Central Europe’s used car king

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Anthony Denny is happy to concede that the name of his company, AAA Auto, is “cheesy and tacky”. But his brazen attempt to ensure the name is at the top of the phone directory has not prevented it gaining almost universal brand recognition in the Czech Republic, Slovakia, Romania, Hungary and Poland.

The 45-year-old entrepreneur has nurtured his used car company from a single lot into central Europe’s largest second-hand dealer. Now, flush with cash from a recent market listing, he is taking aim at the swiftly growing Russian market.

AAA Auto this year became the world’s second used-car dealer to go public, following in the footsteps of CarMax of the US, raising €39m ($56m) by listing on the Prague and Budapest stock exchanges. “I always wanted to do an IPO and now I want to grow the share price,” says Mr Denny, adding that being listed gives “a lot of transparency to a company in a controversial business in a strange region of the world”.

Although he has Czech roots, building a business and a life in Prague was not an obvious step for Mr Denny, an Australian who visited his father’s homeland once in the 1980s and found it “the worst place in the world”, where “the only people who would talk to me were money-changers and prostitutes”.

He got his start in business selling used cars in Australia, dabbling in the stock market and developing houses on the coast of New South Wales. He then moved to California, where he exported sports cars to Europe. It was there, following the collapse of communism in 1989, that he noticed newly rich central Europeans arriving to buy cars that were unavailable at home.

His curiosity piqued, Mr Denny took a trip to the region in 1992 to gauge the business possibilities. “What I saw was just amazing,” he says. “There was an incredible energy. It was innocent and magical.” Most startling of all was the ruinous condition of cars he found navigating the local potholed roads. “I was shocked. A lot of these cars were garbage. They were just unsafe.”

The business was started with $100,000 he had to borrow from a bank following the loss of his original $100,000 investment, when dishonest business partners refused to pay him for cars they had sold.

Beginning by importing new US cars into the Czech Republic, he quickly found that the taxes, bureaucratic hassles and demands for bribes – some by mobsters – made bringing in cars from outside the country too problematic.

By 1993 Mr Denny had hit on a formula of buying used cars for cash and selling them on, breaking with the prevailing local custom whereby dealers act as sales agents for car owners. In a region where vehicle theft is rife and rolling back odometers is common practice, selling cars owned by the dealer, with a money-back guarantee if there is a legal problem with the car, gives buyers a sense of security, says Peter Vidlicka, an analyst with Wood & Co, a Prague broker. “Used cars in central Europe are often associated with fraud and crime,” he says. “AAA’s approach means customers are pretty sure of what they’re buying.”

Starting by selling cars at bazaars, the chaotic open-air markets in which everything from cars to vegetables were traded during the early years of capitalism, Mr Denny then rented a lot in 1996. The business took off. He was turning over his entire stock of 80 cars 55 times a year. Two years later he bought a larger lot and annual sales jumped from about 9,000 to more than 22,000.

In 2001, AAA opened its second branch in Brno, the Czech Republic’s second city, and now has 32 per cent of the Czech used car market. Last year AAA moved into Hungary, and now has 10 outlets. “It took 10 years to reach that level in the Czech Republic, in Hungary we did it in a year,” says Mr Denny.

For his method to work, a country needs to have a decent stock of reasonably high-quality cars to sell. By the mid-1990s, such a stock existed in the Czech Republic. The same is not true of all the countries where AAA Auto operates. In Romania, for example, where AAA has operated since 2005, there are few high-end new cars to feed the used market.

“I think we went into Romania two or three years too early,” says Mr Denny. “They are experiencing a new car boom and we’re finding it very difficult to source good used cars there.” He believes the supply will arrive in 2009, when buyers re-sell their current new cars.

Another tough market is Poland, where AAA has four outlets. Poland was flooded with cheap used cars following its entry into the European Union in 2004. In the first nine months of this year, 730,000 used cars were imported into Poland, a 26 per cent increase over the same period last year, and almost half of those cars were more than a decade old.

“The market is polluted by smashed-up cars with rolled-back odometers,” says Mr Denny. “People have to realise that you get what you pay for, but they’ll prob­ably have to buy two or three garbage cars before they learn that.”

AAA now has 40 branches in the region, and last year sold almost 62,000 cars, selling a similar number in the first three-quarters of this year. Last year it reported revenues of €348m and a profit of €7m.

Rapid growth created staff and management problems: Mr Denny had to build a sales and distribution system from scratch to handle the massive inflow of cars. He now runs a large call centre in Prague where a young team deals with people wanting to sell. Another buying operation in the Netherlands funnels west European cars to central Europe.

“We had to look at our systems and hire, hire, hire, to cope with demand,” says Mr Denny, who steers clear of employing people who had previously sold cars, finding them “tainted”, instead recruiting his staff from retail companies and banks.

Now that AAA dominates much of central Europe, Mr Denny is looking east for his next challenge – breaking into the lucrative and swiftly growing Russian market. AAA hopes to open its first location near Moscow next year.

The Russian second-hand market looks set to explode, with Price­waterhouseCoopers predicting sales of $11bn by 2010. The ending of a 25 per cent transfer tax currently levied on the sale of second-hand cars, which has stunted the market, will fuel the boom. AAA will enter Russia in co-operation with a local partner who can clear the way through the legal hazards that await foreign investors.

Although he travels frequently to Australia, Mr Denny has no intention of abdicating as central Europe’s used car king. “Life is just too boring in Australia,” he says.

Words of wisdom from a seasoned salesman

●“When we expanded beyond the Czech Republic, a key was to have Czech managers. We have them in Hungary, Slovakia, Poland and Romania. These are people who have good corporate culture and who can make the locals understand that.”

●“The bureaucracy in many countries is bad but in Poland it is horrific. I’ve just come back from Moscow, and the bureaucracy there is going to be a challenge as well.”

●“We just don’t give bribes, even though it may have cost us some business. I also have no political contacts. People think it’s strange that you can do business without political connections, but to be honest I wouldn’t even know how to cultivate them.”

●“Labour costs are really starting to affect us. Over the past six months the Czech labour market has tightened enormously. It’s also very tough in Poland. We have to offer our staff more incentives and benefits.”

●In the second-hand car business, “don’t hire people from within the industry – they’ve already been tainted”.

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