Cazoo, the UK-based online retailer of used cars, is set to go public in the US at an $8.1bn valuation, merging with Ajax I, led by the billionaire US investor Dan Och, making it the latest company to take advantage of the growing SPAC  trend. If Cazoo achieves its target equity valuation, this would be more than three times the $2.5bn valuation at which Cazoo last raised capital privately in October.
So, why has Cazoo been valued so highly?
Cazoo claims to be the UK’s ‘leading’ online used car retailer, citing a number of metrics including:
- A £450M run-rate revenue after only 14 months in operation
- 60% national UK brand awareness with an NPS of 80+
- 4.8 star Trustpilot rating with 93% Excellent or Great
Undoubtedly, Cazoo has also benefited from market trends; recent research by NTT DATA revealed that almost 1 in 6 UK car buyers intend to purchase their next car using online platforms only– a 500% increase on those that have previously bought a car entirely online. In short, Cazoo is well placed for this moment of opportunity, with a business model well suited to shifting consumer needs.
Industry observers sceptical of Cazoo have rightly linked its recent success, in part, to its launch coinciding with a year of three COVID-19 prompted lockdowns, which have forced consumers to buy purely online. Many also question if Cazoo can cope with the increased competitiveness of more established car dealers, many of whom have upped their online offerings significantly in the last year – selling more cars than they did in previous years via online click-and-collect models alone.
While this scepticism may not be unwarranted, it also rests heavily on the continuation of the car ‘buying’ status quo, with long term private ‘ownership’  transactions simply shifting online. We believe that now is the ideal opportunity to re-consider such models, particularly with a new cohort of potential ‘mobility’ buyers coming to market.
A new future for mobility
As previously highlighted in our own recent thought leadership, COVID-19 has caused increased reluctance to use public transport and encouraged 18–34-year-olds to consider the advantages of private transport. Cazoo’s own Investor Presentation cited CarGurus’ research that following COVID-19:
- 44% of public transport users are reducing or stopping their usage
- 48% of ride-sharing and taxi users are reducing or stopping their usage
- 15% of used car buyers hadn’t previously planned to purchase
Perhaps Cazoo’s staggering valuation can be linked to the planning it is putting in place for the future of automotive retail. Over the last 4 months it has acquired subscription platforms Drover in December 2021 and Cluno in February 2021, becoming Europe’s largest car subscription player.
There is growing evidence to support Cazoo (and its investors) bet that subscription is where the market is heading. Recent McKinsey research highlighted that in particular millennials, long comfortable with subscription models in their lives, are open to the flexibility and minimal commitment that on-demand mobility provides. With the UK government refusing to rule out future lockdowns, the opportunity to subscribe to a vehicle for as little as a month, including maintenance, insurance and breakdown cover is increasingly attractive.
Cazoo’s Competitive Advantage
Cazoo claim they have an opportunity to establish competitive advantage due to the highly fragmented nature of the UK market, with no dealer group having greater than ~3% market share. Moreover, in light of the disruption to the new car market, reducing the number of traditional used car dealers, Cazoo, backed by a $1BN war chest for investment, has the opportunity to achieve a nationwide scale, supported with national brand awareness, which others will struggle to match.
When considering a subscription model, name recognition could be critical in persuading customers to take the plunge. Perhaps describing Cazoo as the ‘Uber of the used car marketplace’ fails to emphasise how radically they could disrupt this particular market.
In this light, Cazoo’s decision to invest in Imperial Cars, previously suggested as being indicative that perhaps a pure-play online used car retailer is unviable, is better viewed as a mechanism to expand its infrastructure and obtain operational and logistical expertise. Rather than focus on Cazoo’s algorithmic pricing models and glossy website, we should pay closer attention to its claims of ‘hard to replicate vertically integrated infrastructure’ and to be ‘set up for scale with market-leading operations and logistics’. Although Cazoo’s current subscription service remains supplementary to its core proposition, the company’s wider scale could potentially create a significant barrier to entry, and provide scope to experiment with increasingly innovative offerings.
Looking forward, innovative subscription models, enabled through increasing use of telematics, and ultimately autonomous vehicles, open up opportunities for even more flexible models of mobility. Although a truly nationwide scheme to access vehicles in a manner similar to Car Clubs, or even TfL’s Santander Cycle Hire is someway off, the advantage of Cazoo’s scale for such a network, along with the operations and logistics to manage the redistribution required, provides a potentially formidable competitive advantage.
Perhaps it is these flexible mobility subscriptions, for example, providing multiple divergent brands within a single subscription (exchanging the family car for the occasional weekend sports car) that give dealers the opportunity to reinforce their value as OEMs continue to expand their B2C offerings.
Cazoo is by no means guaranteed to succeed, with rivals such as Cinch expecting to receive a similar valuation based on the latest investment in owner Constellation Automotive Group. Nevertheless, dealers need to reconsider their business models in a rapidly changing environment, and NTT DATA is ideally placed to support them to do so:
- Experienced in reshaping and evolving used car sales models in major European markets
- Expertise and ongoing investment in telematics, connected vehicles, and mobility
- Trusted partner for OEMs, and increasingly dealers, as they respond to the acceleration of existing trends through COVID-19 that are transforming the car dealership customer experience
 A SPAC is essentially a shell company that raises money from investors by listing on a stock exchange and then using those funds to acquire an existing business in private hands.
 For simplicity, I have not considered the complexity of various potential financing options including leasing. Fundamentally, these models are predicated on dedicated, personal, use of ‘your’ vehicle for a multi-year period