Schadenfreude

Schadenfreude is the German word for taking pleasure from another person’s misfortune.  In a British culture it is not considered polite to indulge in such behaviour, but given the news of the last couple weeks, it would be strange if my blog covered any topic other than the pain that is now being admitted by Cazoo – the online used car retailer that promised in its IPO document just 15 months ago that it would “transform the car buying experience across the UK and Europe”.  The launch had been accompanied by highly critical comments about the established players, which was not only obviously wrong as a broad statement at the time, but has been shown to be wrong by the performance gap between those ‘dinosaurs’ and Cazoo – hence the justification for those established players to feel a little smug.

On May 3rd, the company announced their financial results for the first quarter of 2022, and although the official statements put a gloss on the numbers, the reality is that they were dire.  There was growth in volume and revenue, to be fair with a higher revenue per unit, but during a period when traditional retailers were making record profits, Cazoo reported a gross profit per unit that was down by 13% to only £124 per unit – described as “broadly stable”, but give the growth in sales revenue, actually a drop in gross profit percentage of one third.  During the first quarter Cazoo also resorted to an alternative form of fund-raising which reduces risk for the funder as it was unable to use normal funding methods because of the loss of investor confidence – Cazoo argue because of weak financial market conditions, but the poor financial performance gives them no argument in their defence.

Last week, Cazoo announced a ‘Business Realignment Plan’ with a new focus on profitability and the promise of delivering sustainable margins.  This is intended to cut £200 million from costs, the first evidence of which was the further news at the weekend that their title sponsor deal with Everton Football Club would not be renewed, just one of the many big ticket sports sponsorship deals that they have struck over the last two years to drive brand awareness.  Not referenced in the public announcements was a decision to stop offering subscriptions – despite spending over £200 million on acquiring Drover and other continental European subscription players over the last two years.  The primary driver may be to release cash tied up in the operating fleet, but based on ICDP modelling it is also quite likely that these businesses were loss-making with little chance of a turnaround.  To the extent that Drover was successful before being acquired by Cazoo, this was largely dependent on highly advantageous terms being offered by OEMs who treated it as an experiment.

This was followed up by a regulatory filing in the US on Thursday which by it’s nature has to be free of any PR ‘spin’ and included the statements that “we have a history of losses and we may not achieve or maintain profitability in the future” and “our recent growth may not be indicative of our future growth and, if we continue to grow rapidly, we may not be able to manage our growth effectively”.  The filing as a whole is actually a fairly comprehensive summary of the challenges faced by Cazoo and other similar start-ups which were obvious to anyone with industry experience at the outset.

Does all of this mean that Cazoo is going to fail?  I think it would be premature to make that prediction, as the hundreds of millions spent to date have created brand awareness (though this will decay without continuing marketing spend), a competitive (but not unique) online platform, and an infrastructure that can prepare and deliver cars in high volumes.  In my view, to make this a viable business going forward requires a singular focus on the UK market, as there are few synergies across to the continental European market, strengthening of used car operational capability to improve sourcing and pricing, and a bit more humility.  Can this all be done with the support of the existing shareholder base?  Probably not, as it is far removed from the original ‘pot of gold at the end of rainbow’ promise.  Would those investors accept a bid from a trade investor who wanted to quickly acquire scale in the UK market?  Probably yes, but a bidder is unlikely to see almost a billion dollars of value in Cazoo, even at the current share price of barely a dollar a share – down 90% from the IPO.