Is Zooplus (ZO1) the Amazon of pet retail? The online pet retailer has c3.5% of the 25bn EUR pet supplies market and 50% of the online market. Sales have a 5-year CAGR of over 30% and are set to top 1.2bn EU in 2017 according to management estimates. ZO1 is an interesting case study to analyse the potential benefits of scale for groceries.
Firstly, the potential business unit growth is promising. The EU online market is currently 6.8% of the total which is far below the US rate of 12% of total dog owners buying online. It seems the EU market is years behind the US and due to high density, higher use of public transport and favourable demographics, it is reasonable to expect a much higher proportion of Europeans to ship pet food online. Assuming ZO1 maintains 50% of the online market and the EU industry online market share expands close to US ratio over the next 10 years, we can expect ZO1 to earn around c2.5bn EU in 2025.
ZO1 currently has a 25% gross margin and 2-3% operating margin with 1bn EUR in revenue. The bull thesis comes from assumptions on how increased scale will drive operating margins. Let’s explore the reasons for given by management in the recent presentation.
Procurement savings
With scale comes procurement power. Can ZO1 really benefit from scale over manufacturers? Brand owners know that customers are fairly loyal to the brand due to the risk of uncertainty from switching brand to something your pet is not used to. If Zooplus are heavily weighted to the largest brand would this reduce their potential sourcing scale? Pets at Home COGS is 45%, which is 25% lower than ZO1. A founder of a UK online player commented:
‘ there is no extra scale Zooplus is going to get from those brands. In this sector, it is hard to pull the brand power. Pets at Home makes most of their money from services, I think partly for this reason’.
Private label mix
ZO1 total product mix is c82% pet food, 18% non-food supplies. Pets at Home has a gross margin of 55% which explains the potential upside for ZO1 when shifting away from food.
Lower unit economics
ZO1 all-in logistics cost is currently 20% for the group but c15% in Germany where they claim to be at ‘full scale’. But when diving into ZO1’s logistics infrastructure, it seems the unit logistics costs are down to efficiencies in labour and overheads intra-warehouse. ZO1 use an ‘arms-length third-party’ courier, which all other online players seem to use for the UK market, and thus will limit the potential to reduce unit costs.
The same expert commented:
‘ we’re using the same couriers and packaging suppliers, so it is hard for Zooplus to get any real scale there’.
There are obvious scale efficiencies when comparing the 15% logistics costs of Germany vs the Group’s 20%. But can we assume that as you build out more DC’s in dense countries, this 5% saving will flow straight through to EBIT? Reinvesting scale advantages to improve the customer offering has long been a trait of traditional retail businesses (see Amazon Prime, supermarket loyalty schemes).
Overall, it seems the growth and spare capacity is there for ZO1, but the potential for margin expansion is limited. If long run operating margins double to 4% on 2025 revenue of 2.5bn EUR, ZO1 will earn 100m EUR in EBIT which only gives 25-50% upside over 10 years on 12.5-15x terminal multiple. However, Patt, Zooplus’ CEO, has recently put his money where his mouth is as he recently purchased $220k of stock at average price of 119EUR.
Disclosure: this post was written Feb 21st.
Disclosure: this post was written Feb 21st.
