Finding the Used Car Amazon Sounds Like a Pipe Dream

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Introducing Cazoo Group Ltd. as the “Carvana of Europe” seemed like a smart move when serial entrepreneur Alex Chesterman bought his online used-car dealership from investors last year. Doesn’t look so smart now.

Initially, his decision to avoid the London market in favor of a SPAC listing on the New York Stock Exchange paid off. Cazoo secured a whopping $7 billion valuation, a staggering amount for a company launched in December 2019 and certainly helped by the then $60 billion market capitalization of American muse Carvana Co.

These companies’ business of allowing consumers to buy a car with the click of a mouse and have it delivered to their driveway, with a seven-day money-back guarantee, has struck a chord with investors. But Cazoo only sold 50,000 cars in 2021 and earned just £25m ($31m) in gross profit – the money left over after deducting the cost of acquiring the vehicles and preparing them for sale. The net loss was £300m.(3)

This week, the British firm became the latest pandemic winner to announce layoffs after its shares have plummeted nearly 90% since November. In addition to a 15% reduction in staff and a more disciplined marketing budget – which closely resembled Carvana’s recent restructuring – Cazoo also reduced its revenue guidance and other key financial targets in response to an increasingly consumer environment. more difficult.

Rising interest rates have made investors wary of online used car retailers who promise hassle-free service but require huge amounts of capital to finance inventory, refurbish vehicles and truck them home. Cazoo will remain in the red for at least two more years, according to analyst forecasts compiled by Bloomberg.

As at Carvana, the hedge funds and family offices that financed these losses must be feeling gloomy: Dan Sundheim’s D1 Capital Partners and Dan Och’s Willoughby Capital Holdings LLC are Cazoo’s largest shareholders, while Viking Global bought a large part of its convertible debt. (1)

After raising $630 million from Viking and others in February, Cazoo has at least a cash reserve that should carry him through 2024.

But having struggled to make money in the scorching used-car market, how likely are Cazoo and his ilk to do so quickly now that interest rates and car prices are moving in the wrong direction? ? Used car retail is highly competitive, and for disruptors, profitability can prove more difficult than building an empire.

You probably haven’t bought a car from Cazoo yet, but European readers will certainly be familiar with the brand. The company spent £65million on marketing last year, thanks to an astonishing number of sports partnerships that span football, rugby and even fishing.

In a rare departure from Carvana’s strategy, Cazoo has also spent a lot of money creating a subscription service that allows customers to rent a vehicle for six months for a flat rate that includes insurance, cover breakdown and road tax. The service is now being phased out as maintaining inventory consumes too much money. Cazoo is also closing a few vehicle refurbishment facilities to cut costs.

It’s certainly not the first company to realize that the music of the financial markets has changed. Making less dependence on Wall Street’s money taps makes sense because they are drying up. Carvana was forced to pay more than 10% interest on its debt in April. Others have been unable to raise funds at any cost: British challenger Carzam collapsed last week.

But the pivot to greater efficiency and positive cash flow promised by Cazoo in its UK operations by the end of 2023 will not come easily.

As inflation accelerates, some customers will have to settle for a cheaper model or forgo a purchase altogether. Softer used car prices may cause Cazoo to book higher depreciation expenses on vehicles purchased at exorbitant prices last year. The cost of labor and auto parts are also increasing.

Cazoo now expects around 75,000 retail car sales in 2022, less than 60% of forecast when it went public last year. Gross profit per vehicle sold in the UK will also be impacted, likely reaching just £550. Lookers Plc, a traditional car dealership, earned nearly four times as much as used car sales last year by my calculations.(2)

Investors have become accustomed to companies dropping their bullish forecasts soon after going public via SPACs and the shortfall will put even more pressure on Cazoo to cut administration and distribution expenses. , without affecting the quality of service.

Customers won’t want to start haggling in a parking lot again, but brick-and-mortar car dealerships are investing in their own online services, meaning investors are hoping Carvana or Cazoo will become “the Amazon of used cars.” lost.

Without unlimited capital for acquisition, infrastructure, and glitzy marketing, digital disruptors like Cazoo will become a lesser 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 revive UK businesses again: Chris Hughes

(1) After adjusting for non-cash expenses associated with SPAC registration.

(2) Cazoo went public by merging with Och’s SPAC, Ajax I

(3) Revenue and gross margin are shown at the midpoint of Cazoo’s new guidance range

This column does not necessarily reflect the opinion of the Editorial Board or of 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.

More stories like this are available at bloomberg.com/opinion

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