Today on Lunch with an Entrepreneur we are talking to Ned Montarello, the executive chairman of Perth-based company ThinkSmart, which specialises in providing finance products for the B2B sector. The company is having a good year given the state of the global economy, with profit up 17% to $2.6 million in the first half of 2009.
Montarello says Australian SMEs remain in good shape and while European markets are still struggling, the company is well placed to cash in on the recovery.
Ned, thanks for joining us. Firstly can you tell us a little bit about ThinkSmart's model?
RentSmart is the brand here in Australia, which is solely a B2B vehicle - we focus on the one to five seat small businesses. They have a strong appetite for technology and typically, Yellow Pages tells us that they spend somewhere between $4,000 to $5,000 every year on keeping up-to-date with technologies, purchasing laptops, scanners, printers, software, etc.
Banks simply don't have an appetite to handle small transactions of that nature - a $2,000 to $3,000 purchase at one point. So the proposition for RentSmart was to place themselves at the point of sale where these small businesses purchase, and that's the super stores such as your JB HiFi's, Dick Smith, Officeworks. We made it a very easy process for this appetite to be soaked up at the point of sale. And that's really been the premise of the business.
Now six or seven years ago we broadened that same key proposition into the consumer market, so that we now offer that product through JB, Dick Smith and Officeworks and a lot of other retailers here in Australia as well.
In the European marketplace, where we expanded eight years ago, we've positioned ourselves solely as we did here firstly in Australia on the B2B basis. The UK's been alive now for eight years for us. Spain's been there for five years. We've got Italy, France and New Zealand. They are the six countries that we trade in and the proposition outside of the Australia is solely B2B, with that same set of principles in place of that demand by the small business community to purchase technology on an annual basis through retailers.
What are some of the keys in selling to SMEs? Are they a different beast than the normal B2B customer?
Well, let's talk about definitions of what I consider to be an SME as there are so many acronyms floating around - nano ticket financing, micro ticket.
What I refer to in terms of small business is one to five seats and that would take up I would suggest 90% of most of western communities' small business communities, the workforce, one to five seats.
I come from a three generation small business and understand what it's like to be in small business: cash is everything. Small businesses will fail and a large amount of them do fail in the first year because of lack of cash or lack of planning. So the management of cashflow is critical and often the ability to grow a small business is constrained significantly because of that lack of cash or the management of that cash.
So that to me is the mentality behind a small business - the ability to be able to have money come in the door to be able to then buy more stock or do with whatever your business needs to have.
As much in this small business is about the fear of being left behind as it is about the keeping up-to-date. It's a subtle difference but it's a big difference. You don't want to fall behind the pack, you want to keep up with technology and that's why the newest and the latest is always very important.
I remember being told by the CEO of one of the Dixon chains in the UK many years ago, we were working with them six or seven years ago, that one of his major roles was buying laptops for his chain. We're talking about in 14 different countries, and his challenge was that it would take him 12 weeks to buy 10,000 Toshibas and get them delivered to his stores. However, Toshiba produces new models every six weeks, so by the time it actually hit the showroom floor it was two models old. That is driven by small business appetite for technology.
Yes, they are absolutely starving for new gadgets. Now you're in a very unique position to give us a bit of an insight into how small businesses have travelled through the last 12 months in the downturn. I'm guessing it's very different in Australia to what it might be in the European markets?
And you'd be right. Clearly Australia's been extremely resilient in terms of growth. In Australia our last half year grew by 56% EBITDA. Last year was another double digit growth for us in the Australian marketplace. Our penetration levels have grown and so have our physical application numbers, so the Australian economy has been extremely resilient. We really haven't seen anywhere near the depth of the recession as being experienced in the European marketplace.
In Europe the UK's been in deep recession for the last 18 months to two years. What we've seen is the foot flow into the retailers that we deal with in the UK or the major retailer there - Dixons is the dominant player - has slowed last year. We work in calendar years and in 2008 their like-for-like sales in the B2B market dropped by 10%.
Conversely though, our penetrations in that marketplace grew by 10% and that's because as there's less footfall coming in, the retailer focuses more on the customer that is in the store and the ability for them to add value to that customer and sell up in terms of adding further attachments and equipment and software, etc, becomes more important. So our product has been extremely resilient in this softer marketplace.
In the first half of this year, it's dropped even further in terms of the UK economy but again our product has remained resilient. Spain, another economy that we trade in, they really started seeing a downfall some nine months before Lehman Brothers went down. So there's deep recessions in certain countries in the European marketplace.
But having said that, certainly the worst is behind. We've seen growth both in the UK and in Spain come through in the first half of this year and further. So from our perspective it's a position, where there's been a lot of tightening of belts, there's been a lot of focusing of the core business attributes of a lot of these small businesses and there's been certainly a shake out.
But at the same time there is clearly there is now light at the end of the tunnel and they're looking towards the opportunity, as opposed to waiting for the next hit. That was really a lot of the mentality, certainly in the first half of last year, moving into the second half of last year.
Given you're really reliant to a large extent on how those retailers themselves are tracking, when you see those sort of extended downturns in Europe, what can you do to adjust the ThinkSmart model or help those retailers? Are there strategies you can put in place to give them a bit of help?
There is and we have - we've never traded more profitably than we have in the last two years. Last year was a record year and this year's going to be a better year again.
From our perspective, what we can do is train and arm the salespeople in the retail outlets, support them very closely in terms of their marketing initiatives and their catalogues, because what the retailer obtains by utilising our product is an increased invoice price in sale. An average cash sale in the UK for example, is something like £500 or £600, when they do it through our product, we call it SmartPlan over there, the average sale is £800 to £900. So it's an extra 50% on invoice price plus they get a healthy margin back from us, plus they also attach an extra two or three items to the core sale of the laptop, etc.
So what the retailer sees is more customer share through less customers coming in the door. So we've increased our value add, we're a value and credit proposition to the retailers that we play with in a softer market because there's less footfall coming in.
And one of the benefits is having such a diverse international footprint. You've got Australia travelling along very nicely, really powering along, and the fact that we're tied up with a JB HiFi who's really surging through numbers over the last couple of years. We've got a UK that's been hit hard but now slowly beginning to show some improvement. Because we're diversified in five or six different companies, we have the ebbs and flows that allows us to keep ourselves moving along and picking up the recovery as soon as it occurs, as well as trading strongly through a downturn.
That geographic spread gives you great diversity but I think it would present some pretty big challenges. How similar are those European markets? Are there subtle but important differences in the way retailing is done in say Spain as compared to Britain?
Yes there are, but a good retailer is a good retailer and it's amazing how similar the attitude and the structures are of the performing retailers. If you talked to Richard Ucheritz from JB Hi-Fi or if you talked to the CEO of the Dixons PCWorld chain, you'll see an amazing similarity. They are both tremendously focused individuals who both understand their marketplace tremendously well.
There are subtle nuisances and you'd be fairly arrogant if you went into a marketplace and imposed the way you do your business in that marketplace. Our process is a very iterative one, it's a very integrated one with the retailer, and we only work with the largest retailers in that country. We've just signed up the Fnac Group in Spain and they're probably the fourth or fifth largest group in the European marketplace, they're the most dominant player in France.
We're partnering with their process and partnering their sales behaviours and their marketing in their country that they understand. We provide a service to that and then the way that we integrate is we marry up to the tone that they use in their market and the messaging they use.
So we don't impose ourselves into a different culture, we let them dictate those terms and we provide the services to support their initiatives. So that in itself is important and that's why our strategy has always been we have no debt, we grow through cash and we grow through aligning ourselves with market leading global retailers and that's why the strategy's worked for us.
In terms of managing an extensive European organisation like that, is it all done from Perth or do you have a European hub?
Yes absolutely, we've had a hub in Manchester in the UK since 2003. We've got our call centre there, our credit area there, our collections people there, our marketing people there. And then we have sales people spread around the country. But we also have our call centre for Spain, Italy, France based in Manchester. They're English speaking French and Spanish nationals, but you still have sales people who support the retailers on the ground in each of the countries. So the hub is in Manchester and there is a hub here in Perth that looks after Australasia.
So that's held us in very good stead going forward and it's certainly given us a very good transactional base to leverage. So for us to move into different countries is a very low cost scenario for us. And our model is such that not only do we earn a fee from the upfront transaction, we also have a trail fee that comes to us as a transaction's completed. Customers tend to give the equipment back and we on-sell that equipment and customers on-rent. So it's a very profitable business, not just as an upfront transaction but through the life of the actual contract and at the tail end. So there's a very strong revenue flow for us in the countries that we are trading in and particular when the model is more than four years old, it's a very robust model.
You just expanded your Spanish operations, will Europe remain the sort of target area for expansion or would you like to look at the big US market or further Asian markets?
We have a very strong appetite. In 2009 there won't be any more new territories, but we've got a very keen eye to grow further territories in the European market in 2010 and as I've mentioned it's a very low cost scenario for us to do it. We'll do it through cash and we'll do it by aligning ourselves with leading retailers.
We hope through 2010 we'll make more announcements of further retailers that we've added, global retailers, leading retailers but we also have a very keen eye for the States. We have traded in the States; in 2008 we suspended transactions there until we see the economy improve and credit improve there and we'll look towards our position in the States through the course of 2010. We still maintain a real appetite to get into that market.
Now I'm sure that the small business tax break this year would have helped in Australia a bit. Can you give us any insights on how support for small business in Australia compares to some of those European markets? Do we do enough, could we do some more?
That's good question. When we go into a country, we look to some key indicators. Is there a healthy small business community? Is there a healthy appetite for technology? Is there a tax regime that is suitable in terms of tax deductibility? We look towards a centralised credit bureau where we can extract information quickly for it's approvals on the spot and we look for a funding relationship that we believe will support all of that for us.
When we look at those five indicators and we look to each of the countries, they've all got a similar backdrop to the one that we've got here in Australia. There are some initiatives that are slightly different in each country that the governments may go to. But in my view the tax regime system assists and assists strongly to drive that.
There's always more that governments could be doing and in particular when we're talking about a recessionary environment I think that my view is that banks could be a lot more fluid in their lending to open the credit markets to small business. That has been a real issue and I think the opportunity exists now to really take the lead while the banks have recapitalised strongly. I think it's important that the banks start lending to new customers, not just their existing customers.
So a lot of these stimulus packages have been great but what I'd like to think occurs is that banks take the lead and particularly Australian banks and start looking towards lending to new customers and giving them opportunities to start proving themselves going forward.
Looking at the last three months of the year, what will you be focussing on particularly? Is there an opportunity to leverage off the fledgling European recovering we're seeing?
We've got three months to finish our financial year. As I mentioned we run a calendar year so from our perspective we've let the market know that we're on target for another positive year of growth and we maintain that, so for us at this point at time we're running full steam ahead to execute on the proposition in every country.
And hopefully even faster as the global economy recovers.
We look towards 2010 as being a significant revenue growth year for us. I think the last six months has really enabled good businesses to refocus themselves and get themselves geared appropriately to really capture market. And that's certainly been our stance over the last six months and we're looking forward to finishing this year and moving on to 2010 with a strong year.