranges from basically zero in Hungary — because of their importation laws — to around 12 percent in Poland, because you can’t find good cars there, so you have to import.

➎ Doesn’t the Hungarian importation law go against the European Union’s single market?

It does, but we support it. Something we’ve noticed in the Hungarian market is the lack of criminality. When you have a more protected market, it doesn’t make sense for people to manipulate the speedometer, to rejuvenate the car — which means presenting the car as a younger car — and other tricks people pull when they import cars. It’s horrible stuff that’s designed to rip off the consumer, like importing two smashed cars, cutting them in half and welding them together.

To prevent our complicity in these tricks, we cooperate with a company that gives us the origin of every car, telling us whether it was smashed in the West, whether it was potentially stolen, etc. We control every car we sell. That’s why we give a lifetime guarantee on the car’s serial numbers and history, which in this region is quite important.

➏ How long are people holding on to their cars here?

We call it the itch cycle. The time that people retain a car in the Czech Republic is still much longer than in the West, as are ownership rates. But people will change their cars more and more frequently. As wages increase, you get the people who now have an old car — the average age of a car in the Czech Republic is about 14 years — who want to trade up but cannot afford a new car. There’s a lot of pent-up demand that should equal continued growth.

➐ AAA sells new cars as well. Will that become a larger part of your business in the future?

We’ve got the biggest Opel showroom in the country in Brno and we’re about to buy a dealership group that sells Opel, Chevrolet and Hyundai. But you don’t make money off new cars. You make money out of servicing and spare parts. When we buy a new-car dealership, our main intention is to sell used cars there, so the dealership must have space for that. If there isn’t room, we simply close down the new cars. We’d prefer to keep the new cars, but the used-car side of the business is far more profitable.

➑ What’s the most demanded car you sell?

The Škoda Fabia, definitely. A 5-year-old Fabia at around 70,000 kilometers [43,496 miles] depreciates by less than half its original price. We cannot get enough. People with the old Škoda 120s who are brand loyal and want to trade up are coming in and buying these.

➒ The used-car industry faces its share of criticism, and AAA has not been exempt from that. How do you respond to it?

We’ve gone through a lot of that over the years, to be sure. We put our cars through a rigorous testing process. We have a 24-hour no-questions-asked exchange policy and each car has a three-month mechanical warrantee.

You have to find a balance between profitability and customer satisfaction. We continually take a look at ourselves and how we operate. It is a controversial industry. When people buy a car, ultimately it breaks down, whether it’s new or used. Who are they going to blame? They blame the seller, fair enough. Sometimes they think the seller knew about it and it’s hard to persuade them that’s not the case. The region still has a semi-socialistic mentality that the warrantee goes on forever.

I know there are all these negative blogs about our company and we have a dedicated team talking to these people. Eighty percent are probably competitors or nasty people, but 20 percent are real and we’ll do anything to satisfy them.

➓ One growing part of the used-car market in the West is certified pre-owned dealers, which offer extended warrantees to newer used cars. Any plans to offer similar services?

We’ll enter that segment next year, launching AAA Premium, which will sell factory-approved used cars that are less than 2 years old. It’s an increasingly interesting segment that we’re not really in. So we’ll be entering it conservatively.

Want your manager to answer our 10 Questions? Send a message to Paul Voosen at pvoosen@praguepost.com

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