I remember when I was looking to buy my first used car in the 1980s, when used car dealers had a poor reputation built on the ‘Arthur Daley’ stereotype, from the popular TV series Minder.
Cazoo and Cinch to IPO
Today the industry has largely moved on from the rather dodgy practices of that era, however it’s still a stretch to imagine buying a car from the comfort of your own home, and yet we have companies like Cazoo and Cinch who want to sell us this very idea, as both companies look to float their businesses on public markets.
Two years ago, viewing and buying a car online without driving it first would probably have been hard to imagine, however the events of the last 12 months have helped evolve this process, and change some people’s mindsets.
Vroom yet to make a profit after IPO
In June last year, Vroom (NASDAQ:VRM) in the US decided to join sector peer Carvana (NYSE:CVNA) in floating on the New York Stock Exchange, in an IPO that saw the fledgling business rise from an IPO price of $22, to close at $47.90 and a market cap of $5.52bn. That’s quite a hefty valuation for a company that has never made a profit since it started in 2012, and in 2019 lost $143m.
In 2020 things didn’t improve as losses increased to $202.8m, despite an increase in revenue to $1.36bn, $915.5m of which came from e-commerce. The number of cars sold is certainly going up, however the company is spending a fortune on marketing, as well as other administration expenses. These increased by $60m to $245.5m in 2020. The surprise rise in losses has led to Vroom now being sued by some of its investors for allegedly misleading them about the health of the company.
It’s a similar story for Carvana, who also operates at a loss, which brings us neatly to the UK and the growing popularity of Cazoo and Cinch, who run similar services, with a seven-day money back guarantee, as they look to steal market share from the more established high-street showroom operations.
Large marketing spend
Both companies are also spending huge amounts of money on marketing, with Cazoo signing Premier League shirt sponsorship deals with Everton and Aston Villa, while Cinch signed a deal with Tottenham Hotspur earlier this year, the costs of which aren’t known but are likely to be similar to the £10m deals signed by Cazoo, with Everton. Cazoo has also signed deals with the World Snooker Tour, as well as the English Football League from next season to become an official partner.
The premise for the growing popularity of online used cars appears to be that in a post Covid-19 world, a website that allows potential customers to view the car online, and have it delivered direct to their door with no human interaction, is the way forward. This is perhaps why both companies appear to have had little trouble finding backers for their evolving business models, however the hurdles to profitability, as shown in the US, are quite large.
Cazoo reaches £2bn valuation in October
In October 2020, Cazoo’s latest accounts showed a £19m loss for its first year of business, at around the same time as securing £240m worth of funding, bringing the total sums raised to £450m at a valuation of £2bn.
While on the face of it the premise may seem a sound one, buying a car online is one of those experiences that can’t really be compared to buying an electrical item like a TV, Blu-Ray player or games console online. Most people will already have shopped around and kicked the tyres, so to speak, at an electrical retailer beforehand.
This is what makes buying a new or used car a much trickier process. Even if you go into a car showroom, you also have to tread carefully, not to mention navigate your way around car salesman keen to sell you a hatful of extras in order to bump up their commissions.
The advantage the buyer has in a car showroom is the ability to get in the car and go out for a test drive to see how the car handles, where the pedals are, what the seats are like, the leg room, as well as all the optional extras of electric windows, air-conditioning, music system and adjustable seats.
You won’t get to experience this if you buy a car online, and while the seven-day money back return policy is a useful safety net, some problems may not become immediately apparent until after that period has been and gone.
Cazoo SPAC deal will see firm join NYSE
To understand the challenges facing Cazoo and Cinch, you only have to look at how Vroom and Carvana have performed in the US. Cazoo’s SPAC deal has succeeded in persuading billionaire US investor Dan Och’s Ajax I (NYSE:AJAX) to raise an extra $1.6bn, valuing the business at £5bn, over double of what it was last October and a listing in New York. However, it doesn’t mean that the business will be anywhere near profitable in the short- to medium-term.
Cazoo says it expects sales to rise to $1bn this year, a growth rate of 300%, with the expectation that revenues will double annually through to 2024, when according to projections it expects EBITDA to start turning positive.
After the Cazoo SPAC deal and securing new funding, as opposed to the IPO route, the big question now is whether Cinch will do the same, go down the IPO route, or raise more funds from private investors with a view to going public later on.
Buying a used car is always a tricky proposition; you can be lucky and find yourself a reliable car with low mileage, or you can find yourself buying a pig in a poke. However, it’s becoming clearer that the new and used car market is starting to evolve in a way that is becoming very difficult to predict, as it moves away from what has been the norm for most of us over the last few decades.
While a lot of people still buy cars outright, others by way of finance or using a leasing facility, the growing popularity of car subscription services is changing the way we look at how we move around, and it’s increasing in popularity.
Cazoo has plans to expand its own offering, where for a fixed monthly fee you get to keep a car for up to 12 months, without the inconvenience of sorting out insurance, road tax or maintenance, which is all inclusive. It’s more expensive than buying the vehicle in the longer term, but you have the convenience of changing it on a regular basis if you want to.
Will it catch on? Time will tell, but for now the Cazoo SPAC investors, along with Cinch, appear to be taking a bet on the likelihood of consumers opting for the subscription route when buying their cars. That probably makes more sense if you live in a city where parking can be challenging, but becomes less so when parking isn’t an issue.
"DISCLAIMER: CMC Markets is an execution only provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed.
No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. "