Learning from Cazoo: Underestimating Logistics Costs Can Be Fatal

This week, I had to travel to London’s Heathrow airport for a couple of days. The UK weather was pleasantly warm, providing an opportunity to sit on one of the hotel terraces and enjoy the evening sun while watching the arrivals land on 09L. This terrace is popular, with almost all guests enjoying the views across the airfield.

As these evenings often do, it turned into a conversation with my fellow guests. One in particular turned out to be more than just a friendly conversationalist. He was in the automotive industry and was one of the largest buyers of BMW and Mini vehicles for wholesale to forecourt dealers. We chatted, and it was interesting to hear his views on how personal relationships are still so important across his industry at every level of the supply chain.

The view from our terrace where the views are as interesting as the conversation.

He educated me on the recent events at Cazoo, where, ultimately, the rise and fall of this business was due to a lack of understanding of how relationships work and the costs of logistics. Cazoo, a car retailing website founded by a tech entrepreneur, raised huge sums of money and even achieved a valuation above $5bn USD in 2021. It was listed in NYC and employed over 700 people in the UK. However, after failing to find fresh investment following a loss of £704m in 2022, which was on top of its £544m deficit in 2021, the company eventually had to call in the insolvency practitioners. Sadly, the 700+ employees lost their jobs.

In our discussion, I learned that the promise offered to customers was simply not sustainable from a cost perspective. For example, the vehicles could be returned, free of charge if you change your mind, with delivery and collection included. If anyone has ever looked at how logistics companies operate, it becomes very clear that these are significant costs which have to be added to the others to make the sale (customer acquisition, overhead, staff etc) and comes directly from the margin.

To quote, “it may look like £2000 per car is a good margin to the investors, and that soon goes when there is no revenue after a cancellation and you are holding all the cost”. We have an associate at Boston Warwick who is an expert in the direct-to-consumer automotive market with recent experience running the logistics for a rival to Cazoo, and has confirmed that this will run into the hundreds of pounds (GBP) for the transportation and then has to also consider inspection, repairs, regrading vehicles. The list goes on.

In this situation, there was a winner: the consumer! However, we are seeing more unsustainable models where the idea is to give the consumer everything and fail to cost this out correctly. A great example is Uber Eats and Door Dash, who are losing hundreds of millions of dollars a year. The riders and company lose. The consumer wins.

A dangerous precedent is being set here too. If we continue to allow these ‘too good to be true’ consumer propositions to continue, we will have trained a society to expect this service which is not commercially sustainable. Eventually, more will fail as the debt mountains pile up.

So, what could Cazoo have done differently? Well, for a start, the intent was good. They just over-promised and over-delivered to the customer. It was too much too soon and simply wasn’t sustainable. Better options would have been to reduce the logistics costs through consolidation points. Perhaps asking customers to drive a shorter distance to regional forecourts and applying surcharges if they did change their minds. It wasn’t as attractive, although it would have been a lot fairer for the company finances.

We’d encourage any business in this space to really look at its whole supply chain and cost the logistics correctly. It is an area that clearly makes a difference to the customer experience and can make or break a business. Some better and more original planning that finds the cost-vs-benefits sweet spots is a lot easier than many realise and just takes some decisions based on seeing the broader supply chain.

There is some news about Cazoo today (28th June) which has been acquired by the Motors group and will be integrated into its existing network. It’s not clear if this is just the brand that has been acquired and what will happen to the 700 staff, although we do hope they all find good work in a stable business that lasts a lot longer than Cazoo did.