CAZOO’s Numbers?,,,,,, WTF!?,,,,,,,,

Apologies to all the frank and to the point nature of the heading in this article but I wanted to grab everyone’s attention after a recent post on LinkedIn by James Baggott, regarding the supposed leaking of Cazoo’s 5 year projections for their investors.

Now before commenting I must make it known that I have no commercial relationship with Cazoo and am not an investor in their business; I comment as a used car business development professional and a director of Europe’s only supplier of total and complete used car business development and personnel training programmes; so with some credibility. I must also point out that this article is not being written to offer investment advice; those wishing to invest in Cazoo must make their own judgement on the likely returns, as many have if, (as reported), they have already secured ￡80 Million of funding.

No I write this as a fascinated observer and used car market place professional, and because I suspect that we might all be being taken for fools; but also that we may be missing something, because the projections stated are, (at face value), ambitious to say the least! Now in compiling this business case analysis I also asked myself the question; has Alex Chesterman and his band of investors really struck on something that we have all missed? And let’s not forget that having founded Zoopla, Alex Chesterman is no stranger to success, so I took this a little more seriously than I do all the new car internet based market disruptors; all of whom could be put out of business within 6 months, if manufacturers and their franchise partners ran their new car business differently; but that is another article!

So let’s start by reminding ourselves of the 5 year projections reportedly made:

Cazoo’s (alleged) Objectives:

·      217,000 used cars retailed by year 5.

·      Targeting ￡1,500 Profit Per Unit.

·      Looking to secure 5% of the used car market.

Now let’s be in no doubt, these figures are “Ballsey” to say the least! If these are the genuine “stated” objectives and those that have been made to investors, then we all need to treat them with an open mind in the first instance, because Alex Chesterman has proven himself a very capable market disruptor, but I also add the caveat that this does not give his model a divine right to be achievable.

So where did I start in my process of assessment and in ripping apart the objectives? Well I treated it like any other business I would be working with and started by ripping things apart before putting back together again. So below in this article you will find some of the highlights and my initial thoughts regarding the trading objectives of Cazoo!

The Used Car Market Opportunity:

The purpose of this article is not to delve too deeply into the opportunity that is available, (this would be a White Paper in itself), however, (and in brevity), it is worth remembering that the used car market is over 3 times the size of the new car market in the UK, in terms of the level annualised sales volumes, so the opportunity for successful businesses is vast. Even more so as new car manufacturers appear to have deserted any defined and structured ambitions to take advantage of both the used car market place opportunity and the many commercial advantages they have which, if managed correctly on an operational basis, would effectively create “Barriers Of Entry” to competitors.

The fact that the manufacturers offer no programmes of used car business development and personnel training programmes for their franchise partners is baffling, but as new car markets continue to evolve and fracture, I feel sure that many will return to focusing on growing used car market place share; they may be years behind the curve and lacking the experience and expertise to do so at inception, but should the correct investments be made, be in no doubt that their used car market place success will render the business models of specialist independent used car retailers close to obsolete.

The Cazoo Team:

Whenever starting work with a client I look at the team in place as this is vital; no business can run before it can walk and I must have this in mind when constructing their bespoke used car business development programme. In the short term and until investments are made in additional more experienced/capable personnel, or the existing team members have been developed, the team in place should dictate your realistic growth objectives.

The team in place at a business is no different to any other team because the experience contained within the team, along with the personnel and business model development capabilities of those responsible, is vital. We forget this at our peril; there are hundreds of football clubs in the UK, they all have a manager, 11 players in the same positions and a football pitch to play upon, but only one can win the Premier League.

So just as it is ridiculous to say that Torquay Utd will win the premier league in 5 years, (sorry Torquay fans), it could also make the stated objectives of Cazoo just as fanciful if they don’t have the right team in place. Now, not working with Cazoo means resorting to their company LinkedIn page, but knowing how important this is and how important the Cazoo Team would/should have been to those investing in the company, I feel confident that the staff listed here is accurate.

On the face of it the Cazoo team is typical of many tech based disruptors, especially those targeting the new and/or used car markets; they appear to be staffed by “Tech, Data and Marketing associated professionals” which is great and vital when you are running a digital sales leading business. What worries me with tech based market disruptors is that there is, (in the main), almost an arrogance in the employment process, where they think they know better and what I didn’t find as I ran through the 151 employees listed on their company LinkedIn page, was anyone who has had a successful career in building used car businesses, either at manufacturer or, more importantly perhaps, at a senior level within companies owning successful used car businesses!

Call me “Old Fashioned” but I would worry about this; as you will see in my initial conclusions below, this lack of market intel and genuine used car market expertise will be the “Achilles Heel” for tech based new and used car market disruptors, provided of course, that manufacturers and their franchised partners stop running scared, ignoring the threat and seeing them as “The Bogey Men!”

The Cazoo Model:

Having digested their offering from the Cazoo website it appears that Cazoo really aren’t doing anything different, so in reality any success they achieve can only be about price; a dangerous operational flaw when the numbers “leaked” state that Cazoo are aiming to make ￡1,500 profit per unit, (more on this in my conclusions).

In fact it is worse than this; their model not only appears inferior it also has no barriers to entry. Although no details were provided they only offer a 3 month warranty, 9 months less than the warranties supplied via manufacturer approved used car programmes. Their stated USP seems to be the fact that the car will be delivered to your home or place of work, at a time to suit you, (well this is not a USP as everyone will do this), and that the customer can return the car after 7 days if they don’t like it.

My fear here is that this is naive and could be abused; there were no details regarding the terms and conditions surrounding this initiative and the “Devil Will Be In The Small Print” of course; but in this instance, what happens to the customers part exchange? Does it get returned as part of the money back guarantee? In reality I would need to know a lot more before commenting but at first glance there are no genuine used car market place USP’s here, in fact they could actually be leaving the business exposed to losses!

There is also no mention of the ability to see and test drive the car before making a decision and handing over your money? I’m not convinced that this purchase model will drive sales volumes where they are going to need to be during the first year, let alone in year 5; a point rather proven in the statement in James Baggott’s article, made by Cazoo representative Lawrence Hall, and I quote; ‘We launched just 12 weeks ago and have already delivered over 1,000 cars to customers all over the country so we are very happy with the way things are going so far.’

As much as this may be a worthy achievement, unless performance improves dramatically in the remaining part of the first trading year, this level of sales puts Cazoo on an annualised sales rate of between 4,000 and 5,000 cars; way below the stated figure of 12,375 in the first 12 months of trading.

Numbers Versus Operational Reality:

I decided just to look at the year 5 number here and the operational and financial reality of them are astounding. Now in commenting on these numbers I have had to assume that Cazoo will go on journey of self-learnt used car business development; by not securing access to genuinely successful used car professionals, I assume that they are also unlikely to feel the need to invest in their education and/or the genuinely successful used car professionals required, and I say this because it appears that the owners and shareholders don’t appear to have deemed a necessary step thus far, although this could change if any of the earlier performance objectives are missed.

So let’s assume that Cazoo morph into a used car business that operates at the level, in terms of the rate of stock turn being achieved, that franchised dealer based used car operations are operating at, as an average. I can state this as genuine fact as this is where, on average, the used car businesses contained within franchised dealerships are operating, at the time our business audits them, and the average rate of stock turn being achieved by used car operations contained within franchised dealer networks is 6 times per annum or 60 days per unit.

Now it is worth stating at this point that this rate of stock turn does not make a used car operation profitable in isolation, when it comes to the utilisation of the funds employed to the used car stock holding; as covered in our recent article, 95% Of Used Car Businesses In Franchised Dealers Are Losing Money!,,,

I will expand on this more in my conclusions but should, (and this is a big “Should”), the Cazoo business morph into a used car business, capable on a acquisitions, operational and sales basis, of turning used car stock over at this rate, they will need an average of 36,167 used cars in stock during year 5, (not allowing for any cyclical peaks and lows in the stocking level required which could see this at a far higher figure), just to achieve their volume target of 217,000 sales.

Perhaps more importantly, (and again I state that I am not in receipt of the operational and funding plans), this is likely to equate to over ￡700 Million worth of used car stock; on the basis that their projected RGP Per Unit of ￡1,500:00 equates to sensible 7.5% return. Now we must accept that they may be including finance commission in that income, (something that would reduce the overall amount invested in used car stock), but nevertheless the figures are staggering.

Conclusions:

Those who know me and have worked with me know that I am not shy of an opinion; I’m not always right, but the mere the fact that I am doing what I am doing is proof that I am right more often than I am wrong, when it comes to used car businesses and the used car market.

Something though worries me about the numbers supposedly “Leaked;” it could be a ruse, and I say this because they appear just so ridiculous, in terms of a set of objectives for a new start business targeting a highly specialised market, and without appearing to have the professionals on board who have proven experience and success within the UK used car market. However, the fact that they have acquired funding means we should take note, even if it may be more to do with an investment in Alex Chesterman than it is to do with the model.

So in conclusion I have decided to outline what I would have said to Alex Chesterman if he had decided to call me for some advice; now he didn’t but if he had shared the numbers and the model, (as it appears), in brevity my professional recommendations would have been as below.

It is a bold step to move from the model you ran when you launched Zoopla which is a brokerage model where you are not investing in commodities for retail profit. This is what I would call the “Amazon” model; one where you own nothing and therefore can run a completely different operational model compared to one of a retailer, where you are acquiring and investing in a depreciating asset class, whilst operating within a 60 day window of fiscal profitability.

The first challenge will be a lack of a message of specialism; in order to achieve the sales numbers stated you are going to have to appeal to all used car markets; this is the traditional used car supermarket model which has been proven to work successfully but has also shown how challenging it can be, with a raft of losses for the established major PLC’s operating in the UK trying, (and failing), to run this model in the UK; as covered in our recent article; Used Car Retailing?,,,,, How Hard Can It Be?

I would not go any further into this point without agreeing a fee structure in advance; but in essence this model, one of doing the same, (and in some cases less than established businesses in this sector), will make it all about price in the eyes of the consumer and this will leave the stated RGP Per Unit target of ￡1,500:00 challenging in the extreme.

I would also advise that successful used car retailing has two major skills at the foundations of any success; the first being used car stock acquisition. Every business buying and reselling commodities makes its money when it buys and this is a skill that seems to be missing from the personnel listed on the company’s LinkedIn page. Again I would not get into this on a deeper strategic level without being invited professionally to advise, but I would offer for free the fact that purchasing used car stock at the levels required and at the prices required in order to achieve the RGP Per Unit stated will imperative to success.

I would also advise those involved that their primary focus should not be in “Selling,”  (although this is important), the volumes of used cars required, but in “Acquiring” the right used car stock in the volumes required! It is important to remember at all times that although you think you are launching a retail business, you are actually running an acquisitions business in the first instance and without an acquisitions business capable of securing the used car stock required, and in the volumes required, your sales business is going to fail.

My final point on the this subject would be to point out that any relationship you may be trying to build and leverage with auction houses is not the answer; and leave it there until I have agreed a fee for further consultation and strategic advice. As a gift I would refer them to my recent article covering this issue; Successful Used Car Businesses Aren’t Buying Used Car Stock From Auctions!,,,

The other major skill appearing to be missing is the art of “Selling” which is vital in any successful used car or new car business, This is a huge operational area of importance and to have abandoned “Selling” and the professionals involved and capable in this process, whilst looking to leverage technology and marketing, (although both vital in their own right), alone to drive the volumes you require has left me opened mouthed!

Only time will tell, but it would appear that Cazoo have fallen into the trap that many manufacturers and their franchised partners have, in abandoning investing in genuine sales professionals and looking to technology and marketing alone to drive sales; now guess what, it has not worked and for many reasons, a major one being to think that the success technology has had in disrupting and evolving the sales process in FMCG markets can be replicated in the new and used car markets.

This is a highly specialised area of expertise and I would stop here before giving Alex Chesterman any more free used car market place intelligence; but I would point out the irony that the weaknesses decisions like this have caused in the trading model of manufacturers and their franchised dealer networks, are the weaknesses that have enabled disruptive tech based businesses to target the market, but only it would appear for them to repeat them!

Finally, I would point out to Alex Chesterman the perilous state of existence that all independent tech based businesses are trading in, when it comes to the new car and used car markets. At the moment you have an opportunity because of the intransigence of the manufacturers and their franchise partners, however for many the new car model is one of diminishing financial returns, and this in turn is effecting the financial resilience of franchised dealer networks, those required to support the new car model.

Any strategy for reversing the current declines, and I will be brief here, (unless of course Alex Chesterman wants to engage me in this level of consultancy), will only come from successful used car retailing. As much as this is a huge operational challenge, it can be done with the right investments, commitment and hard work; unfortunately for the independent used car businesses like Cazoo, in order to succeed the first thing any manufacturer must do is to secure their used car vehicle park.

In the strategy and proposal documents we are compiling and delivering for manufacturers, this is one of our first recommendations because if you control access to used car stock, then you control access to the used car market; and without access to used car stock, you have no used car business! I will not give too much away for free here, but with 85% of new cars being sold via PCP schemes and the trading advantages that the manufacturer and their franchise partners have as the first supplier, it would be possible to lock independent used car businesses out of their used car vehicle parks; leaving a huge dent in the ability of Cazoo and others to be able to acquire this stock.

Now there is much to do in order to make this a reality, but the manufacturer and their franchise dealer network have all the trading and operational advantages required to lock independent used car businesses out of the used car market and it would be this, more than anything else, that would be keeping me awake at night!