Saturday, June 25 2022

Cazoo, the UK-based online used-car supermarket, declared itself a unicorn last year during its $8 billion float in New York.

But unicorns are mythical creatures. For investors, Cazoo is best viewed as a hare.

Entrepreneur Alex Chesterman launched Cazoo in Britain in 2018 to transform the used car market. Now, Cazoo vans deliver 50,000 cars a year to the doorsteps of online shoppers. There is no store visit, no haggling and no test drive. Cazoo offers customers money-back guarantees.

Investors may also wish to have collateral. Cazoo shares have halved since their IPO. The hare disappeared deep into the tall grass.

A safer way to access used cars might be through some existing tech-conscious dealerships. They may look more like a tortoise than a hare, but like the old tale, that can turn out to be an advantage.

They searched for a long time before jumping. Take Motorpoint – the only listed used car supermarket in the UK. It was launched in 1998 in Derby with a website, a call center and a showroom in a former slaughterhouse. It has since expanded to 15 click and collect sites, sells almost 100,000 used cars a year, delivers to the customer’s doorstep and is expected to make £25million in pre-tax profits through March 2023 and £40m the year. after.

It’s still small, worth less than £300million. But it shows how difficult it is to foment a revolution in used cars. Only 1% of the 8 million used cars sold are purchased online. Motorists may be wary of salespeople in sharp suits, but they’re even more wary of the web.

The market is changing, but slowly. Price comparators like Autotrader have brought transparency. The pandemic has forced shoppers to face their fears of the web. Mark Lavery, owner of franchise dealer Cambria Automobiles, explains that ten years ago, buyers made four visits to the showroom before buying. Now they search online and only visit once.

Motorpoint is aiming for £2bn in revenue within a few years – 70% online, up from 60% currently. Still, managing director Mark Carpenter says buyers will still want a choice – internet or showroom or a bit of both – and is expanding branches.

At Cazoo, Chesterman estimates purely digital used car purchases could top 30% of the UK market, but that’s still a lot for Cazoo if it takes 2-3%. He expects Cazoo to make a profit by doubling its sales to 100,000 used cars by next year.

It’s a big challenge. A decade after its launch, Carvana, the American online supermarket on which Cazoo is modeled, is barely profitable.

In truth, the sale of cars, used or new, is extremely competitive.

“It’s not an over-paid industry that offers easy choices for a disruptor,” says Liberum’s Sanjay Vidyarthi. “Manufacturers’ overcapacity leads to competition and limited pricing power. The distribution network is complex and fragmented.

Up to half of used vehicles are sold through manufacturer-linked franchise dealerships, often with expensive showrooms. Eager for market share, manufacturers are flooding distributors with new vehicles that need to be sold as quickly as possible. The resulting discounts trickle down to used cars which reduce margins.

Motorpoint has established relationships with manufacturers and fleet companies to source inexpensive near-new cars. Vidyarthi says, “It’s a hard model to copy.”

Motorpoint’s share of the near-new market is only 4% and its profit margins are still a measly 2%. But that’s double that of publicly traded franchise dealerships, such as Pendragon and Lookers.

At Cazoo, Chesterman’s strategy is to stay online only and achieve economies of scale. He may be lucky. The pandemic has pushed more consumers online while a global chip shortage has stalled engine production, driving up prices for cars, old and new.

Industry watchers warn this could be temporary. Production will resume, prices will fall and margins will normalize. Better profitability on used cars encourages competition.

Meanwhile, franchise dealers, forced to equip themselves to sell electric vehicles, are investing heavily in virtual forecourts. Competition will intensify as manufacturers seek to offset the higher production costs of electric vehicles by squeezing distributors and dealing directly with punters.

Chesterman says all of this helps shape the online market. Still, Cazoo’s nationwide network isn’t cheap: Last week, it raised $630 million in convertible notes to fund its expansion.

Liberum’s Vidyarthi believes Cazoo’s biggest challenge might be getting enough cars at good prices. The older he gets, the harder it will be.

Cazoo can jump like a hare. But shares of the loss-making company, which trade at twice the price of earnings, are not priced for disappointment even after their decline.

Conversely, Motorpoint, which is profitable, is trading at a modest nine times expected earnings. Like the tortoise, it has resistance.

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