#025 - Cazoo

Upcoming European online used car retailer.

Cazoo - (NYSE: CZOO)

Cazoo is an online used car retailer that operates primarily in the UK and is looking to expand to the rest of Europe. Cazoo isn’t publicly trading yet, but is going public through a SPAC with AJAX I.

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Please note that this article does not constitute investment advice in any form. This article is not a research report and is not intended to serve as the basis for any investment decision. All investments involve risk and the past performance of a security or financial product does not guarantee future returns. Investors have to conduct their own research before conducting any transaction. There is always the risk of losing parts or all of your money when you invest in securities or other financial products.


Quick Intro

This will be my last shallow dive about an online used car retailer. I’ve covered the main ones (Carvana, Vroom, CarMax, Shift, CarLotz, Auto1 Group, and now Cazoo). I’ve thought about writing an overall summary of the industry and what I’ve learned over the past number of weeks. This would be premium content so you’d have to pay for it sadly (I’ve got to make a profit somehow). If there’s enough interest, I’ll consider doing this so please let me know if you’d be interested in this.

Next week, I’ll cover Squarespace since I’ve covered Wix, GoDaddy, BigCommerce, and Shopify already. After that, I’m open to suggestions on different industries to cover. I’m interested in looking at the BNPL space (Affirm, Klarna, Afterpay) but also have some other ideas. If there’s anything you’d want to hear/read about please let me know!


Industry Overview

I’ve been profiling the online used car market for a number of weeks now. I think this industry is interesting, but I don’t know if it’s very attractive at current prices. I think just like the rest of the market there might be pockets of opportunity, but I don’t know where they are today.

Cazoo competes with other online used car retailers such as Auto1 Group’s Autohero, which is looking to expand and grow from being more than a wholesale platform for buyers and sellers. Cazoo also competes with traditional physical used car retailers.

I think the shift from buying cars in person and negotiating with a salesman is changing and more people will be comfortable buying a car online and having the opportunity to test out the car for a number of days or weeks before deciding on a purchase. Buying a car online reduces friction and with the environment of the past year, I think people are comfortable doing many more things remote and sight unseen.

Business Overview

Cazoo is a European online used retailer that is going public through a SPAC with AJAX 1. Cazoo has established itself in the UK and is looking to expand across the rest of Europe. Cazoo expects to use the proceeds from this transaction to accomplish this goal of basically being the “Carvana of Europe.”

Cazoo is another vertically integrated online used car retailer with in-house logistics and reconditioning. Cazoo has delivered more than 20,000 cars to consumers since its founding in 2018.

Like I’ve touched on before, I think having a vertically integrated process is important fort these online used car retailers. I think the infrastructure needed to succeed in this business is quite high. The density of reconditioning centers and logistics infrastructure helps to improve the economics of these businesses. Having higher infrastructure density leads to better turns of inventory, which reduces depreciation and lowers working capital commitments, and cheaper logistics costs. This strategy might differ between less dense and more dense areas of the world. For American competitors like Carvana, Shift, Vroom, CarLotz, and CarMax, these companies need to invest in their infrastructure to build out a fixed cost business that will hopefully turn into operating leverage one day.

This seems to be the same story for Cazoo. I think the story just depends on how likely it is that Cazoo can achieve its goals with competition (mainly Auto1 Group) existing and looking to compete in this space combined with a fair valuation.

Since Cazoo isn’t even publicly trading yet, it’s hard to find more materials discussing earnings on strategy for example.

Total Addressable Market

Europe’s used car industry is also a massive industry just like the United States. I touched on this last week in Auto1 Group’s shallow dive, but the used car industry in most countries is likely to be massive given how prevalent cars are in most parts of the world. The European used car market is valued at more than €600 billion. This is in line with the American used car market. One additional factor that likely brings up the total addressable market size is financing, which is estimated to bring in an additional €100 billion.

Competitive Advantages

  • Scale

    Like I alluded to above, I think scale is the best source of competitive advantage for many of these companies. Scale leads to economies of scale which leads to less costs and higher profits. If Cazoo or other competitors can build out a larger scale before any competitors can replicate it, then this might lead to a sustainable competitive advantage.

    On the flip side, if traditional used car retailers already have this scale in place yet are losing ground to online competitors than maybe scale doesn’t lead to a competitive advantage. I think as an answer to this question I’d say that traditional used car retailers still have lots of friction in their business model and I want to say it’d be nearly impossible for these companies to basically reinvent themselves in order to reduce friction for customers.

  • Brand

    I’ve also been saying that branding is important. Over your lifetime, the average consumer will probably buy a number of cars. If you’ve had a good experience with a certain retailer or you’ve heard your friends have had good experiences with a certain online retailer, then you’re likely to visit that website instead of others. You’ll know you’re likely to have a good experience and not have to start from scratch and find out what companies offer the best combination of prices, selection, and convenience for you.

Management

There aren’t many available (or trustworthy) financials for this business, so instead of doing a financials overview, I’m going to do a management overview. If this is something you’d like to see in the future, let me know!

The main connection between the four executives profiled below is that 3/4 worked at Zoopla in very senior roles. Zoopla had a great exit and maybe Cazoo can do the same?

Alex Chesterman

Alex Chesterman founded Cazoo in 2018. His goal was to make buying a car just as easy and seamless as buying any other product online. Alex previously founded Zoopla (Zillow of UK?) in 2007, took it public in 2014, and sold it to Silver Lake in 2018 for €2.2 billion.

Alex also co-founded LoveFilm (DVD-by-mail, basically early day Netflix for the UK) in 2002. LoveFilm was eventually bought by Amazon for ~$200 million. Alex seems to be a very experienced executive and founder. He has some great experiences in the tech industry and I wonder what his motivation is for founding and running Cazoo (a much different business than before). Alex is likely already quite wealthy and doesn’t need to start, manage, and grow another business to have financial freedom.

Stephen Morana

Stephen is the Chief Financial Officer at Cazoo. Stephen previously worked at Zoopla Property Group (the company founded by Chesterman. Stephen has worked in various roles before this position, such as CFO of Zoopla, various venture capital investing positions, CFO of Betfair, and other positions.

Jonathan Howell

Jonathan is the Chief Technology Officer at Cazoo. Jonathan previously worked at MADE.com, a furniture retail company. Jonathan has been working at Cazoo since June 2019.

Paul Whitehead

Paul is the Chief Operating Officer at Cazoo. Paul has been working at Cazoo since December 2018 and previously worked as the Chief Strategy Officer at Zoopla.

What’s Interesting

  • “Carvana of Europe”

    The idea of being the “Carvana of Europe” without some of the concerns of Carvana is quite attractive. I worry that there are already more formidable competitors such as Auto1 Group, but I think there is likely an opportunity for this industry to support a number of companies. This is a massive fragmented market with a massive potential for many of these transactions to occur online as more people look to reduce the friction of buying a used car in-person and negotiating with a salesperson.

    I think this idea is interesting enough. Carvana is a large business (whether or not you are concerned about some of the risks is a different story. There are other large online used car retailers and if Cazoo can be the winner in the European market, then this could likely be a big business.

Future Questions

  • More about the business

    I’m looking forward to learning more about the business once the stock is trading and the management team has a couple of earnings call. I’m just curious about what are some of the similarities and differences with the rest of the American competitors. There’s just not enough information for me to make an informed decision where I can sleep peacefully at night knowing I own part of this business.

  • Does density of infrastructure matter as much in Europe?

    I’m curious how important infrastructure or the density of infrastructure really is in Europe since cities are closer, population density is higher, and people use public transportation more often. Maybe having a handful of massive reconditioning centers instead of more reconditioning centers spread out is a better use of capital. What if the density of infrastructure isn’t as important as American peers, then the competitive advantage from scale isn’t truly sustainable since competitors can buildout the same infrastructure, make less costly mistakes, and all of a sudden are competing with Cazoo?

Conclusion

I think Cazoo is an interesting company and there’s likely potential for it to be a successful company. I’d like to see more information and think about the company though before investing in this business. I’m pretty selective about my holdings so I doubt this business will make it into my portfolio.


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