Finding The Amazon Of Used Cars Looks Like A Pipe Dream
(Bloomberg Opinion) -- Pitching Cazoo Group Ltd. as the “Carvana of Europe” seemed a shrewd move when serial entrepreneur Alex Chesterman was shopping his online used-car dealer to investors last year. It doesn’t look so clever now.
Initially, his decision to shun the London market in favor of a SPAC listing on the New York Stock Exchange paid off handsomely. Cazoo obtained a whopping $7 billion valuation, a stunning amount for a business launched in December 2019 and one certainly helped by U.S. muse Carvana Co.’s then-$60 billion market capitalization.
These companies’ business of allowing consumers to purchase a car with a few mouse clicks and have it delivered to their driveway, with a seven-day money-back guarantee, struck a chord with investors. But Cazoo sold just 50,000 cars in 2021 and earned a mere £25 million ($31 million) of gross profit — the money left over after deducting the cost of acquiring vehicles and preparing them for sale. The net loss was £300 million.(3)
This week the British firm became the latest pandemic winner to announce layoffs after a plunge of almost 90% in its shares since November. Besides a 15% headcount reduction and more disciplined marketing budget – which all sounded much like Carvana’s recent restructuring — Cazoo also slashed revenue guidance and other key financial targets in response to the increasingly difficult consumer environment.
Rising interest rates have made investors leery of online used-car retailers that promise a hassle-free service but require huge amounts of capital to finance inventory, refurbish vehicles and truck them to homes. Cazoo will remain in the red for at least a couple more years, according to analyst forecasts compiled by Bloomberg.
As at Carvana, the hedge funds and family offices that financed those losses must be feeling glum: Dan Sundheim’s D1 Capital Partners and Dan Och’s Willoughby Capital Holdings LLC are major Cazoo shareholders, while Viking Global purchased a big chunk of its convertible debt. (1)
After raising $630 million from Viking and others in February, Cazoo at least has a cash buffer that should carry it into 2024.
But having struggled to make money in the red-hot used car market, what’s the likelihood of Cazoo and its ilk doing so quickly now that interest rates and car prices are moving the wrong way? Used-car retail is very competitive, and for the disrupters profitability may prove more challenging than empire building.
You probably haven’t yet bought a car from Cazoo, but European readers will almost certainly be familiar with the brand. The company spent £65 million on marketing last year, owing to an astonishing number of sports partnerships that spans soccer, rugby — even fishing.
In a rare departure from Carvana’s strategy, Cazoo has also spent heavily building a subscription service that lets customers rent a vehicle for six months for a flat fee that includes insurance, breakdown cover and road tax. The service is now being wound down because holding the inventory consumes too much cash. Cazoo is also closing a couple of vehicle-refurbishment facilities to cut costs.
It certainly isn’t the first business to realize the mood music in capital markets has changed. Making itself less dependent on Wall Street’s money taps is sensible because they’re running dry. Carvana was forced to pay more than 10% interest for debt in April. Others weren’t able to raise money at any price: UK challenger Carzam collapsed last week.
But the pivot to greater efficiency and the positive cash flow Cazoo promises at its UK operations by the end of 2023 won’t come easily.
As accelerating inflation bites, some customers will have to make do with a cheaper model or may forgo a purchase entirely. Softening used-car prices may cause Cazoo to book higher depreciation expenses on vehicles purchased at sky-high prices last year. The cost of labor and car parts is also rising.
Cazoo now expects about 75,000 retail car sales in 2022, or less than 60% of the forecast when it went public last year. Gross profit per vehicle sold in the UK will be similarly impacted, likely reaching just £550. Lookers Plc, a traditional car dealer, earned almost four times that selling used cars last year by my calculation.(2)
Investors have become wearily accustomed to companies ditching optimistic predictions soon after being taken public via SPACs and the revenue shortfall will pile even more pressure on Cazoo to cut administration and distribution expenses, without impacting service quality.
Customers won’t want to go back to haggling in a parking lot, but brick-and-mortar car dealers are investing in their own online services, meaning lingering investor hopes that Carvana or Cazoo will become the “Amazon of used cars” are probably misplaced.
Without unlimited capital for acquisitions, infrastructure and glitzy marketing, digital disrupters like Cazoo will become a less potent force.
More From Bloomberg Opinion:
- Cantor, Goldman Sachs and a Disastrous SPAC Deal: Chris Bryant
- Welcome to Our Be-Careful-What-You-Wish-For Economy: Conor Sen
- Private Equity Can Lap Up British Business Again: Chris Hughes
(1) When adjusted for non-cash expenses associated with the SPAC listing.
(2) Cazoo went public by merging with Och’s SPAC, Ajax I
(3) Revenue and gross profit are stated at the mid-point of Cazoo's new guidance range
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Chris Bryant is a Bloomberg Opinion columnist covering industrial companies in Europe. Previously, he was a reporter for the Financial Times.
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