Cazoo marches on…

Life certainly never seems to be dull at Cazoo, the used car start-up that launched its used car proposition less than two years ago.  Over that time, they claim to have sold a total of 20,000 used cars – around half the volume that the average of the Top 25 European dealer groups managed in a Covid-affected market in 2020.  They have also made a string of acquisitions – Imperial Car Supermarkets which added physical outlets and preparation centres, car subscription players Drover in the UK and Cluno in Germany, and Smart Fleet Solutions, a four-site refurbishment and remarketing company.

In the last two weeks, they have also added SMH Fleet Solutions that has the capacity to process 70,000 used cars annually through six sites, doubling Cazoo’s existing capacity from the earlier acquisitions, and Cazana, a used car market data and analytical business that provides dealers with real-time market pricing and tools to support sourcing decisions and inventory management.  They have also completed their IPO on the New York Stock Exchange with an US$8 billion valuation and producing another $1 billion in new funding for Cazoo to continue to pursue its goal of becoming the dominant player in the European used car market.

I have little doubt that the founders and early investors will make a handsome return on their initial stake.  The momentum achieved and the huge sums raised will buy the time that will allow them to cash out profitably, even if they retain a stake in the business beyond that.  Whether new investors will be able to rely on good returns is another question.  The original IPO presentation produced by Cazoo did not anticipate reaching a positive EBITDA (Earnings before interest, tax, depreciation and amortisation) or positive free cash flow until 2024.  Until then, it is burning up investor cash, and will doubtless go through additional fund-raising rounds, in much the same way that stocks like Tesla and Uber have done before them.

With so much going on over an expanding geography in such a short period of time, there will inevitably be some mis-steps which traditional players will point to, suggesting that this shows that Cazoo does not know what they are doing.  We have seen this in recent months with reports of dealers buying cars from Cazoo at retail and immediately reselling them at a profit, and of cars being delivered with faults or poor preparation.  However, the key question is whether the model itself is viable, and whether there are the elements here to build a new style of European used car business in the way that the founders have claimed?

The platform itself has no exceptional functionality that a prospective customer would recognise compared to those offered by a growing number of traditional players.  There will probably be some technical leapfrog as different retailers introduce new features ahead of rivals, but I do not see the platform as an unique advantage, at least in the UK.  In Continental Europe, the potential competitors from the traditional dealer world and independents need to up their game, but that is true with or without Cazoo coming into their market.

As mentioned, valuation and pricing seems to have been a problem, but the purchase of Cazana (which has European scope) will build up valuable skills, even if they lose their independent business from other dealer groups.  The dynamics of the used car business have changed and relying on past experience or traditional price guides to buy and sell stock is no longer adequate.  This was one of the factors recognised by the founders of CarMax in the US – they acquired a super-computer in the early days, and described data as the “deep defensive ditch” that would protect their position.  By recognising the criticality of data and data science, this will pay off for Cazoo to an increasing extent as their volumes grow.

The traditional approach in dealers has been for used car preparation to be used as fill-in work in their own workshops.  This tends to result in poor cost control, as cars are over-prepared to drive aftersales departmental profit, and retail customer work is prioritised leading to delays in photographing, listing and displaying used car inventory.  Through acquisition, Cazoo reflects best practice of dedicated centres operating on flow line principles to quickly process new stock.  Others have demonstrated that preparation time can be reduced to 2-3 days, eliminating a week of inventory and reducing costs through control of preparation levels and efficiency improvements.

The acquisition of Cluno and Drover potentially will provide Cazoo with a competitive advantage.  Although subscription models leveraging used car stock have gained some traction in the USA, we have found European dealers to be generally more resistant, preferring to sell stock through rather than offer it on subscription, potentially remaining on their own balance sheet.  With the funding received, Cazoo has a strong balance sheet and with the proven Cluno/Drover business models can potentially build up a new profit stream and a more engaged customer base that traditional dealers and independents do not have.

The final area of note is sourcing of stock.  This is an area where established dealer groups have a major advantage as they generate used cars through their new car trading and have first call on used cars from the OEMs themselves.  Neither are available to Cazoo who need to compete in the open market to buy good quality stock at the right price.  They have launched a “we buy any car” type offer (again an idea adopted by CarMax years ago) and will be generating trade-ins from their own sales activity.  This is potentially the biggest challenge facing Cazoo as they try to ramp up, particularly in the most developed markets like the UK.

Taken together, you now have to give Cazoo a better than 50:50 chance of making a significant impact in the major European markets.  They have invested sensibly in data intelligence and preparation, have an edge through subscription offers, but may be constrained by supply.  If their advantages give them an edge on slower-moving competitors, they may then also be in the position to win the sourcing battle, being able to offer more to secure scare supplies.