Wolfgang Grenke, how do you build an MDAX company?

Wolfgang Grenke was a leading figure to build the German Grenke AG. In this interview, we cover the history of the company. The interview was conducted in Juli 2020 and done in German. Here is also the German version. With this transcript we want to make it accessible for English-speaking investors. The interview was translated with DeepL.

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We have discussed the following topics:

Introduction

[00:00:00] Tilman Versch: Welcome, dear viewers, to our live stream, at 8 p.m. sharp. I would like to welcome Wolfgang Grenke from Grenke AG. Hello Mr. Grenke, I am very pleased that you are here.

[00:00:10] Wolfgang Grenke: Hello.

The year 2020 for Wolfgang Grenke

[00:00:11] Tilman Versch: I’m glad I could win you over for this live stream. Dear viewers, you already know that I have to fade into the topic at the beginning. But before I do that, I want to ask Mr. Grenke a question with a current reference, but we also want to go back a bit in the video to the founding history of Grenke AG, so to speak, and also to the development over the years. But I thought this was a good question to start with: What cost you more nerves this year, Mr. Grenke? The relegation battle of the KSC or the drop in the share price at the beginning of the year? You can think of an answer for a moment, I’ll quickly insert the disclaimer so that all the viewers here are up to date. This is already the right picture, but not yet the disclaimer.

This is the disclaimer, which you will find under the video. It tells you: please do your own research, what we are doing here is a well-qualified discussion, but of course, you have to see for yourself how you “get started” on the stock market and how you invest. This is not advice or a recommendation. So now we go back to our conversation. What is your answer to the question? KSC’s relegation battle or the drop in share prices in March?

[00:01:32] Wolfgang Grenke: Neither of those things made my hair grey, I already had them before. So it’s also like this: sport is a sport, and the fact that it was very close at the end for KSC can be seen in the table, the goal difference was really decisive, and that’s, of course, exciting, but that’s part of the sport and you have to live with it. And as far as the stock market is concerned, well, in comparison we were, of course, punished a bit more than others, but that is also quite logical because we are positioned throughout Europe, which means that we are also very strong in Italy, Spain, and France, and there the effects are obviously greater. So in this respect, it is relatively easy and logical to explain, but neither of these causes me much grief. On the one hand, because KSC has developed quite well despite this crisis, and on the other hand, we believe that our business model is actually stable enough to be stable and survive for many years.

[00:02:46] Tilman Versch: I would also like to welcome our viewers and invite them to ask questions via the chat which I will be happy to include in the course of the interview. But I would like to stay on the pitch for a moment, maybe move away from football to your second passion, chess. What can an entrepreneur or perhaps also an investor learn from chess and take away for himself?

[00:03:10] Wolfgang Grenke: So what is commonly meant by strategic thinking and perhaps being particularly clever or intelligent in the game, I have my doubts about that. But what you really learn is to make decisions under pressure, under external pressure, and under time pressure. That’s what you’re trained to do and that’s where you develop your skills, of course, so I’m usually not very excited.

What does Grenke AG do?

[00:03:35] Tilman Versch: That is also very good. Florian König and the others in the chat have already sent you their best wishes, and I’m sure there will be some good questions in a moment. I would like to go through the basics with you once again so that the viewers who don’t know Grenke AG so well yet can do so. So what does Grenke AG do and why is it more successful than other companies? The fact that you have grown so strongly over the last few years is reflected in the figures.

[00:04:11] Wolfgang Grenke: Historically, we have always been very much concerned with the so-called SMEs as customers, i.e. the small and medium-sized enterprises, actually rather the small enterprises, that’s just how it developed historically, but then it has also gradually become a great advantage because we focus our financing, which we offer via leasing, via factoring, also via banking in Germany, primarily on the small enterprises. There are various reasons for this, one reason is of course that the risk is spread because you have a large number of cases, and the second is that when you have concentrated on something like this, you also develop particular strengths for it, that is, you know more, you can do more, you can concentrate more on your customers, and that has certainly helped us.

Who are the customers?

[00:05:07] Tilman Versch: So who is a typical customer or the typical customer groups for you, who are they?

[00:05:13] Wolfgang Grenke: So with the leasing objects – I’ll stay with the leasing business, because that still makes up about 90% of our business, although in the meantime banking is growing strongly, especially in this phase, but maybe I’ll come back to that later – with the leasing business it depends on the object that is to be leased. We don’t do real estate, for example, because the ticket is simply too big for us in individual cases, with the associated risk, and the administration is also too time-consuming.

We do a car now and then, but only when we actually have a framework agreement with a client, otherwise it’s not our category either. We are mainly active in the office sector, i.e. everything that has to do with IT, with technology in the office, but also medical technology, and these are all areas in which – i.e. IT technology in particular, which is actually suitable for all companies – you don’t have to select a very specific small element, but you have quite a broad clientele to whom you can provide your services.

Who is the competition?

[00:06:27] Tilman Versch: Who are your competitors in this field of leasing?

[00:06:31] Wolfgang Grenke: Well, the background is that most of the contracts are concluded via so-called sales leasing, you might also know that with cars, the contract is usually concluded with the specialist dealer, in the sales area, that is the specialist dealer, and it is similar with us, because for a single contract of four, five, six, seven thousand euros, it is of course not worthwhile to drive to the customer, so you have to have an intermediary, so to speak, and these are naturally the specialist dealers who, when they make an offer to their customers, say, “You can also lease, for this we offer you the offer of our partner, Grenke AG.” Therefore, the range of companies that lease from us is correspondingly large. That’s why we also have a statistically stable situation.

The founding story

[00:07:30] Tilman Versch: I want to try to divide your story of the company into two phases: Up to the IPO and the story after the IPO. It started in 1978. You were still a student at the time, your hair was still black, that’s what you saw in other photos I looked at.

[00:07:51] Wolfgang Grenke: Yes, let’s say dark brown.

[00:07:52] Tilman Versch: Dark brown, okay, I think that was a black and white photo, I should have looked again. How did it start back then?

[00:08:02] Wolfgang Grenke: Yes, I actually just wanted to finance my studies, and I couldn’t afford to be in my father’s pocket, so I had a job during my studies, drove a taxi, drove a truck. Of course, that prolonged my studies, that’s logical, it was still possible to do that back then, but my later brother-in-law founded a leasing company and asked me if I wanted to work for him instead of as a taxi driver, because I studied industrial engineering, and of course, economic practice is something you can use. No sooner said than done, but after a relatively short time – I was still concentrating on smaller companies – he said, “Well, that’s too much administrative work, we don’t really want that.

So he didn’t want to sign any contracts for less than 50,000 D-marks because of administrative costs, and I was able to program and thought to myself, “Well, if you convert that into programs, then the administrative costs are relatively low”, which was indeed the case, I spoke to the local savings bank, took out credit insurance, which cost me half of my contract, but of course, secured refinancing. Yes, and that’s how I started in the first year with a few hundred thousand euros in turnover, then it almost reached a million, then 1.5 million and then it went on.

[00:09:29] Tilman Versch: The topic at that time was what they also leased, telephone systems, copiers, and computers. That was still a “wild growth market” at that time.

[00:09:39] Wolfgang Grenke: In the case of the copier, the patent of (unv.) had expired and that’s why the Japanese companies came onto the market, and of course, they didn’t have a leasing model like (unv.), but they had to compete with them and of course, the dealers had to realize something. And of course, it was possible to realize something like that with leasing. So of course the market was there. There were no PCs yet, there were mini-computers, but no PCs, they only came in the course of the 1980s.

[00:10:14] Tilman Versch: How did your business develop in the 80s and 90s as well?

[00:10:19] Wolfgang Grenke: It was actually a steady upward trend. From Baden-Baden, we had a few focal points, so I had a relatively large number of customers in the Cologne and Düsseldorf area, but also in Augsburg, Munich, Stuttgart, and of course here in Baden, that’s clear, where you could work at home relatively soon, where you could travel to the customers. But then the big development was actually at the end of the 1980s, more precisely the reunification, because that’s when we decided to found the first branch office in Berlin, in East Berlin, because at that time there was an investment subsidy and we could use it to secure – after all, they were all start-ups, because the existing companies couldn’t be called real companies, the state-owned enterprises were start-ups, and of course, they had to be secured somehow.

And with this investment subsidy, it was possible, and in addition, the traders often took on a repurchase agreement for a certain percentage, maybe 50% on average, and with that, the investment was secured and we could then start. I sent my best man from Baden-Baden to do it, trained the people for ten months, and then said: “Well, now they can do it, what are we going to do? Then I said, “I don’t know either, your place in Baden-Baden is taken.” Then I said, “How about a branch in Düsseldorf?” And then he said, “Well, let’s try that, let’s do that.” And then it worked just as well and after that, the other cities in Germany were added, in Hamburg, Munich, the people who were active at that time are still with us today, it has to be said.

[00:12:12] Tilman Versch: That’s good, if you can keep the good stuff for so long, excellent. So let me understand again, what was the point that then also gave the business an extra boost?

[00:12:26] Wolfgang Grenke: Well, one very important point was that we concentrated on the quick processing of the contracts right from the start, which was also based on what I had learned at university. We had a principle that we pay on the same day that all the formal things are done, there was no delay. And of course, at the beginning of the 90s, we also tried to develop statistical models, that is, we developed them with which we could actually make a better assessment of the customers in a short period of time, i.e. scoring models. In addition, the big players also took notice of us and we had a partner at that time, Hewlett Packard, which actually needed exactly this product. They had their own financial service, but for the small business and for their dealer business, the distribution via dealers, they had no solution and we could provide that.

The change to the AG

[00:13:26] Tilman Versch: That’s exciting. In 1997 you then decided to transform into AG. What was the first step in this process? And in 2000 you went public, was that the perspective you were aiming for?

[00:13:39] Wolfgang Grenke: No, it was actually because we had a relatively critical situation in 1995. In the meantime we had fixed partners in the refinancing, there were two banks. One bank got into difficulties and the other one went bankrupt, that was a specialized bank in Hamburg, also a specialized leasing refinancing bank, which took over the organization, and then we were left without financing, Hewlett Packard solved a problem for them, we had to reduce our business somewhat, but we were able to implement it together with Hewlett Packard.

But of course, we had learned from that, well, please no clumps, no dependencies on individual partners. And that’s why we said we had to change the structure and founded a public limited company, it wasn’t actually the idea to go directly to the stock exchange, only a few days later after the registration I got a call from the local head of Deutsche Bank who asked me exactly what you asked me, whether I had the idea to go public.

And that was the time when the new market was just emerging or had just come into being, and then I said: “Well, that’s not possible without further ado, because if we are dependent on other partners, for example, banks, for refinancing, then it will be difficult to implement that on the capital market, on the stock exchange. But I have an idea: if we succeed in securing capital market refinancing, for example through asset-backed securities programs, then I could imagine that we could go public,” because at that time I already had my eye on it, we had already founded our first branch office in Vienna, we were already doing business across the border in Alsace and of course, I already had the idea that we could then expand accordingly.

The European expansion

[00:15:39] Tilman Versch: What was it like to go abroad, which was already indicated at that time? Was it a special challenge to expand in the European economic area?

[00:15:50] Wolfgang Grenke: Well, within the EU it’s certainly easy, that’s why we first went to Austria because there was both the language and the EU country. France was not a problem because of its proximity, but with our person in charge, an Alsatian who is now a member of the board of Grenke AG, he did it for France, and Switzerland was added relatively soon as a non-EU country, but without language barriers. You have to realize that you can of course talk in English, but it is a bit more difficult to hold a technical discussion in the language if you have no previous training. And that’s why we went further, but then it went quite well.

The culture at Grenke

[00:16:42] Tilman Versch: What I had heard a little bit and what I also found quite exciting, so to speak, as I got to know you personally, is that you also have a very accessible, pleasant culture, which you also radiate, so to speak, and you are a good conversational partner, and that also gives the employees a certain loyalty to you. How did you manage to get people to stay with the company for so long?

[00:17:12] Wolfgang Grenke: Well, of course, we try very hard to organize flat hierarchies, that’s been the case all along, you have to take your own responsibility, that has to be reflected in some kind of recognition, where it’s possible. So we worked relatively early on with a balanced scorecard and the people’s bonus linked to it, but a balanced scorecard in order to implement the strategic and long-term goals accordingly. And we then, which goes beyond the IPO, naturally also pursued further expansion with new methods, which later led to the corresponding growth.

The IPO

[00:17:58] Tilman Versch: Let’s maybe take a step back to look at the IPO in 2000. What was the trigger then? That was certainly the conversation with the representative from Deutsche Bank, but there were certainly other reasons for it.

[00:18:12] Wolfgang Grenke: Yes, in the meantime we had become active in France and noticed that it works really well. Of course, we also had to see that for capital market financing – and we had aimed to not just stay with the asset-backed programs, but to develop this further, for example, to get our own rating and to be able to issue bonds ourselves, and of course, you need equity capital for that. Until then, we had been able to generate that quite well from our profits, but if you want to grow quickly, then, of course, it is not enough.

With leasing, most of the costs are incurred at the beginning, when the contract is installed, the distribution costs, but also the setup of the contract, and the income only comes over the term, which is four years on average. This means that you always have costs in advance, and of course, you must always be able to finance them and at the same time make it visible to the outside world not as cash burning, but rather as income, which is also shown on a balance sheet, but always with a time lag.

The first years in and after the New Market

[00:19:30] Tilman Versch: Exciting. I would like to ask the viewers once again, if you have any questions, please ask them in the chat. There’s already one, I’ll take it up in the rest of the conversation, and if you like the video, please leave a Like, I’d be very pleased. What changed for you with the IPO and how did it go – once again before that – for you, 2000, the new market phase, which was also rather a wilder phase on the stock exchange?

[00:19:59] Wolfgang Grenke: Yes, that was quite an exciting story, there is also a film about it, that here in our neighborhood a horizontal drilling machine jammer, FlowTex, committed a big leasing fraud, so to speak, and that was just at the time when we were preparing our IPO. Of course, that caused some excitement, although from my point of view there is actually a logical reason why something like that can happen to some and not to others, maybe we’ll get to that. The other question, which was exciting at the time, so you suddenly had to be able to present your company in English. I did have my school English, I also learned a bit of pilot English once, but then it also had, that is, I wasn’t there every day in speaking, and of course, it then changed radically with the IPO.

Most conversations, at least abroad, were then of course conducted in English. I had actually expected that with the IPO because we were becoming more transparent, we would see a decline in our margins in our business because the competition could see better how we worked and what we achieved, but obviously, our business was so resistant that the competition was very restrained, or at least not very intense.

In some areas, yes, in copiers, which we mentioned earlier, there is definitely competition worth mentioning, but in many other areas rather less, and that is why the margin was not under pressure, but due to the publicity we had through the IPO, many more companies became aware of us, many more specialized dealers, and as a result, business increased relatively strongly, also in Germany, where we had already been active for a long time. So it was a very positive result throughout, even though we entered a new market and the new market collapsed shortly afterward, so to speak.

[00:22:19] Tilman Versch: Did it have an impact on the share price?

[00:22:25] Wolfgang Grenke: Yes, well, in general, the prices went down during that time, it was the same with us, we came to the market with 19 euros at that time and the price went down to 8.60 euros, I think, before it went up again after it had already gone up at the beginning.

The acquisition of the bank

[00:22:43] Tilman Versch: I would now like to take the liberty of showing you the chart that you saw earlier so that you can also count the long-term perspective a little bit. Unfortunately, it doesn’t go all the way back to the IPO, that’s the year 2005, how the company had developed and also, which is why I’m also very glad that I have you as an interlocutor, you can see that it was already a good investment, so to speak, for the shareholders, the company Grenke, to invest in it.

We also saw that there was a certain challenge in 2008, but it was also a great opportunity for you in the long term because you were able to acquire a bank at that time in 2009. How did that come about and what did it enable you to do in terms of operational business?

[00:23:43] Wolfgang Grenke: So in autumn 2008, both the bond market was no longer functioning as well as the ABS market, and those were the two areas, in 2003 we got our rating, that was the area where we didn’t get any refinancing funds. We did have some frameworks, we took the precaution of saying that we would reduce our new business by 20%, but on the other hand, we saw that small banks, which either belong to the Deposit Protection Fund or because of their function as savings banks and Volksbanks, had inflows from private customers as deposits. So they were not dependent on the capital market.

Incidentally, this did not only affect us but also Siemens Financial Service withdrew from the market to some extent, GE Capital as an American company in the same way, so all those who had refinanced themselves on the capital market naturally had a need to refinance themselves from one day to the next. And then we saw that this bank had a full banking license, we were of course already active in several European countries, we had a so-called European passport or EU passport for banking, so to speak, and we built that up, acquired the bank and also expanded it further in order to master crisis situations in such a situation. And perhaps as anticipation, we were of course able to use this very well this year.

Wolfgang Grenke on the European expansion

[00:25:31] Tilman Versch: That’s good. So I had also heard with you in the context when I heard about Grenke with one of the first times, also the example that it is always a challenge to expand in Europe, which was always a partial step of the whole thing. I think you are currently represented in 26 European countries. How have these expansion steps always been when you open up new markets in Europe and what are the challenges of the European single market?

[00:25:56] Wolfgang Grenke: Yes, of course, we started with branches at the beginning, but we noticed a lack of dynamism. Especially when you start with your own people, it’s difficult to enter such a market, sometimes there are no big differences between the SMEs, but there are definitely legal differences. Let me give you just one example: a typical leasing contract from Germany at that time was still completely free of requirements regarding banking supervision, that was only the case with us when we bought the bank because we were then a whole group of institutions, but in some neighboring European countries, France, Italy, Spain, it is the case – also Norway – that the leasing business then requires a banking license, at least a limited banking license. And that means, of course, that expansion is more difficult from the side. But above all, it was also a question of distribution:

How do you bring this idea to the specialized dealers and to the end customers in a shorter period of time, as I myself succeeded in doing in the 80s and 90s? And that’s why we decided to implement an adapted franchise model. That means that we gave someone, mostly from our own team, the opportunity to go into such a country, to build up the company, and then we secured the refinancing, of course, we did the credit check, and then we had the opportunity to acquire this company, this franchise company. In most cases, we did that, whereby the dynamic development continued because such companies are already built up in the direction of expansion because the price at which we took over the company was of course dependent on the business that was generated in the year before the takeover took place. And for this reason, we have developed relatively strongly in many countries.

In the meantime, we are only somewhere between 20 and 25 % in the German market, maybe a little more this year, because the Corona influence was not quite as big as in other countries. But nevertheless, it is no longer the case that we are a purely German event, but have been international for a long time. Of course, there are still differences, so you have to see that – and you have to adapt this – you also feed the conditions step by step. The basic concept, however, is that it actually works everywhere, and even where it could be more difficult, i.e. in countries like Italy, Spain, Southern Europe, but also in Eastern Europe, it sometimes works better than in our country, because the competition, of course, not the competition from leasing companies, which is not there anyway, but also the competition from banks is much lower, because the corresponding credit institutions are often not set up in such a way, also organisationally and also in terms of the mindset towards the customers, that there would be real competition.

[00:29:26] Tilman Versch: That’s definitely an exciting point. There’s also a conversation with Rob Vinall the head of PSG Group where he says something similar to the example of South Africa. For example, in London, you have ten competitors with a good idea, but in South Africa, you might have one or two and that’s why you can get higher margins.

[00:29:45] Wolfgang Grenke: But you have to be careful, the higher margins have to be logically justified, so it doesn’t help in any way to want to squeeze the lemon, so to speak. If the customer has the feeling that he has been taken advantage of, then you have lost him. So you have to approach this with a lot of sensitivity.

The improvement in numbers since 2009

[00:30:10] Tilman Versch: Definitely. If you look at the historical figures, 2009 was the last year with a single-digit growth in turnover or net income growth, sorry, and after that, it was all double-digit growth. What was the reason for the company’s strong growth after 2009?

[00:30:33] Wolfgang Grenke: So certainly in this area of new business, the catch-up effect after the voluntary decline in 2009 was then correspondingly, the banks have switched back further after the financial market crisis, especially in Southern Europe, that was clearly noticeable, which means we were able to grow accordingly faster. Ultimately, it was economies of scale that allowed us to develop. And as I said earlier, the actual profit always comes afterward, which is why many analysts attach so much importance to our new business figures, because that is, so to speak, the profit that will be generated over the next four years.

The visibility of the business model

[00:31:18] Tilman Versch: So your business model is then very visual in a good way if you can break it down to that aspect, based on the new business figures?

[00:31:28] Wolfgang Grenke: Yes, of course, there are still – well, one point is of course: How much do we want to grow with further methods? That also costs money. And the other question is, of course, how much do we invest in further technologies, for example, we have had purely electronic contracts for a few years now, which of course does not work without effort, both in terms of organization, but also in terms of programming, provision, all the security measures that are associated with it. So investments have to be made, and that, of course, reduces the profit at the moment, because many of the points I have just mentioned are not depreciable, which means that at the moment we have the expense, although they will only have the income later, they are first of all expenses in the year, so there is always the catch-up effect later.

The challenges of growth

[00:32:23] Tilman Versch: The topic of our conversation is also entrepreneurship, and that is also exciting to see, so one of the most beautiful things in entrepreneurship is to be able to grow, many times, and at the same time this goes hand in hand with the desire, as I understand it, to make decisions even faster and to be able to act very quickly. How did you manage to keep both in balance? Growth, which is also a certain challenge for the structures, where adjustments have to be made, and the ability to make decisions quickly.

[00:32:56] Wolfgang Grenke: So one important point is that all data at Grenke, no matter where it originates in the world, meanwhile we are also down under in Australia, in Sydney, in Melbourne, that all data is centrally available in Baden-Baden, of course then mirrored, to the data center, that is, not distributed data. We are very cautious about acquisitions outside of our franchise area, as already mentioned, where there is of course a franchise manual that is being created, that the development is similar to what it already is in the entire group.

And of course, it also depends on adding other areas, for example, the areas where the prices of the properties continue to go down and a broader number of customers want to invest in these properties. For example, medical technology used to jump immediately into the several hundred thousand ranges, but now there are many devices and furnishings that are significantly below that and are therefore of course very interesting for us.

IT at Grenke

[00:34:04] Tilman Versch: The keyword data is in a way also linked to the IT infrastructure. I heard from one of my members who work at the post office that there is actually a different IT system in each country and that they have a “patchwork quilt” in a way. What is the situation at Grenke AG with the IT system?

[00:34:22] Wolfgang Grenke: That’s exactly what I was talking about. We all work with one system.

[00:34:26] Tilman Versch: And this is then developed centrally by Karlsruhe, so to speak, or by Baden-Baden?

[00:34:32] Wolfgang Grenke: Baden-Baden, Karlsruhe, yes. The IT subsidiary is located in Karlsruhe.

Finding good employees

[00:34:38] Tilman Versch: One aspect of growth is finding good employees. How did you manage to do that? You must have conducted hundreds or thousands of job interviews. What do you look for and how did you manage to find good people?

[00:34:54] Wolfgang Grenke: So I always reflect the question back and ask: “How did you hear about us? There is a reason why someone applies to us. If it’s a run-of-the-mill application, there’s usually no answer, and if someone has already been dealing with it a bit longer or already knows us a bit and actually knows which company they’re applying for, then of course it’s a different situation. All in all, I have to say, I mean, in the meantime we have almost 2,000 employees together with the franchisers, and of course, I don’t know all of them anymore. But of course, there have been situations from time to time – that was a long time ago, of course – where we were not satisfied with an employee and all the attempts to achieve a better situation did not work, and then I would always say to the employee: “Take your time and look for something else, I don’t think it will work out with us, but I don’t want to simply dismiss you now, but look for something else”.

And that has almost always worked, I actually only know of one exception, that the employee actually looked for something, because who would want to work in a company where they don’t really see themselves as being positioned for the future. That’s why I believe that a certain openness is often very helpful with these questions. Of course, there is also the occasional situation where an employee wants to leave, possibly now because we are much bigger because there is a superior who is simply blocking him in his development, whom he “can’t get past”, so to speak, whom he simply can’t replace and he sees his opportunities elsewhere. But especially with our franchise system, there are also quite a number of employees who have gone their way in this way.

[00:36:51] Tilman Versch: What makes this franchise system attractive for employees?

[00:37:01] Wolfgang Grenke: Yes, well, of course, we have a payment of the purchase price for the company that the franchiser is building up, which represents a relatively high value. You could perhaps put it this way: As a rule, the employee will hardly realize an eight-hour day but will work off what he sees as an opportunity, as many small or medium-sized enterprises do today anyway, and thus of course also generate success, with very few exceptions, the franchisers have all been successful, are all very respectable, if you add everything up, the salaries that they still have to live on, even during the time they are franchisers, and what is thereafter as a purchase price, that can already make up a lot.

And that’s why it’s attractive, above all the possibility to decide, to be self-employed, even though it’s tied into a certain form. So among our franchisees, who are then acquired by our company, about one-third realize something they have always wanted to realize, maybe a trip around the world or whatever, which is behind it. And one third comes to us in management, which is also very favorable because we then have entrepreneurs in management, and the other third wants to do another franchise in another country. So in this respect, it’s a very nice development that is also correspondingly dynamic.

How do you find new markets?

[00:38:40] Tilman Versch: That sounds very exciting. If you look at it from your point of view, how do you evaluate the expansion targets? So do you have a matrix where you say, I’m going to do a top-down analysis for this country and say, “Now I’m going to Australia”? Or does that perhaps also result in an opportunity to make an acquisition, which you tend to do less?

[00:39:03] Wolfgang Grenke: Yes, it is actually relatively simple. We have certain requirements in a country, so the first thing we do is a so-called capability study, which means we check whether the legal conditions are actually there to do the business. I already said earlier that in some countries you need a banking license, at least a limited banking license, and then the second thing, which is of course almost more important for us, which we also analyzed beforehand, is: are there enough SMEs in the country, i.e. companies that also correspond to our target group? We can do relatively little with companies that are already relatively large with a corresponding administrative burden – that is not our world.

We want to specifically promote small and medium-sized enterprises with our services. And what is indispensable, of course, is sufficient legal certainty in a country, which is why we are naturally a little more critical of some countries, not because of the legal certainty in that country – that is, legal certainty that the contracts will be adhered to, of course – but not because of the risk of the individual customer. But if legal certainty is not guaranteed in a country as a whole, then that is a cluster risk for us, so to speak, because all leasing contracts that are concluded there could be legally contestable in one fell swoop. That would, of course, be something that would have a strong impact on our business model, which we do not want to take. That is why we are still cautious about some countries. We will have to see how things develop in the future, but we are not in Russia at the moment, and we are not in China at the moment.

[00:40:53] Tilman Versch: For the company, this franchise model is also a safeguard that the risk of such an expansion remains relatively low. When you look at such an expansion, what is the time horizon when you say: “We’ll keep trying here”, or: “We’ll stop for a while”, or until when do you think that such an expansion should go well?

[00:41:20] Wolfgang Grenke: Yes, that’s why the option is set after four, five, and six years. We have to decide this way or that way, and then we can also assess relatively well whether this step into this country was successful or not.

The US expansion

[00:41:37] Tilman Versch: Now I have a question from the chat, sorry that it took me a while to ask it, but I think it fits in quite well here. It’s from Florian König and it’s about the first market entry: How does the market differ from the usual environment? Where do you see opportunities and risks?

[00:41:53] Wolfgang Grenke: So when we go to a new country?

[00:41:57] Tilman Versch: To the US.

[00:41:58] Wolfgang Grenke: Oh, to the USA. Yes, the first problem we have in the USA is that it’s the home country of leasing, so to speak, and of course, you don’t know exactly what the situation is like there. That’s why we took a little diversion, we first had a franchise in Canada, in Toronto, we still have it, we are in the process of acquiring it for five years, we still have to see, but we have seen one thing: Of course, the competition – and yet all the American leasing companies are also represented, that is close enough to the United States – and that is why it is more a question of the market situation in the USA, which would also be the case in South Korea, by the way, where a lot of active leasing takes place, you first have to take a close look at the market before you enter it. As I said, it worked in Toronto, and now our franchiser has also signed contracts in the United States, we are there in Arizona, and now we will see how it goes. So in any case, the market is of course very interesting, but of course, it is also more competitive, you always have to take that into account.

[00:43:28] Tilman Versch: Where do you see opportunities and risks in the US market?

[00:43:31] Wolfgang Grenke: Yes, the opportunities are there, of course, it’s a huge market, it’s not unusual to lease, so you don’t need to overcome any obstacles, no barriers in your mind, so to speak, and the risks are, of course, competition on the one hand, but also a certain attitude, which is naturally also stronger in America. There is also a lot of praise for the fact that one is allowed to fail, but for the leasing business, the failure of our customers is not quite so much fun, it costs money, and therefore, of course, one has to look very carefully whether the conditions for the prerequisites of solvency are also sufficient. But we are actually confident that we can do this, and we will still enter the market with caution.

Amazon and other competitors

[00:44:26] Tilman Versch: I’m keeping my fingers crossed for that. Looking at the US, there’s also a second question that you can plug in there. There are big US tech companies, including Amazon. The question comes from Bahram and goes in the direction of how you keep your competitive advantages in times when Amazon and Co. cut out middlemen, know a lot about their business customers, and offer financial services.

[00:44:51] Wolfgang Grenke: Well, of course, you can also say that we were always able to use the banks in Europe during the whole time from the foundation until the end. They had the balance sheets of their clients, they had all the conditions. There is a very simple way of looking at it: if I already have a certain dependence on a company or a bank, then I don’t necessarily want to increase it. That’s why we are actually relatively relaxed, even with very strong companies, because if they want to enter the market, they would basically have to take the customer by the hand even more, and some customers are quite reluctant to do that.

Options through business with the bank

[00:45:40] Tilman Versch: We had the topic, you had just mentioned the keyword banks, and you had already indicated that new options have emerged in the banking business. Entrepreneurship is also about building something that is perhaps not yet available in this form and that offers customers more added value. What made it possible to have this banking business and to build a product on it, how are they currently growing and what are the opportunities in this area?

[00:46:06] Wolfgang Grenke: Well, there are several points, so on the one hand the bank now has branches in Norway, in Italy, in Portugal, because the licensing conditions there are appropriate, as I said earlier, on the other hand, we also offer to finance with the bank. For example, we run the micro-credit program of the Federal Republic of Germany because we are technically oriented, which means that we have a large number of contracts with a relatively small volume, which even the local savings banks cannot reach with their costs. And we are trying to make this as simple as possible electronically and still make it secure. In recent weeks and months, in the wake of the Corona crisis, we have seen that business at the bank has picked up accordingly.

Perhaps you could say that if you look at a bank’s balance sheet, you have so-called asset transactions and liability transactions. Lending transactions are the loans that you make and the loans that you grant and similar things more, there are of course on the assets side, on the liabilities side the money is also taken in, for example, time deposits or corresponding refinancing funds. And we have often been told in the course of the last decades: “Well, the banks are of course much cheaper because they get their money cheaper.

Yes, that was also the case for a long time, maybe it’s not quite the same for us today, but it was the case for a long time, but in such a case you also have to add the administrative costs that are associated with a corresponding deposit business, for example. And if you take a look at the website of WeltSparen, for example, you will see that Grenke Bank can offer attractive conditions, but because of its high degree of automation, it is still more favorable for us, for the Grenke Group, than if we had financing in cooperation with a traditional bank.

Research & Development

[00:48:25] Tilman Versch: The high degree of automation and also the digital speed is simply perhaps also a core of your company, which means that you also have a lot to invest in R&D if I conclude that logically. How much do you invest in this area?

[00:48:41] Wolfgang Grenke: That’s why it’s so difficult to say because a lot of it is immediately expensed, personnel expenses for example. We can’t capitalize our own personnel expenses, of course, we don’t capitalize them either, and that’s why it’s very difficult to delimit them. Nevertheless, we have shown in our balance sheets what our project costs are, and they are almost always projects for both administration and sales, with which we want to advance the solution of the problems. You have to take a look at the figures in the balance sheets, in the published balance sheets.

Wolfgang Grenke’s switch to the supervisory board

[00:49:28] Tilman Versch: 2018 was a certain turning point for you, as you changed roles in the company and moved from the board of directors to the supervisory board. What changed for you and how do you perhaps deal with the newly gained time?

[00:49:47] Wolfgang Grenke: Yes, it was already apparent in the years before, because it had been planned for a long time, and I had already spent some of my time on other things beforehand, and that has of course intensified now. I got involved in the Chamber of Industry and Commerce very early on, has been President of the Chamber of Industry and Commerce in Karlsruhe for a relatively long time now, and have also been President of the Baden-Württemberg Chamber of Industry and Commerce.

In addition, I am a member of the board of the DIHK and vice-president of (unv.), which is the area that I do with enthusiasm, because there, too, it is actually about supporting the SMEs, the board does that on the business side, so to speak, and I look at what we can bring, can do, can implement in the political or policy-related area of support. That is actually something that is fun when you are out of the active business for a while. In the case of the Supervisory Board, of course, I try to pass on all my knowledge, which is sometimes something that you can’t write down somewhere or simply hand over, but where you say: “Have we ever had a similar situation and what was it like back then? That I naturally pass on the knowledge in this form without – the situations and the framework conditions do change – without it then necessarily having to be solved in exactly the same way as it was solved in the past. But it simply broadens one’s horizons if one knows a little more about history than perhaps someone else.

[00:51:31] Tilman Versch: What are your current concerns and topics that you are burning for in these new tasks, besides the promotion of SMEs, or that can also be the answer.

[00:51:42] Wolfgang Grenke: Yes, so of course, I follow, because I wrote our IT programs myself until ’95, of course, I follow the development of our company in the IT area, in particular, so what effects that has, what products, what improvements in the administrative process, of course, I like to look at that, and also the development of the franchise companies in new countries, so these are topics where I can also contribute something, where the franchisers also appreciate once in a while that they can speak directly with the founder, even if I can’t perhaps say as much to them for the day-to-day business.

Grenke AG and COVID-19

[00:52:22] Tilman Versch: We also have a question about the day-to-day business thanks to our fund managers who are listening. We had said in the preliminary discussion that you might stay out of it a little bit because you have a different role, which I personally find quite good. But I’ll ask it anyway, and you can then decide whether you answer it, it’s from Michael (Maier?): How is the leasing default rate expected to develop in the next few quarters? Covid-19, will it continue to rise slightly or will there be no serious change, because there are big aid packages and liquidity injections everywhere?

[00:52:51] Wolfgang Grenke: Yes, that would be nice to know exactly. I can only try to estimate it: For example, it depends very much on whether there is another wave of the virus and perhaps another relatively harsh reaction to it, which I don’t think anyone knows exactly at the moment, namely the question of whether the measures that we now know can achieve something, namely keeping one’s distance and using mouth protection and sensible behavior, will be sufficiently observed. We simply don’t know and that’s why I can’t say that, of course. Another question is how payment behavior could change. There are certain sectors that are much more severely affected than others, of course, everything that has to do with travel, everything that has to do with large events, everything that has to do with close contact between people, all that is of course problematic, but on the other hand, there are corresponding aid programs from governments and the EU. It will be exciting to see how big the effects are.

Now, we have of course accommodated our customers and agreed on corresponding deferments where necessary, so that the customers can survive, we have also selected them beforehand, and of course, we have always had to reject customers in the past because we already had a correspondingly poor credit rating. It is quite clear that they are in a particularly bad situation now, but as I said, we were able to choose our customers and therefore we assume that we are also affected by the defaults.

You mentioned Rob Vinall earlier, I think he put it like this the other day: Before Grenke goes bankrupt due to high defaults, all banks will probably have gone bankrupt, simply because we have a relatively large cushion in terms of contribution margin, which we also use for expansion. There will be no expansion at the moment, the declines are there, of course, because in such a case, when people can no longer go out on the streets, no one thinks about investing, at least not on a large scale. Of course, the (unv.) declines, although we are now – we were able to report this at the beginning of the month – quite happy that there was a clear upward trend again in June.

We will certainly not reach the previous year’s result this month, in July, maybe not even in August, let’s see how autumn will be. The trend is positive, but I think that is the case in the entire economy at the moment. Perhaps you will notice that if you go out on the roads and compare how many lorries were on the road two months ago with how many are on the road again now, you will notice that there is already a certain revival, even if one or two companies, including large ones, are not doing particularly well.

Low interest rates and Grenke AG

[00:56:20] Tilman Versch: There is another question that I think fits quite well at this point because it also plays into the long-term baselines a bit. It’s about the low-interest rate environment, and the question is whether the low-interest rate environment is inhibiting new business because entrepreneurs and SMEs are using their own liquidity rather than resorting to leasing. Maybe I’ll expand the question to what the low-interest rate environment also means for your own bank.

[00:56:51] Wolfgang Grenke: Yes, well, the low-interest rate environment has been there for several years before that, and we still had very significant growth rates. I think there is another reason that has to be added, namely: What do people expect in the future? And in 2008 and 2009, some banks were simply unable to help for their own reasons, for their own regulatory reasons. And of course, even now in the Corona crisis, it is not the case that every bank, even with one hundred percent protection, i.e. loans by the federal government, by the KB, for example, grants these loans simply because, of course, even with one hundred percent protection, if a company goes bankrupt, there is still a lot of work involved and there is no profit. So it’s not quite as linear as one might imagine at first.

And in this phase, of course, companies also appreciate not having to depend on individuals, and we actually heard that very often as an argument after 2008, 2009, that people said: “Well, we want to transfer a certain percentage of our investment to (unv.), there’s still enough left over for the bank, for the house bank, but we don’t make it dependent to the same extent as if we were to process everything through an address.” So certain independence certainly comes into play, but overall I can say that leasing is not just a substitute for credit.

One example, which is of great importance, especially in these times when there is a lot of talk about sustainability: over the years, now almost thirty years, we have taken the recycling of used goods into our own hands, because we say that the good customer actually needs equipment that is state-of-the-art again relatively quickly, and at the same time there are enough sales opportunities for used equipment. So this secondary recycling, this secondary marketing, is something we do very, I think, very professionally and, incidentally, we also make sure that the appliances, which often also have environmentally harmful contents, are not simply thrown on the rubbish, but are put to sensible use, and if we recycle them ourselves, they are of course recycled in an environmentally friendly way according to the appropriate standards, i.e. they are disposed of.

So these are all points that speak for it, you can also say that it is actually a bit similar to car leasing, the manufacturers have been very successful with car leasing in the business sector, and they certainly still are, simply because they always co-finance the whole cycle and you don’t really have to worry about it. The differences to the conventional interest rates at banks are then if you [look at] all factors, i.e. also costs, the own costs, but also the administrative costs of the banks, I think relatively modest.

Acquisitions

[01:00:14] Tilman Versch: On the supervisory board, you are also somewhat responsible for the strategic, the larger lines. That’s why the question also goes in the direction of acquisitions, what could be interesting for you in order to perhaps develop the company further.

[01:00:32] Wolfgang Grenke: Well, we have made very few acquisitions, once a medical leasing company, where we knew the people involved for many years, and we have also become somewhat involved on the part of the bank with the company Cash Payment Solutions, better known as Barzahlen.de, the product with which you can deposit and withdraw money at DM markets, Rewe markets and somewhere else, simply because the bank wants to replace the costs of ATMs, which are not low, with a more intelligent solution for its normal business.

Of course, we also know that in the long run other payment methods will certainly become more popular, especially now in the Corona phase, it is clear that so many card payments are very important. Nevertheless, people still want and need cash, and that’s why it’s necessary for every bank to have the appropriate options. So there are issues like this that you might do in addition in one case or another, but essentially we want to push this forward in such a way that we avoid this patchwork in IT, for example, that we don’t acquire other companies because they usually have a different system than we do.

What are new business fields, Wolfgang Grenke?

[01:02:04] Tilman Versch: Exciting. There was another question from the chat and I would also make the last call, so to speak, for the people who still have questions to ask now. The question is from Bahram and he asked: “Which new business areas are foreseeable for Grenke or already there, but still on a smaller basis?”

[01:02:24] Wolfgang Grenke: So, in addition to the leasing business, we have the factoring vectoring business, which is of course also interesting, we also have the financing of start-ups in the lending business, micro-programmes, which I have already mentioned, where you can expand in the longer term, because the bank is actually operational at the moment, apart from the branches in Italy, Portugal and Norway, which are the legal prerequisite for the license, i.e. the leasing business (unv.) or factoring vectoring business, but is not itself offered on the market with credit. There are certainly opportunities to expand. Of course, I know the cost structure that we have ourselves, I also know from statements, from many statements, also from analyses of the cost structures that other banks, also savings banks, and cooperative banks have.

Of course, supervisory issues play a major role in small institutions, and I think we have a relatively good grip on this, both in terms of the quality of supervision and the costs associated with it, because we are very strongly oriented accordingly and thus, in the end, our cost structure is actually more favorable than many others. And that, I believe, gives us the opportunity to invest in these countries in the future. In Germany, there are certainly one or two other things, but I ask for your understanding that we do not name them very specifically, because we naturally want to keep the lead that we have with our thoughts there for the benefit of our shareholders.

[01:04:06] Tilman Versch: Totally understandable. There is one more question then afterward: Is it also conceivable to offer the intelligence about customer payment behavior also as services for other non-competitors?

[01:04:21] Wolfgang Grenke: Well, to a certain extent this is done anyway, when we obtain information from the SCHUFA, from the (unv.), it is often connected with the fact that we also give certain feedback, so with the SCHUFA it is also contractually provided for. Simply so that – yes, you can see it positively and negatively. Negatively, of course, it means that we don’t want to have any damage because others have already had bad experiences. Still, positively it can also be seen in such a way that some people should not get into too much debt if they were already unable to pay in the first case or were unable to pay on time. And from that point of view, it is of course a necessity. Beyond that, we will certainly not actively sell our data, because quite apart from the legal restrictions, the Basic Data Protection Regulation and the like, but even then we are very, very cautious, because I think that would affect the relationship of trust with our customers, and we don’t want to restrict or even destroy that in any case.

What is a good investment for Wolfgang Grenke?

[01:05:37] Tilman Versch: The framework in which we are having this conversation is the Gut Investieren TV channel. I have an interesting question for you as someone who also invests: What is a good investment for you?

[01:05:50] Wolfgang Grenke: Well, if you restrict it to the stock market, I have my own philosophy, which doesn’t come from me alone, I’ve already discussed it with a few professional investors because you’re not only in competition – that doesn’t mean that you have any knowledge yourself, but you’re in competition with the others, so to speak, you have to be better than the others if you want to have a better return. And on the other hand, you are faced with professionals, so in the past, when I was still active when I was once on the advisory board of Deutsche Bank, that is, with the best, I was often able to look at the trading room of Deutsche Bank in Frankfurt at that time, you could see – this is certainly presented differently today, but at that time there were young people or at least not old people sitting there with four screens in front of them, and there were a few hundred of them at the machines.

That’s why I don’t advise quick action in investments, because you play against very good people, which also has something to do with my hobby of playing chess, because there are also very good players in our club, for example, the current world champion and the previous world champion. And wanting to play against them all the time can’t be very successful. So it may be that someone has found another way, but I would advise the normal investor against it. What does it depend on? I think it’s two things, one is: What do I think that the product that a company produces, or offers, that this product will still have its market in five years and will have a significant market, maybe a growing market?

So I can well imagine that it is the right product? And the second thing is: Is the management trustworthy? For the first question, I maintain, that common sense is enough, so even the professionals have no advantage there. For the second part, of course, you need information and there you might need one or two reliable sources of information. Maybe, if you invest a lot of time, you can work it out yourself, but I have actually always taken the two principles to heart in my own investments.

[01:08:39] Tilman Versch: In any case, you also have, so to speak – short-term investing is not the exciting thing where you have an advantage, you also have the long-term perspective, after forty years of entrepreneurship you know what can be invested, so to speak, in small changes in companies and what values it can create. At least I have the impression that you have taken something like that with you.

[01:09:02] Wolfgang Grenke: Yes, yes, I do think that I have one or two advantages.

[01:09:09] Tilman Versch: What is the time perspective for your investments, so to speak – perhaps to conclude, what is the time perspective?

[01:09:24] Wolfgang Grenke: Well, I am a value investor, which means that I would like to go to the five years if possible, where I also believe that it will hold there accordingly. I’m sure that as a (unv.) you have built in that you’re not too surprised when things go down, but on the whole, it’s probably the case that – well, I was talking to a banker in Switzerland the other day, he said: “In every crisis so far, the old price was exceeded again on the markets after six years at the latest.” Perhaps this form of statistics also helps to get over one or two losses. It doesn’t have to be that you have a case like Wirecard or similar cases, that can of course happen sometimes.

The share price crash in March and its impact on Wolfgang Grenke

[01:10:34] Tilman Versch: I want to close with a question from the chat and also thank you very much for the good questions and the participation in the chat and also the likes. If anyone else would like to, please feel free to leave one. It’s Michael Mayer’s question: “How does an entrepreneur feel mentally when, as we saw in March, the value of the company halves in three weeks?

[01:10:57] Wolfgang Grenke: Since I didn’t want to sell any shares and I don’t want to, I can only say: This is the valuation of those who wanted to sell shares and others who sold, and of course, I would prefer to be able to show my shareholders rising prices or constantly rising prices, but that was also the case in the past, that it sometimes goes down significantly, I said earlier, from 19 euros to well below 10 euros. At that time, it was nothing different in relative terms, and as I said, of course, you don’t like it, but you would prefer it to go in the other direction, northwards. But nevertheless, you just have to put up with that too, that’s part of it.

Concluding remarks

[01:11:45] Tilman Versch: Then thank you very much for our interview. Do you now want to add something at the end, which is perhaps an aspect for you that is important to emphasize, which we had not yet discussed?

[01:12:00] Wolfgang Grenke: Oh, I think we’ve gone through almost everything, but I think one point of view, we had that just the other day, a member of the board said that should be done: I only want to sign contracts in my life where I can or would also sign on the other side. So it can’t always be like that, but you should enter into such contracts right from the start, and perhaps you should also, when it comes to more complex things, not let the contract negotiations be conducted by lawyers right from the start, but by those who want to achieve the goal directly, and then take on the lawyers later, so that of course you don’t make any technical mistakes. These are two principles that we have always tried to adhere to.

[01:12:50] Tilman Versch: Nice words of wisdom at the end, thank you very much. Stay tuned for a moment, I’d like to thank all the viewers, thank you very much for watching, and until the next live stream on Sunday, it’s about the topic of Wirecard, which is more an example of bad investing at that point or bad entrepreneurship. But it will still be very exciting, we have the two guests Baki Irmak and Daniel Bauer from the SdK there, the fund manager Baki Irmak and Daniel Bauer from the SdK, Danyal Bayaz from the Bundestag, who will talk about parliamentary clarification, and Professor Matthias Meitner, who will look at the whole thing from a scientific perspective. I hope to see you again on Sunday, have a good evening.

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Tilman is a very enthusiastic, long-term investor. Over the last years he has taught himself important investing concepts autodidactically. He tries to combine a positive climate and environmental impact with his investments.
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