Have the disruptors been disrupted?

One of the hot news items over the last few weeks has been the significant drop in the share price of Cazoo along with other ‘tech’ stocks.  The markets appear to have decided that they need to pay more attention to profit than to Powerpoint, and are applying a more realistic valuation to businesses that are burning through investor cash, but are yet to turn a profit.  Whilst announcing a further US$630 million fund raising last week, the company announced that sales had topped US$665 million from sales of almost 50,000 units last year.  However, the business remains loss-making and burns cash, in part to fund the huge marketing spend with sponsorships of football, rugby, golf, horse-racing and snooker as well as pervasive advertising across all media.  Gross profit per unit of £450 in 2021 was certainly an improvement on the £229 loss in 2020, but is still a long way from the £900 per unit ambition for 2022.  It is also well below the levels achieved by the traditional dealer groups and the 15% gross margin target that was a highlight of the IPO documents last year.

None of that means that Cazoo is doomed to crash and burn.  In 2017, Tesla was in a similar position – albeit Cazoo spends more on just one of the team sponsorship deals than Tesla spends in total on marketing globally.  They had made losses every year since launch, had major issues with ramping up production and sales and selling emissions credits were a vital financial lifeline.  Fast forward to today, and Tesla achieved its half million sales target in 2020, hit its 2021 target of a million sales, and has turned losses up to 2019 into a modest profit in 2020 and almost US$3.5 billion in the year to September 2021.  I don’t anticipate that Cazoo will have such a spectacular turnaround, and there are inherent challenges in their business plan, but they – and other so-called disruptors like Auto-1 and cinch – are already having a positive effect on used car retailing.

These new businesses may have an unfair advantage in that they have secured capital at lower cost and higher volumes than the existing players – a phenomena that Herbert Diess at VW attributed to the existing players not having “sufficiently proved yet that we can hold our ground in the new competitive environment – our valuation is still located in ‘old auto’.”  He was referring to VW against the likes of Tesla, but the same principle applies to franchised dealers and independent used car players.  Just as VW is fighting back with a massive BEV onslaught, I see signs that the better players in the traditional motor trade are also fighting back and given their competitive advantage in terms of securing supply of used stock, I believe that they can win this battle.  That does not mean that I am predicting the death of Auto-1, Cazoo, cinch and other smaller but similar players, but at best they will become significant competitors – just as franchised dealers and used car supermarkets co-exist today.

Although the pandemic lockdowns also played their part in forcing dealers to find new ways of doing business, a number of the actions taken and maintained since restrictions eased mirror what might have been USPs (Unique Selling Propositions) of the would-be disruptors.  Although we first talked about using the customers own condition report to offer a remote trade-in valuation almost ten years ago based on the experience of what is now Trustford in the UK, and CitNow offered a customer app to do the walkround over five years ago, it has only become common practice in the last couple years.  The quality of imaging, detailed and honest descriptions and provision of key documents on website listings is now more common than it was, but again has been around for a while, with Imperial Car Supermarkets (ironically one of the first acquisitions made by Cazoo) being a pioneer.  Fixed pricing guaranteed to be at market levels was pioneered in Europe, not by one of the disruptors, but to my knowledge by Trevor Finn at Pendragon a decade ago, reflecting best practice from CarMax in the US.  WeBuyAnyCar was established by a used car supermarket (Carcraft, now out of business) way back in 2006, and was acquired by BCA (now a sister company to cinch) in 2013.  A similar offer was launched by Pendragon in 2015, and in the face of the supply challenges, many dealer groups and larger independents now have similar offerings.  The ability to reserve a specific car or complete the whole sales transaction online is now offered by many dealers, despite the fact that showrooms are open again, and home delivery with the opportunity to return a car within 7 or 14 days if the customer is not satisfied are also now well established.

 This leaves the would-be disruptors at best on a level playing field with the established players. I say ‘at best’ because the disruptors do not have the access to used car stock that franchised dealers enjoy. That is a particular challenge at the moment, but even in normal conditions, they will be competing with all other players to secure defleet deals or buy at auction. They will therefore be squeezed between market forces at both the buying and selling end of the deal, and lacking any differentiation with the better established players in the sales process. The investors who swallowed the sales pitch that they had some defensible USP will lose as the share price falls to a level that more closely reflects the fundamentals of the business. However, the biggest losers may be the existing players who have not moved with their peers and the disruptors to improve processes and the customer experience. They may blame the disruptors, but the reality will be that they did not keep up with their peer group.