The world is changing fast and to keep up you need local knowledge with global context.
DAVOS — Media group Naspers is best known for being the biggest shareholder in Chinese internet giant Tencent – its stake today being worth more than the total capitalisation of the South African company’s listed shares. But it’s not a one trick pony. Naspers is starting to be recognised for some smart investments that have turned it into a major global player in the mushrooming food delivery business. Equally significant is its even lower profile online classified advertising operations. The business has 330m users in 41 countries, leading the market in most of them. It’s boss, Martin Scheepbouwer, explains here how his business is about to become a major profit contributor to the Naspers group. It is now on the exciting side of the investment/harvesting cycle having broken into profit after six years of investment. The Naspers share is held in the SA Champions portfolio on the Easy Equities platform. – Alec Hogg
This podcast was made possible by Brightrock, the company that introduced the first ever needs-matched life insurance.
I’m here with Martin Scheepbouwer, who’s with Naspers. He runs the OLX division, (classifieds). At the recent investor day in New York, you were the first presenter so I presume it’s an important part of the Naspers Group nowadays.
I’ve been in classifieds for 12 years now, and the last 6 years here, with Naspers and yes, I’m quite content with what we’ve built to date, which is one of the global leaders in this industry segment.
You say, ‘one of.’
Yes there are several other global classified companies, for instance Schibsted, who are in the classifieds group, but yes we clearly stand our rank in that group but we’re also, I think, home-built by the opportunities out there for us, because classifieds is never a boring industry segment. Things are very dynamic, which makes it interesting for me and my team to work in.
Most people who’ve got a little bit of grey hair will remember classifieds from newspapers. Of course newspapers seem to have lost them completely now. Is it a similar business model?
No I would say it’s quite different. So classifieds at its heart is platforms that are a two-sided marketplace. People can buy items, or cars or even houses from other consumers who sell something they no longer need. That is good for both parties. The principle is as old as humanity. It used to take place in physical market places then newspapers covered it a half-a-century ago and it was one of their primary revenue drivers. When the internet emerged it quickly became the dominant channel for classifieds because everything was easier. Posting was much cheaper. One could leave much more information about ads. The buyer can search the ads so that was the first step-up that classifieds made in terms of volume. Now with mobile phones that everybody has we see how the market has grown to defer to a new level again and the market potential is huge. It builds in, let’s say, the European and other Western economies but also in Asia, in the Middle East and in Latin America.
We know with Amazon for instance, if you purchase something through Amazon there are guarantees that you are going to receive it. What about with OLX, is that not a challenge?
The traditional way to do classifieds is to see an ad on one of our platforms, and to contact the seller through phone or email, and then agree on a time and place to meet, at which point cash would be exchanged for the item and the vast majority of transactions are handled this way.
So it’s face-to-face?
Yes it’s face-to-face, and that is also the best and safest way to do these transactions. What we see now increasingly and we are experimenting with that ourselves is to take out that bit of friction as well and help users to pay on our platform and also deliver the goods to them and payments are only released when you like what you receive.
Like an escrow?
Yes that’s something we’ve pioneered in a few places in Dubai and in the Ukraine. That seems to be getting very good attraction.
Tell us a bit about your background. What drew you to the classified advertising field?
My first job after university was one in consulting. I worked at McKinsey for 7 years and then I was looking for an industry job, and that one came along in the form of heading up finance for eBay in the Netherlands, who had just bought Marktplaats, a main classifieds platform there.
How big were they at the time?
Well eBay bought them for €220m plus, I forgot, but it was a very sizeable investment at the time but yes Marktplaats volumes then were drawn off by the volumes we now see in other markets. So their market has grown enormously, as I just explained, through better offerings through a mobile but that was my entry into the classifieds world and I’ve loved it ever since because it’s a fairly unique combination of big impact to societies. There’s this win-win transaction between consumers that takes place for free because most people don’t pay anything on our platforms.
What’s the business model? How do you make your money?
I’ll get to that but most consumers they don’t pay fees, and that means they love our platforms. Secondly it’s a very good business model for our investors because platforms reach a certain size then it not only interests consumers but also for businesses, who then pay us a fee to list their inventory of cars or property, or even small business around mobile phone covers for instance. That’s part of our business model and I think our numbers that I showed in New York proved that there’s a significant revenue potential and profit potential in classifieds. The third unique element is that there is so much dynamic change in this industry – there’s never a dull moment and there’s new competitors, new technologies, new disruptive startups appear all the time and that means that we need to be innovative and open to change and look out in order to stay competitive.
When investors look at Naspers particularly South African investors, whether in their pension funds or through their unit trusts, have got a big slug invested in your company. They see it as Tencent, the value of Tencent, which for the Naspers Holding, which is actually higher than the Naspers share price, they also see it in the move into fast food delivery and classifieds. Are those the major focus points of the Group?
Well I’m the guy running classifieds so it’s difficult for me to comment on the overall direction of Naspers but what I’m here in Davos and in New York for is to tell our story and to convey the message that Naspers is building several strong e-commerce businesses, one of which is classifieds. That is yet another reason to look at the stock carefully and invest in it.
But the numbers are enormous. Just take us through the number of people that you reach and how many of those actually list products on your platform?
We have a monthly reach of more than 330 million devices.
Say that slowly, 330 million?
How would that compare with Facebook or something of that ilk?
Facebook and Google will have more users but the way we look at it the most relevant form and business model perspective is to have a leading position by market because you can imagine that the classifieds principle is a largely domestic affair. You don’t easily buy a household item from somebody in a neighbouring country so we look at a number of leadership positions. Of which we have at the top of my head 35, so we have 41 markets, and nearly three-dozen of them are in leadership positions and then it aggregates to more than 330 million monthly devices connected.
Let’s understand this, Martin. If you are a consumer in India, which is one of your markets, and you want to sell something that you find you have no more use for, as you would have done with the newspapers, you would use OLX in India?
And you’ve got 330 million people. It’s a bit of an undiscovered gem within the Naspers stable. I’m not so sure it’s well appreciated because those are enormous numbers. In a SA context it would be 10 to 20 times the economically active population.
Yes the volumes are enormous. We have about 18 million people or individuals who list something on our platform every month. We generate an enormous number of new ads per day, so the volumes are enormous. That means that, as I said, we have a big impact on societies because at the moment a few million people use OLX in Brazil and that’s something they talk about and they will really miss it if we were not there. So big volumes and high impact on societies.
Clearly you must have a lot of engineers who are making sure that the processes work the way that they should.
Yes, and that brings me to one of the key trends in this industry, which is to go for marketing lead, which it used to be 10-odd years ago, when we all had the same, simple websites, to more technology-led today, in which we have to comply with or meet the standards that Facebook and Amazon have set for product quality, and deliver that over both websites to native app platforms, and IOS but also mobile web, which is for many of our frontier countries still and one of the primary channels. That means that we are increasingly shifting investment from marketing to technology and that basically means people. So globally we have about 4,000 colleagues, of which around one-third works in product and technology.
And your biggest markets?
Our biggest market is Russia, both by volume and by value. Then the next biggest in terms of volume is probably Brazil, but then in financial terms Poland, which is also a market that we are in a very good position with a horizontal platform and two vertical ones, one for property and one for cars. Then another large market potential, at least, is India where we are also in a strong position but monetisation is still quite early.
You spoke about the verticals. We know about cars. Cars dominated classified advertising. Property not so much but you mentioned that a minute ago. Is that a particular focus area?
Yes take SA. There we have the leading property vertical called P24, and that is a fantastic business in terms of product quality, in terms of position, in terms of financial, and in terms of team and technology. We have several of those around the world because a horizontal platform where you can buy and sell anything does not automatically cater for the needs of a property buyer. That is one of the biggest purchase decisions in ones’ life and at least, to some people, it deserves or justifies a separate platform with more information about the house, larger pictures, the ability for monetary services like financing, insurance, or book comparison, so there is value in building dedicated experience for property. Sometimes we do that on the horizontal but in the case of SA and others we do that on a separate vertical.
Then the real estate agents they would pay to have their properties listed?
In most cases.
And that’s your business model?
That’s our business model.
How is it developing because there are still newspapers around and presumably some of them in some markets would still have classifieds, which potentially could come across to a business like yours?
Newspapers still hold onto some volumes of classifieds although it’s tiny compared to ours but more importantly, there’s still a lot of people who have not discovered classifieds yet, neither in newspapers nor on one of our platforms. They still store items in attics and garages in the US for instance, there are more storage facilities where people pay to store their goods than there are Starbucks, MacDonalds and Subway outlets combined, so there’s enormous potential. In the US they make TV programs on what happens to storage facilities where people go out and buy the whole lot and auction items off and the funny things they find there. We believe that, or tying back to the theme of the conference in Davos – if people get together on a platform to exchange goods that is unwanted or unused, and on the other hand something that somebody else can need. Isn’t that a great example of a win-win exchange that benefits both?
It’s a massive potential with all of these storage facilities and in a consumption driven society, where people really do have too much in the rich north, and they put it away. Your challenge, presumably is to say, well bring it out of storage and sell it.
Totally and that’s the challenge. The way we solve that is primarily by making it easy to snap a picture of my bike and post it on Letgo that it will lie there and within seconds… Then wow, people actually start calling or chatting or apping me with interest. That’s a wow experience that many people never thought was possible with something that was stored in an attic for years. I think that’s a behavioural mindset that needs to change.
How are you changing people’s minds?
Remarkably the millennials, the younger generation is much more open to this idea than the older generation. So buying something temporarily for justification – you buy a tent for a vacation and then you sell it again. Or you buy a dinner table and some chairs because you’re throwing a party and you resell it again. It is something that many older people will find a bit odd but for the younger generation, between 18 and 30 especially, it’s becoming very normal. You don’t own a car, you order one through the phone. Why would you permanently own stuff that you need only for a fraction of the time, so there’s a natural movement towards and we amplify that with targeted marketing so we are on TV in the US, for instance, to build that platform and also on digital marketing on the internet.
What keeps you awake at night?
I told you that this is one of the most dynamic industries that I know, probably more happens in classifieds in a few months than in many other industries in years. So what keeps me awake at night is agile startups, young people with this mindset of moving away from possession to say utilities – not owning it but using it when I need it, who come up with something fundamentally better to facilitate this. So a technology that allows these win-win exchanges to happen even more seamlessly, and take away some of the friction that we still have in consumer-to-consumer transactions. I think it’s amazing, and like we have done ourselves, with Letgo and with other examples, a small team with focus and some funding can do but yes we always realise that that can also happen to us. So we are always awake, especially for these new initiatives that start small but gain traction on the back of an improved user experience.
What about Tencent, do you collaborate?
With Tencent it has an investment in 58.com, which is a very large classifieds company in China. With them we have a corridors of exchange so we’ve met a few times. We are inspired by some of the things that they are doing especially around the monetisation of those platforms with enormously large and organised sales forces and, also they pioneered an initiatives to take away friction. So for instance they do an inspection of mobile phones to make sure that what you buy is actually advertised so that’s how we cooperate with 50.com.
What’s the likely journey from here given that Chinese companies, Tencent included, are now starting to flex their muscles into other parts of the world? You’re very strong in the emerging world. You’re flexing your muscles into the USA as well so, where to now?
I think from a geographic perspective we are in 41 markets. While we continuously look into launching existing formats in new markets I think the bulk of what we do today and how we’ll spend our time going forward is in building out what we have in terms of platforms. So OLX in a lot of countries, Letgo in the US and in Turkey, Avito in Russia because there is enormous potential. As I said in the US that market is now starting to realise that there is a better way to deal with used items than storing them. If I look in Boston, New York at the growth rates in terms of volume and value in Poland and Russia, we believe that the potential in those markets is still a lot bigger than we’ve captured today. So that’s where I spend most of my time, to make sure that the positions we have are fully developed.
Where would you say you were, if you were to take the full potential or full capacity, what percentage would you say, on the whole, for your 41 countries?
On the whole it’s still quite early. You mentioned Craigslist before and that has been around for 20 years, which has a very limited view on innovation and that’s still very relevant today. We estimate that the revenues, even though the volumes are declining, are very substantial to the magnitude of $700m per year, at which some people estimate it. Letgo US, currently, we’re hardly monetising so it’s very nascent. If I look at FINN in Norway, which is in many ways a benchmark. It’s owned by Schibsted but it’s a benchmark classifieds platform for many of us. Or Trade Me in New Zealand – these companies were, I think, founded in 2000, so they are nearly 18 years old and still growing double digits and adding services by broadening and deepening, so if I look at our… We’re content with the volume growth to date, and I mentioned some of the numbers, 13 million active users and 18 million monthly listers but there’s a lot still to capture. The same holds for the transfer from volume to value. We started to monetise and we are monetising actively in 40 markets, profitable in most, but those margins can still further increase. So I think we are 6 years into this journey but by no means is it the end.
But the 6 years you’ve now, hockey stick wise, broken into profit.
Yes this year we broke into profit, excluding Letgo, which is a company that we are the largest investor in but we don’t operate it on a day-to-day basis. That is why we treat it a bit separately, we say for this year everything else is profitable.
Is it again, the hockey stick, does that mean that the margins are going to grow now given that you’ve made the investments over the last 6 years, and you’ll expand the margins and the contribution to the Group is going to skyrocket?
I do expect that from here we continue to grow, both in volumes, revenues, and profits, and obviously, some of the less mature markets will grow faster than the more mature ones. I think a lot of upside is still to come.
But it’s at the right stage of a business. This is the time you start making money rather than throwing money or putting money on the table, hoping that one day you’ll make it.
You’ve got a relationship with Bob van Dijk, the CEO, your colleague at Naspers that goes back to eBay.
Correct, Bob and I met even before eBay. We were together in the same office at McKinsey. We didn’t work together, necessarily, but we knew each other from that office. He was my first boss at eBay back in 2005.
What’s his management style?
Over the years, he’s really impressed me by making complex things and drill them down to their essence so he’s really good in taking complex matters and listening to the core, and communicating that fairly effectively and individually to a group, which allows people to make better decisions and to also follow him. In addition, he is an inspiration to me as a thought leader. He is somebody who has a vision and somebody who is extremely hungry and driven to get that vision implemented.
Would he, and clearly, you’re close to him and he’s your boss so I do understand that this is a difficult question, but would he be able to work comfortably in Silicon Valley, with one of the big tech giants if he were not working for Naspers?
I think somebody like Bob can work in many different environments. I’ve seen him be successful as a consultant and be successful at eBay, and now at Naspers. So I think he’s a fantastic asset for us and I hope he will be working with us for much longer.
Naspers into the future… Are you firing on all cylinders yet?
Well I have to tell you that I’m in classifieds so I’m not always qualified to talk about Naspers at large, but from what I see from my perspective is that we, over the past couple of years, have done a pretty impressive job of focussing a portfolio of investments on the one hand. So we sold a number of positions that we thought had a limited strategic outlook, which didn’t really fit the group, often for good money, like Allegro in Poland. A fantastic asset that we sold for good money to somebody who is probably a better owner, going forward. Then secondly, we have opened a number of new territories under ventures such as food and early possessions in agriculture. While at the same time building out the classifieds division, as well as our payments business. Not to mention the continued good results that our paid TV business is a source of, and of course, the execution in Tencent, which has been phenomenal and we continue to be a very happy owner of.
This podcast was made possible by Brightrock, the company that introduced the first ever needs-matched life insurance.
Cyril Ramaphosa: The Audio Biography
Listen to the story of Cyril Ramaphosa's rise to presidential power, narrated by our very own Alec Hogg.