🚙 Cazoo - Building a European Giant in the Used Cars Market
Overlooked #107
Hi, it’s Alexandre from Eurazeo (ex. Idinvest). I’m investing in seed & series A consumer and consumer enablers startups all over Europe. Overlooked is a weekly newsletter about venture capital and underrated consumer trends. Today, I’m sharing a deep-dive on Cazoo which is a UK-based vertically-integrated player acquiring, refurbishing and selling used cars.
Cazoo is a fascinating startup. It’s disrupting the used car market in Europe. It replicates Carvana’s playbook of building a vertically-integrated and centralised player acquiring, refurbishing and selling online used cars. It's a perfect counter-positioning to incumbents, networks of offline retailers which have a limited inventory and offer poor customer experience.
It’s a copycat executed by a team led by Alex Chesterman who is a successful serial entrepreneur (former cofounder at Zoopla which went public before being acquired by Silverlake) and who is executing at an incredible pace rarely seen in European consumer startups (£665m in sales in FY21 with a 300% annual growth rate, 50k cars sold in FY21, 4k employees, doing business in the UK, France, Spain, Italy and Germany).
Cazoo has a rocky equity story. It all started in Dec. 2018. It went public via a SPAC in Aug. 2021 (32 months after inception) raising $1bn at a $7bn valuation. Cazoo is suffering from the current public market turmoil which has been particularly harsh with asset-heavy models and SPACs. Its share price is now down by 75% (vs. IPO price) and Cazoo is now only valued at a $2.2bn.
I divided this post into 3 sections:
Cazoo’s (short) history
Cazoo’s operating model
What is noteworthy about Cazoo?
Part I - Cazoo’s History
In Dec. 2018, Cazoo raised a £30m seed round led by DMG Ventures with the participation of Stride, Octopus and Entrée Capital.
In Jun. 2019, to kickstart its operations, Cazoo signed a partnership with BCA in which BCA supported Cazoo in refurbishing, storing and transporting its cars.
In Jul. 2019, Cazoo signed an exclusive long term agreement with BCA to exploit one of its refurbishment and storage centers in the UK with the capacity to refurbish 50k cars per year and to store 6k cars per year.
In Sep. 2019, Cazoo raised an additional £25m series A round from existing investors DMG Ventures, Stride, Octopus and Entrée Capital.
In Dec. 2019, Cazoo raised a £25m series B from Mudabala and General Catalyst and launched its product with an inventory of 1.5k reconditioned cars.
In Jan. 2020, Cazoo launched a national marketing campaign called "Cazoo Yeah!" with multiple formats (TV ads, radio spots, print, outdoor creative) to build brand awareness with a target to reach 85% of all UK adults in the 1st month of the campaign.
In Mar. 2020, Cazoo raised a £100m series C funding round led by DMG Ventures with the participation of General Catalyst, CNP, Mudabala, Octopus, 8Roads and Stride. 3 months after launch, Cazoo had already generated £20m in revenues.
In Jun. 2020, Cazoo stroke multi-year partnerships starting in 2021 to become the main sponsor of Everton and Aston Villa which are two soccer clubs playing in Premier League. Cazoo's logo was set to appear on players shirts, on the stadium and on official merchandising.
In Jun. 2020, Cazoo reached a $1bn valuation with a £25m series C extension led by Draper Esprit - becoming one of the fastest UK companies to reach unicorn valuation 18m after inception and 6m after launch.
In Jul. 2020, Cazoo acquired Imperial Car Supermarkets which is an independent used car retailer started in 2006 with 18 locations across the UK and an inventory of 2.5k new and used cars. Cazoo converted Imperial Car's locations into Customer Centres which serve for storage, after-sales and collection.
In Sep. 2020, Cazoo launched a 2nd national marketing campaign with the same scope as the 1st one and ahead of the start of the Premier League season in which Cazoo would be also showcased as the main shirt sponsor of Aston Villa and Everton.
In Oct. 2020, Cazoo raised a £240m series D led by D1 Capital, General Catalyst and Fidelity with the participation of other new investors like L. Catterton and Durable Capital.
In Nov. 2020, Cazoo passed the 10,000th threshold of cars delivered - two weeks ahead of its 1st year launch anniversary.
In Nov. 2020, Cazoo announced a partnership to become the main sponsor of the 2021 Rugby World Cup.
In Dec. 2020, Cazoo acquired Drover which was UK's leading subscription service for consumers. Founded in 2016, Drover offered a single monthly payment including car, maintenance, service, tax and breakdown cover. Cazoo leveraged Drover to start its own subscription as a service offering and to expand into Europe as Drover had a presence in cities like Paris, Lisbon and Bucharest.
In Feb. 2021, Cazoo acquired Smart Fleet Solutions which is a reconditioning & storage business in the UK with 4 sites, 500 FTEs, the capacity to refurbish up to 100k cars per year and the capacity to store 20k cars.
In Feb. 2021, Cazoo acquired Cluno which was Germany's leading car subscription service. Founded in 2017, Cluno had a team of 100 people in Munich. Cazoo leveraged Cluno to launch in Germany with a value proposition from day 1 to offer consumers the option to purchase, finance or subscribe to cars.
In Mar. 2021, Cazoo signed a multi-year partnership to become the main sponsor of the EFL which is the second soccer division in the UK.
In May 2021, Cazoo passed the 25,000th threshold of cars delivered - less than 18 months after its official launch. At the time, it also had 180 transporters and 17 collection centres in the UK.
In Jun. 2021, Cazoo launched its all-inclusive car subscription offering. For a unique monthly payment, consumers can get access to a new car with insurance, tax and maintenance included. Cars are delivered in 72 hours and you can rent them for periods between 6 and 24 months. In the UK, 30% of consumers are more willing to subscribe to car than to buy or finance it.
In Aug. 2021, Cazoo launched a car buying service to source used cars from consumers. Consumers can get a guaranteed quote in seconds to sell their cars to Cazoo. Cazoo can pick the car at home or consumers can deliver the car to a Cazoo customer centre.
In Aug. 2021, Cazoo went public on the New York Stock Exchange raising $1bn at a $7bn valuation.
In Sep. 2021, Cazoo bought Cazana which is a data insights platform in the European automotive industry. Cazana products include real time valuation, pricing trends and stock management. Cazoo will leverage Cazana's tools to optimise both the vehicle buying and selling process.
In Sep. 2021, Cazoo acquired SMH Fleet Solutions which is a business operating 6 sites in the UK for reconditioning, imaging, storage and delivery with 500 experts in reconditioning and 300 experts in logistics. SMH has the capacity to refurbish 70k cars per year.
In Oct. 2021, Cazoo launched a B2B offering via the acquisition of Vans365 which is an online used commercial vehicle retailer in the UK. Vans365 was acquired for £6.5m in cash and generated £14m in revenues and a 9% EBITDA margin.
In Nov. 2021, Cazoo acquired Swipcar which is a digital car subscription marketplace founded in 2018 based in Spain with additional operations in Portugal and Italy. Cazoo leveraged Swipcar to launch in Southern Europe starting with Spain and Italy in 2022.
In Nov. 2021, Cazoo signed a long term partnership with Ogilvie Fleet which is a leasing company in the UK to become their end-of-life vehicle solution for more than 18k vehicles at the end of their contract.
In Dec. 2021, Cazoo launched in France and in Germany - 2y after launching the business in the UK.
In Jan. 2022, Cazoo acquired BrumBrum which is an Italian car retailer and subscription platform. BrumBrum started in 2016 and has a refurbishment centre with the capacity to refurbish 15k cars per year.
In Feb. 2022, Cazoo signed a partnership to become the main sponsor of Real Sociedad - a Spanish soccer team.
In Feb. 2022, Cazoo raised $630m in a 2% convertible note at a conversion price of $5 with a consortium of investors led by Viking Global to strengthen its balance sheet in order to conquer the UK and European markets.
Part II - Cazoo’s Operating Model
Cazoo is a vertically integrated online player in the used cars market which acquires, refurbishes and sells used cars. Several purchasing options are available for consumers: buy the card with cash, get financing to buy the car or subscribe to a car (in the case, the car is new - not used).
Before Cazoo, to buy a used car, you would have to go visit several offline retailers with a limited inventory, without transparency on pricing and without strong guarantees on the car quality. On Cazoo, you can access an extensive online inventory. You get extensive information on the cars with photos, videos and 3D visuals. You also have a guarantee that the car has been refurbished with high standards. In a couple of minutes, you can purchase a car. The car is delivered in 72 hours at your place or at a Customer Centre operated by Cazoo. As a driver, you have 72 hours to return the car if it does not match your expectations and you have a 3 month guarantee.
Cazoo is sourcing cars via 3 main channels: retail from B2C consumers (1/3 but with the potential to reach 60%), 1/3 from car auctions and 1/3 from corporates. To kickstart the business, Cazoo worked with an external refurbisher but has quickly brought reconditioning in-house to increase margins and to ensure strong speed and quality standards. It has now 11 reconditioning sites in the UK with the capacity to recondition 250k cars per year.
It recently launched a car subscription offering for several reasons: (i) it's a way to amortise marketing costs by having both a supply of new and used cars instead of only used cars, (ii) subscribers get new cars than can be refurbished after the 6-24m subscription period given Cazoo a proprietary supply and (iii) additional monetization (both on subscription and on reselling the car with a gross profit).
When you dig into the unit economics, you understand that it's a model that needs large economies of scale to optimise its cost centers (delta between buying & selling cars, refurbishment, logistics and marketing) and that most of its profits will come from ancillaries (esp. financing and insurance) as opposed to profits from refurbishment.
Part III - What is Noteworthy about Cazoo?
Per European standards, Alex Chesterman is a unique entrepreneur: he built 3 successful businesses (LoveFilm sold to Amazon, Zoopla which went public in 2014 and Cazoo which went public in 2021) and he has contributed to build a dynamic pre-seed and seed scene in the UK (Cleo, Uniplaces, Lick, Farewill, Motorway, Tide, Plum Guide, Secret Escapes).
A vertically-integrated model is the next logical step to disrupt certain consumer categories when marketplaces don't bring sufficient value.
In a post called sequencing business models, Casey broke down marketplaces models. This spectrum is based on the involvement of the company into the transaction, ranging from a SaaS in which the company is not involved in transactions to a vertically integrated business in which the company is heavily involved because it is providing the supply in-house.
Several consumer categories are being disrupted by vertically integrated models which want to bring a unified, superior and more efficient consumer experience. It's the case for Cazoo and Carvana in the used cars vertical.
A perfect counter-positioning to disrupt incumbents. Incumbents are relying on offline sales and on a decentralised retail network when Cazoo is selling/buying cars online and has a unique inventory per country. Incumbents cannot react quickly to Cazoo's positioning without massively jeopardising their core business.
A serial entrepreneur replicating a successful playbook from the US in Europe with higher execution speed. We're starting to see a wave of repeat European entrepreneurs bringing successful models from the US to Europe and executing them at an unseen speed (e.g. Ankorstore replicating Faire's model in Europe, AviMedical replicating CarbonHealth's model and Cazoo replicating Carvana's model).
In Europe, Alex remains an exception in terms of achievements in the tech scene but in the next decades, we will have many serial successful entrepreneurs building their next business on challenging topics and executing at an unseen velocity.
Cazoo's growth trajectory also indicates the expectations that VC investors have when they're investing into a consumer business.
"On a long enough timeline everyone sells financial services". Overtime, in Cazoo's model, most of the gross profit margin will come from financial services like leasing, loans or insurance to end-consumers.
A serial M&A acquirer to expand in new geographies, to consolidate its market, to launch a car subscription offering and to vertically integrate its operations (refurbishment operator, used car retailer network and proprietary dataset).
A playbook to blitzscale general awareness around a new consumer brand. From day 1, Cazoo worked hard to build a strong consumer brand to avoid dependency on 3P providers (aggregators, advertisers) and to have a strong share of organic trafic on its website. It launched massive traditional marketing campaigns and made many sports sponsoring deals (e.g. Aston Villa, Everton, Real Sociedad, Rugby World Cup). As a result, Cazoo has reached a 76% brand awareness in c. 2y.
Thanks to Julia for the feedback! 🦒 Thanks for reading! See you next week for another issue! 👋