Cazoo’s struggles: Self-inflicted? Or a warning to the used car sector?

As an online used car retailer launched within the last decade, Cazoo was in many ways a poster child for the UK’s resurgent used car marketplace.

Established in 2018 by Alex Chesterman, founder of Zoopla and Love Film, Cazoo’s online used car marketplace was launched in December 2019, rapidly becoming the company’s primary operation.

Chesterman was an outspoken owner, criticising the used car industry over its “complete lack of online penetration”, saying the existing market was “flawed on every level” and openly discussing his aim of “revolutionising” the sector.

Chesterman’s much publicised talk helped drive astonishing growth during the first few years of the company’s existence. A rush of investment saw the company become the fastest ever UK firm to achieve “unicorn” status (a startup valued at over $1 billion).

In 2021, just three years after it was formed, the company was listed on the New York Stock Exchange in a merger with special purpose acquisition company (SPAC) AJAX I, with a valuation of $8 billion. The company continued to grow, expanding across Europe and striking a range of high-profile sponsorship deals with leading football clubs.

This growth was significantly driven by acquisitions, with Cazoo acquiring businesses such as car dealer group Imperial Car Supermarkets, used car data specialist Cazana, commercial vehicle retailer Van365 and subscription site Drover. Acquisitions also helped the company grow internationally, with overseas deals including German firm Cluno, Spanish site Swipcar and Italian business Brum Brum.

At the time, the company appeared to be at the vanguard of a new, more digital used car market that looked poised for continuing growth. In late 2021, the UK and EU used car sector was estimated to be worth around £500 billion.

However, since then, Cazoo’s fortunes have reversed dramatically. In June 2022, the company announced redundancies in the UK and then, just three months later, revealed that it would close all operations in France, Germany, Italy and Spain.

Despite strong revenue growth, with the company seeing revenue more than double year-on-year to £333 million in Q2 2022, the company was generating huge losses (£243 million in Q2 2022) amid what Chesterman said was a “challenging macroeconomic backdrop”.

The decision to abandon Europe was, Chesterman said, part of the company’s plan of achieving profitability by the end of 2023 by focusing exclusively on the UK’s used car market, which he said was valued at more than £100 billion.

Cazoo’s aim of turning a profit by the end of 2023 has not come to fruition, with Chesterman stepping down as CEO in January 2023 after the company’s market value collapsed 97 per cent from its public listing. In September 2023, the company agreed a debt-for equity swap on debt of nearly $630 million, further diluting the value of shareholder stock.

At the outset of 2024, Cazoo is reportedly on the brink of collapse, having announced it could run out of funding within the first half of 2024 and requires urgent investment to stave off administration. The company’s situation is so dire that a source quoted in the Telegraph, said that no options were off the table, including new investment, a sale, a break-up of the company or asset sales.

While Cazoo’s breakneck expansion and high-profile sponsorship and marketing investment (the company spent £45 million on marketing alone during H1 2022, before subsequently cutting its budget as its issues continued to mount) have likely played a huge part in its dramatic fall from grace, its struggles could also point to wider challenges facing a used car market that, just two years ago, seemed to be on a solid upward trajectory.

Chesterman was adamant that Cazoo’s rapid retreat from the EU market was as a result of challenging economic factors. The September 2022 announcement came as Europe was gripped by a tight squeeze on consumer spending, with inflation and interest rates soaring.

While Cazoo’s decline has been eye-catching, coming so soon after it was undertaking a period of huge expansion, it is not the only high-profile market operator that has reported challenging trading conditions.

Vertu Motors, a fellow listed car retail group, issued a profit warning at the end of last year, saying that its profitability in its current financial year was set to be lower than market expectations amid a “volatile” environment.

According to Vertu, a company that has undergone considerable organic and acquisitive growth over recent years, the three months ending November 30 2023 saw a "material change in the used vehicle market with UK wholesale values experiencing a significant reduction in October and November". This was attributed to higher supply into retail markets and the impact of higher interest rates and vehicle prices on affordability.

During the three month period in question, Vertu’s like-for-like used vehicle volumes fell by 2 per cent. Although this was an improvement on the 5.7 per cent drop that the company saw during the first half of 2023, gross profit generation from used vehicle sales was also below expected levels.

Vertu said in a trading update that it expected UK vehicle values to continue to weaken above historic norms in the near term" and Chief Executive Robert Forrester added: "The current consumer environment remains volatile and recent trends of sluggish new car retail demand and weakness in used car pricing are likely to persist for some months.”

Looking at the broader UK used car market, an update from Auto Trader last month revealed that retail used vehicle values were down 5.6 per cent on a year-on-year and like-for-like basis in December 2023. This was the fourth consecutive month of year-on-year decline, with the publication’s Retail Price Index report saying that data “suggests that recent trends in trade prices are now flowing through into the retail market.”

According to Auto Trader, falling values are largely the result of a “disconnect” between trade and retail values, which is leading some used dealers to slash prices unnecessarily. In an interview with Car Dealer Live, Auto Trader Commercial Director Ian Plummer said that used car dealers were risking profit potential by doing so, commenting: “The price indicators we have on Auto Trader are a reaction to what retailers are positioning the cars at, but they are also what the consumer will see.”

‘With the price indicators, we can see a large cohort of cars are being underpriced when they’re coming to market.” According to Plummer, this represents a loss of value of around £32.7 million, or approximately £4,200 per retailer.

Plummer added: “The phenomenon, the sort of contagion factor, is getting worse rather than better. I just urge people to look at the values their retail customers are seeing and not miss those tricks, particularly on those high retail-rated cars.”

However, Plummer also noted that the underlying metrics of the used car market are still extremely robust, with supply and demand up around 9 per cent year-on-year, strong speed of sale and strong sales figures. Auto Trader also forecast that used car sales would increase to 7.24 million in 2024, up from the 7.17 million expected in 2023.

Overall, it seems that certain factors are beginning to slow the rate of growth that the used car market has seen over recent years, particularly in terms of valuations, which are being impacted by broader economic issues and an overreaction on the part of used dealers to the “disconnect” between trade and retail prices.

While this was potentially a significant factor in Cazoo’s stuttering growth and subsequent decline, the scale of its collapse means that it cannot be attributed to a mere drop in used car valuations or even the widespread economic uncertainty that has been ongoing for the better part of two years.

In addition to a slowdown in the used car market, it has also been speculated that Cazoo suffered as a result of its business model. When the company was initially growing, at a time when new car supply was severely constricted by supply chain disruption, it offered consumers the chance to acquire high-quality used cars quickly and easily.

This also came at a time when money was entering financial markets freely, amid low interest rates and economic measures aimed at boosting the economy during the pandemic and its associated lockdowns, prompting a surge in SPAC deals and IPOs.

With the used car market booming, Cazoo was one of several companies in the sector to list publicly, despite being a young firm. However, the fortunes of these companies rapidly turned as economic conditions worsened, the used car market cooled and interest rates soared.

Quoted in CityAM, AJ Bell Investment Director Russ Mould said that investors in the company, as well as those that invested in competitors such as Vroom and Carvana, were forced to “face the possibility that the Cazoo business model did not scale to profitability very easily.”

Mould continued: “Yes, it scales, as Cazoo won lots of new customers and sold and shipped a lot of cars thanks to aggressive sponsorship and advertising campaigns. But even as sales surged from $162m in 2020 to $1.2bn in 2022, the firm still lost more than half a billion dollars.”

“The deluge of free money meant a lot of other start-ups were operating in the same space and that combination tends to lead to low (if any) profits. Vroom, Carvana and Shift Technologies were notable rivals. All floated.”

“All of their shares soared and then plunged as the second-hand car market cooled, and prices fell sharply from over-heated highs. At least in this respect, Cazoo is not an outlier. It is just one of many.”

Analysing Cazoo’s plight makes it clear that there is no one concrete factor that has led it to its current position. Rather, it has succumbed to a combination of growing too quickly and unsustainably during a brief boom period, growth levelling off in the broader used car sector and wider economic uncertainty.

While the company’s struggles offer a cautionary note to ambitious operators in the used car sector, this is by no means to suggest that it is not possible for a modern, digital-led company to gain significant market share. Rather that the sector is more febrile than it might appear even during periods of significant growth and that expansion should be approached methodically and with a focus on long-term stability, rather than short-term gains and huge rapid expansion.

After all, even when issuing a profit warning and remarking on the car retail sector’s “volatile” environment, Vertu Motors (a company that has taken a far steadier growth trajectory) stated that it continues to have a positive outlook, with Chief Executive Robert Forrester saying: “Vertu remains very focused on delivering outstanding customer experience, tightly controlling inventory and being diligent on costs.”

"The group has a strong balance sheet and long track record of operational excellence and financial discipline. These attributes mean we remain very confident in our ability to take advantage of these challenging market conditions and the resulting increased opportunities in the sector."

For used car businesses seeking to grow in the current environment, these values of diligence, control, and discipline will be invaluable. A lesson that is vividly demonstrated by the case of Cazoo.

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