Cazoo withdraws from mainland Europe

On September 8, online car retailer Cazoo Group Ltd announced, following a review of a range of strategic options, that it proposes to wind down operations in mainland Europe to focus on its core UK market, a market with approximately 8 million used car transactions and a value of over £100 billion annually. Growth in the UK remains strong, with retail unit sales up over 100% year-on-year in July and August, despite the challenging macro-economic backdrop.

Alex Chesterman OBE, Founder & CEO of Cazoo, commented, “Given our target of reaching profitability by the end of next year, we have taken the tough decision to focus solely on the huge UK used car market, worth over £100bn+ annually.

“The strong customer demand we are seeing in the core UK business gives us high confidence in the future opportunity and the decision we have taken today to withdraw from mainland Europe ensures that our balance sheet remains strong and that we have a plan which we believe no longer requires any further external funding.”

Cazoo have said that the plan to withdraw from the EU is based on the material further investment that would be required for Cazoo to continue to scale its operations in the EU and the conflict this has with the Company’s priorities of cash conservation and achieving profitability without the need for additional capital.

However, it was only two months ago that Cazoo announced its launch in Italy along with a shirt sponsorship deal with Bologna FC. The fact that they have now announced that the European operations are to be closed indicates, at best, confusion but, at worst, something more sinister going on. It looks like they were pushed rather than walked away from Europe.

The Cazoo business model was built on rapid expansion into what Alex Chesterman called a “market ripe for disruption”. Many people have tried and failed to disrupt the traditional auto market but, while the market does need to change, the embedded players in the market will not just lie down and be trampled on. Indeed, the more-savvy operators are already a long way along the journey to offer an omni-channel shopping experience for their customers.

Amongst the many headwinds that Cazoo has suffered, perhaps the most telling that has led to the collapse of the share price and subsequent withdrawal from Europe is the supply chain. While we have heard a lot about supply chain issues affecting new car supply, they have also affected used car supply.

Cazoo has not been able to source cars in sufficient quantities to get anywhere near their sales ambitions. They have built a sales and marketing machine designed to deliver at high volume and this machine (with all the sponsorships, etc., that go with it) has led to the company having to bear a very high break-even point. Therefore, even if the sales machine could generate enough customers to meet the sales targets, Cazoo are simply unable to meet the demand.

The current target of selling 100,000 units with total revenues of £2bn in 2022 looks hopelessly optimistic, especially bearing in mind that in 2021 total sales were below 50,000 with a gross margin of £450 per unit. The outgoing CFO, Stephen Morana, indicated in an interview earlier this year that in order to achieve profitability, not only would the sales targets have to be achieved but that the gross profit per unit would have to be more than doubled from its current level.

There are of course other reasons for the setbacks that Cazoo now faces; for example, the fact that buying a car isn’t a completely rational decision for most people. Cazoo have realised this by opening bricks and mortar sites but along with the closure of preparation centres which has already been communicated, it is likely that any real estate investments in the UK will also be liquidated.

Perhaps there are not enough customers in the UK just yet who are prepared to buy a used car completely on-line. But that’s a debate for another day.